Peden G.S. Arms, Economics and British Strategy From Dreadnoughts to Hydrogen Bombs

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by mass formations at night. From the mid-1950s the Lee-Enﬁeld,

which had been used in both world wars, began to be replaced by a

semi-automatic riﬂe of Belgian design.

The economy: searching for stability, 1945–50

Financial restraint was inevitable after the war when, in Keynes’ words,

Britain faced a ‘ﬁnancial Dunkirk’. Lend-Lease had enabled Britain to

concentrate on munitions production but ended with the surrender of

Japan. In 1945 British exports were only 46 per cent of the 1938

volume, yet Britain would have to export more than before the war in

order to avoid a balance-of-payments deﬁcit on current account. Net

income from abroad had been reduced between 1938 and 1945 from

£168 million to £50 million, as a result of the sale between September

1939 and June 1945 of £1,118 million of overseas assets, and an

increase in external liabilities of £2,879 million, mainly sterling bal-

ances. Under the Anglo-American Loan Agreement of December 1945,

Britain became liable for a further $650 million (£161 million) in

respect of Lend-Lease supplies unconsumed or in transit at the date of

Japan’s surrender, and was granted a line of credit of $3,750 million

(£930.5 million) to help to cover an estimated balance-of-payments

deﬁcit of £1,250 million while she was converting her economy from

war to peace. Britain was to repay the principal of the loan plus interest

at 2 per cent over ﬁfty years, starting in 1951. More important, Britain

had to undertake to make sterling convertible for current transactions a

year after ratiﬁcation of the loan by Congress and to remove dis-

crimination against imports from the United States. British Treasury

ofﬁcials believed that it would be nece ssary to control dollar imports

during a longer transitional period than one year and the secret reﬂec-

tion of the Chancellor of the Exchequer, Hugh Dalton, was that it was

quite certain that the conditions attached to the loan would have to be

revised later. The Labour government acquiesced in the American

demands because, as Keynes had advised, the alternative to borrowing

would not only be greater austerity than during the war and a delay in

implementing welfare measures, but also rapid and humiliating with-

drawal from overseas commitments and acceptance for the time being of

the position of a second-class power.

Michael Hickey, The Korean War: The West Confronts Communism (London: John

Murray, 1999), pp. 220–33, 361.

Collected Writings of John Maynard Keynes, vol. XXIV, p. 410; Hugh Dalton, Memoirs

1945–1960: High Tide and After (London: Frederick Muller, 1962), p. 89; G. C. Peden,

‘Economic aspects of British perceptions of power on the eve of the Cold War’, in Josef

The impacts of the atomic bomb and the Cold War 245

The fact that colonial produce could earn dollars for the sterling area

led the Labour government to pursue colonial development more

energetically than any pre-war government had done. African colonies

were expected to progress to self-rule over a longer period than actually

occurred, and continued association with Britain through the Com-

monwealth was assumed.

Communist insurgency in Malaya threa-

tened production of dollar-earning rubber and tin, and was dealt with

ﬁrmly following a declaration of an emergency on 18 June 1948. The

natural resources of the Commonwealth and Empire were seen in the

Treasury as a major advantage in regaining ‘viability’, that is indepen-

dence of American economic aid.

A complicating factor was the

pooling of Britain’s dollars with those of the rest of the sterling area;

whereas the colonies were net contributors to the pool, as a result of

strict controls on their imports, the dominions were no rmally in heavy

deﬁcit with the dollar area. Moreover, while the sterling area maintained

controls on expenditure or investment in foreign currencies, there were

no controls within the area, allowing unplanned capital movements from

Britain to the dominions to occur and placing pressure on sterling.

Another problem was that over £3,000 million of Britain’s external

liabilities were in the form of sterling bal ances, and while much of this

sum was tied up in the form of currency reserves, holders naturally

wanted to use some sterling to pay for imports from Britain. However,

Britain required her limited supply of exportable goods to earn dollars,

so as to be able to ﬁnance her trade with the United States. The

Treasury had to conduct difﬁcult negotiations with Argentina, Egypt,

India and Pakistan in 1946 an d 1947 to secure the agreement of these

countries to accept phased releases of sterling balances, and by 1949

political pressures made it impossible to keep releases as low as had been

agreed.

The full weakness of Britain’s external position was exposed when,

under the Anglo-American Loan Agreement, current earnings of ster-

ling – but not the war-time sterling balances – became convertible into

dollars on 15 July 1947. There was a sharp increase in the rest of the

Becker and Franz Knipping (eds.), Power in Europe? Great Britain, France, Italy and

Germany in a Postwar World (Berlin: Walter de Gruyter, 1986), pp. 237–61.

D. K. Fieldhouse, ‘The Labour governments and the Empire-Commonwealth, 1945–

51’, in Ritchie Ovendale (ed.), The Foreign Policy of the British Labour Governments,

1945–1951 (Leicester University Press, 1984), pp. 83–120, at pp. 95–102.

Sir Richard Clarke, Anglo-American Economic Collaboration in War and Peace 1942–1949,

ed. Alec Cairncross (Oxford: Clarendon Press, 1982), pp. 191, 204.

John Fforde, The Bank of England and Public Policy 1941–1958 (Cambridge University

Press, 1992), pp. 95–124, 249–67; Pressnell, External Economic Policy, vol. I, pp. 247,

347–52, 365–6.

Arms, economics and British strategy246

sterling area’s deﬁcit with the dollar area, and capital movements from

Britain to the rest of the sterling area ﬁnanced this deﬁcit. Britain was

unable to maintain sterli ng convertibility after ﬁve weeks.

There was a

general shortage of dollars in Western Europe, owing to the costs of

imports from the United States of food and of capital equipment for

industrial reconstruction, and already by July 1947 the American

administration was planning what became Marshall aid, wh ich provided

a fresh source of dollars from mid-1948 to the end of 1950.

Deva-

luation of sterling in September 1949 encouraged British exporters to

look to American markets, but it would only bring Britain’s extern al

account into balance if the volume of exports earning dollars increased,

and with the economy at full employment, an increase in exports

implied diversion of output from home markets and defence. The

government’s Economic Survey for 1950 rightly anticipated that the

balance of payments would rema in the central economic problem for

many years ahead.

In contrast to the 1930s, there was a general labour shortage, which

was made worse by the increased size of the armed forces. Numbers had

peaked at 4,653,000 in mid-1945 and even in November 1946 the ﬁgure

was 1,510,000, compared with 385,000 in 1938.

Given Britain’s

foreign policy commitments, Bevin was a powerful opponent of a more

rapid demobilisation, and he also gave his support to universal con-

scription in peace and to the Ministry of Defence’s plans to retain

industrial capacity and design staffs for munitions. Consequently, the

Minister for Defence, Alexander, was able to resist Treasury demands

for a greater reduction in the size of the armed forces an d in their

expenditure down to the convertibility crisis. Dalton, the chancellor,

simply carried less weight in Cabinet than Bevin did. In the light of the

suspension of convertibility, and the likely delay before further Amer-

ican aid would become available (Congress did not approve the

appropriations for Marshall aid until June 1948), Dalton tried again,

and in August 1947 Bevin agreed that reorganisation of the armed forces

ought to allow more rapid demobilisation. The Chiefs of Staff were

instructed to review policy on the assumption that it would not

be possible to contemplate undertaking a major war until Britain’s

Cairncross, Years of Recovery, pp. 79–80, 153–63.

See Alan Milward, The Reconstruction of Western Europe 1945–51 (London: Methuen,

1984).

Economic Survey for 1950 (Cmd 7915), PP 1950, xix. 577–628, paras. 40 and 48–50.

Central Statistical Ofﬁce, Statistical Digest of the War, pp. 8–9; Statement on the Economic

Considerations Affecting Relations between Employers and Workers (Cmd 7018), PP 1946–

47, xix. p. 1195.

The impacts of the atomic bomb and the Cold War 247

economic strength had recovered, and that the risk of a major war must

be ruled out over the next ﬁv e years. On 29 September the Defence

Committee agr eed that the strength of the armed forces should be

reduced from 1,227,000 in September 1947 to 713,000 by the end

of March 1949, while accepting that ‘serious risks and political

consequences’ were involved.

Balance-of-payments difﬁculties were only partly relieved by Marshall

aid, since recipients were expected to become ﬁnancially independent

after the American ﬁscal year 1950/1. The Treasury was now repre-

sented in Cabinet by the formidable Cripps, who had replaced Dalton in

November 1947. The Chancellor took a stand in November 1948 on

£700 million as a maximum for expenditure on the armed forces, and

the Inter-service Working Party on the Size and Shape of the Armed

Forces was set up, with a representative of each of the services, and a

neutral chairman, Edmund Harwood, a civil servant from the Ministry

of Food, to see what could be ﬁnanced with that ﬁgure. The report

produced in February 1949 was guided by three requirements set out by

the Chiefs of Staff: ﬁrst, sufﬁcient provision for waging the Cold War

effectively; second, limited insurance against the threat of unpremedi-

tated war; third, maximum insurance against the more likely threat of

premeditated Soviet aggression in 1957 or later. It concluded that

existing priority for research and development should be maintained, to

ensure that equipment would be up to date in 1957, with special

reference to defence against attacks by aircraft or missiles carrying

atomic weapons. Consequently the Working Party’s proposed econo-

mies focused on reducing the size of forces to be maintained over the

period 1950–3.

The Chiefs of Staff believed that the report showed

that £700 million was too low a ﬁgure to meet the requirements that

they had set.

This view was endorsed by the Minister of Defence,

Alexander, who told ministerial colleagues in June 1949 that the ques-

tion was one of whether Britain still had the resources to m aintain the

forces equipped to modern standards required to allow her to play the

role of a great power and maintain her overseas commitments.

The outcome in July 1949, after discussion over four meetings of the

Defence Committee at which Cripps was unable to hold the line at £700

Dalton to Attlee, 11 Aug., and Bevin to Attlee, 15 Aug. 1947, PREM 8/833; Cabinet

Defence Committee minutes, 29 Sep. 1947, CAB 131/5, TNA.

‘Size and shape of the armed forces: report of the Harwood Working Party’, DO (49)

47, 21 June 1949, CAB 131/7, TNA.

‘Size and shape of the armed forces 1950–53’, report by the Chiefs of Staff, COS (49)

50, 22 June 1949, CAB 131/7, TNA.

‘Size and shape of the armed forces 1950–53’, memorandum by the Minister of

Defence, DO (49) 51, 27 June 1949, CAB 131/7, TNA.

Arms, economics and British strategy248

million, was yet another working party, this time chaired by Sir Harold

Parker, permanent secretary of the Ministry of Defence, with instruc-

tions that the total defence burden was not to exceed £810 million.

Even in a period of severe economic difﬁculties, and with devaluation

only a few weeks away, the Treasury was unable to dictate what the

limits on defence expenditure should be.

Although post-war industrial policy gave priority to the civil economy,

considerable efforts were made to retain capacity for designing and

producing weapons. The Ministry of Aircraft Production was merged

with the Ministry of Supply and the combined department was given

responsibility for the needs of the RAF and army as well as oversight of

engineering and atomic energy. Research and development contracts,

orders for jet aircraft, and repair work kept nineteen airframe and aero-

engine design teams in business, more than the volume of work justiﬁed.

In July 1950 the Defence Committee approved rationalisation plans that

would have reduced the number to thirteen, but rearmament associated

with the Korean War delayed restructuring of the industry. The Min-

istry of Supply hoped to keep four independent tank design teams in

being, but army contacts were too limited to persuade motor vehicle

ﬁrms to stay in the ﬁeld and even Vickers experienced ﬁnancial pro-

blems on account of surplus capacity. More royal ordnance factories

were kept in being than were required for current service requirements.

The problem facing all defence contractors until 1950 was the low level

of government expenditure on research and development and pro-

curement compared with what planners had assumed: only about half in

1948, for example. Overall defence expenditure was not much below

what had been expe cted, but the cost of maintaining forces large enough

for Britain’s global responsibilities made it necessary to economise on

research and development and procurement.

The economy and rearmament, 1950–4

Manpower in the armed forces and defence expenditure as a proportion

of GDP were reduced until 1950 (see tables 5.2 and 5.3). The fears

provoked by the outbreak of the Korean War reversed these trends. On

26 July 1950 the United States asked NATO governments what addi-

tional expenditure they intended to carry out on their own, and how

Interdepartmental Committee on the Defence Estimates, DE/M (49) 1st meeting, 14

July 1949, DEFE 10/65, TNA.

Till Geiger, Britain and the Economic Problem of the Cold War: The Political Economy and

the Economic Effect of the British Defence Effort, 1945–1955 (Aldershot: Ashgate, 2004),

pp. 38–9, 124–8, 132–3.

The impacts of the atomic bomb and the Cold War 249

much more would be physically possible with American help. In

Britain’s case, programmed defence expenditure in the three ﬁnancial

years 1951/2 to 1953/4 prior to the outbreak of the war in June had been

£2,340 million, and by the end of July various approved additions had

raised this ﬁgure to £2,590 million. The Economic Section of the

Cabinet Ofﬁce and the Central Statistical Ofﬁce calculated that it would

be physically possible to add a further £800 million over that period,

making a total of £3,400 million, and the Chancellor, Cripps, thought

that the United States should be asked to ﬁnance half the total increase

of about £1,100 million on the pre-July programme. The new pro-

gramme was prepared and approved in about a week at the beginning of

August, without waiting for any formal agreement on aid. In the event,

the Americans made clear in September that they had no intention of

Table 5.2. Strength of armed forces and women’s services, 1945–54

(’000, at June each year)

1945 5,120

1946 2,055

1947 1,312

1948 847

1949 770

1950 690

1951 827

1952 872

1953 866

1954 839

Source: Central Statistical Ofﬁce, Annual Abstract of Statistics.

Table 5.3. Defence expenditure as a percentage of GDP, 1946/7–

1953/4

Financial year

1946/7 18.6

1947/8 9.0

1948/9 7.2

1949/50 6.7

1950/1 6.6

1951/2 8.6

1952/3 10.0

1953/4 9.2

Source: Central Statistical Ofﬁce, Annual Abstract of Statistics;

Mitchell, British Historical Statistics p. 830.

Arms, economics and British strategy250

supplying dollars to help Britain deal with the consequences of re-

armament for her balance of payments. Aid was to be primarily in the

form of equipment and materials, with limited ﬁnancial aid allocated

according to a formula for fair sharing of the burden of defence by all

NATO countries, including the United States. Meanwhile, the defence

departments, realising that the ﬁnancial brakes were off, sought further

additions to their individual programmes, and the total defence

programme for 1951/2 to 1953/4 was revised to £3,600 million at the

end of August, this ﬁgure representing what Attlee called the maximum

that could be done without resorting to a war economy. When the

Chinese intervened in Korea in November, the Americans asked for

greater efforts, and on 25 January 1951 the Cabinet agreed a new

programme for 1951/2 to 1953/4 of £4,700 million, although the scale

of diversion of labour from civil production, including exports, would be

considerable.

Even the new Chancellor of the Exchequer, Gaitskell,

felt that failure to support the Americans would have serious con-

sequences for NATO, and two of his principal economic advisers, Sir

Robert Hall, head of the Economic Section, and Edwin Plowden, head

of the Central Economic Planning Staff, both believed that the Second

World War could have been avoided if Britain had reacted more quickly

to the Nazi menace.

Nevertheless, how could the government decide to increase a pro-

gramme for £3,600 million, which was supposed to be the maximum

physically possible with a peace-time economy, to £4,700 million?

When announcing the latter programme in January 1951, Attlee

admitted that it might not be possible to spend all the money within the

three-year period; that would depend on prompt delivery of machine

tools and materials from the United States. He also claimed that far-

reaching measures were being taken to secure increased production,

but, although there was a partial reversion to war-time controls to

allocate raw materials, the government did not restore the key war-time

power to direct labour.

Instead employment exchanges took informal

steps to guide workers to key jobs, but with the economy at full

employment, not many workers were applying to employment exchan-

ges. The crucial element in the programme was the demand to be placed

Cairncross, Years of Recovery, pp. 214–21.

Philip Williams (ed.), The Diary of Hugh Gaitskell 1945–1956 (London: Jonathan Cape,

1983), p. 226; Edwin Plowden, An Industrialist in the Treasury: The Post-War Years

(London: Andre

Deutsch, 1989), pp. 97–8.

483 HC Deb., 5s, cc. 582–7. For reimposition of controls, see J. C. R. Dow, The

Management of the British Economy 1945–60 (Cambridge University Press, 1964),

pp. 57, 159–62, 168.

The impacts of the atomic bomb and the Cold War 251

on metal and engineering industries, collectively known as the metal-using

industries, which included the motor industry, electrical goods, machine

tools and shipbuilding, and which accounted for over 40 per cent of

British exports.

Under the £4,700 million programme for 1951/2 to

1953/4, production by the metal-using industries directly for defence

would have to increase from about £170 million in 1950/1 to about £360

million in 1951/2. One-third of the latter ﬁgure would be on aircraft,

one-sixth on shipbuilding and marine engineering, and one-sixth on

vehicles. There would have to be a large increase in employment in

existing aircraft factories, and substantial new indust rial capacity would

be required for making aero-engines and tanks.

As table 5.4 shows, it

did not prove to be possible to carry out the programme in full.

The ﬁgures in table 5.4 are approximate: the planned ﬁgures for 1951/

2 to 1953/4 were ﬂexible as between years, although the ﬁgure of £360

million for 1951/2 did appear in the Economic Survey for 1951. The gap

between planned and actual output was greater than appears in the table

because prices were rising. Production was held up by shortages of

skilled labour and materials, and by delays in designing new equipment

and in the delivery of machine tools and components. In the case of the

Canberra bomber, production in 1951–2 was only about half of the

planned level, and development of tail warning equipment was delayed,

so that aircraft produced before 1953 lacked that importan t item of

equipment. There were other examples of electronic equipment being

delivered later than the aircraft for which it had been designed,

including the Doppler Drift navigation device for the Valiant an d the

Table 5.4. Planned and actual rearmament expenditure on products of metal and

engineering industries, 1950/1–1953/4

(£m.)

Financial year Planned

Actual

1950/1 170 170

1951/2 360 275

1952/3 590 470

1953/4 700 510

Notes:

Civil defence excluded.

March 1951 prices.

Current prices.

Source: Cairncross, Years of Recovery, p. 223.

Cairncross, Years of Recovery, p. 222.

Economic Survey for 1951 (Cmd 8195), PP 1950–51, xxvii. 73–118.

Arms, economics and British strategy252

Canberra.

Delays in production of the Hunter and Swift were pri-

marily due to development problems. In the view of one insider, the

aircraft industry had more projects than it could cope with.

Certainly

rearmament brought about a boom: Ministry of Defence and Ministry

of Supply expenditure on aircraft, including research and development,

rose from about £200 million in the late 1940s to £570 million in 1954

and employment in the aircraft industry increased by 55 per cent

between 1950 and 1954.

Such rapid expansion is rarely pro blem-free.

Machine tools were kept in short supply for the defence programme as a

whole because of the need to retain export markets. As the Ministry of

Supply warned, ‘curtailment of exports would involve the breaking of

contractual delivery dates, and coul d not fail to be damaging in the long

term’. In particular, the Canadian market, which had been lost during

the war, and where a special effort was being made to recover lost

ground, might be lost forever.

When the Conservatives returned to power in October 1951 they were

warned by the Treasury that the country faced a balance-of-payments

crisis brought about by rearmament and by rising prices of raw mate-

rials, the latter being in response to increased defence expenditure and

strategic stockpiling in the world as a whole, especially the United

States. The Permanent Secretary, Sir Edward Bridges, warned the new

Chancellor, R. A. Butler, that the position was worse than in 1949, the

year of devaluation, in that on current trends the gold and dollar

reserves were likely to fall below the minimum of £500 million required

for the operation of the sterling area by the end of June 1952. This date

was subsequently advanced to the end of April when it was discovered in

February that economic and defence aid from the United States would

be $225 (£80.4) million lower than expected. To ease the pressure on

the pound Butler raised Bank rate and used controls inherited from

Labour to cut imports from outside the sterling area. The Cabinet

agreed on 30 October 1951 that all government departments , including

the defence departments, must reduce their expenditure.

A review of the rearmament programme was begun in December,

with an emphasis on reducing demand on the metal-using industries in

‘Progress of rearmament programme: meetings between the Minister of Defence and

service ministers’, DEFE 7/669, passim; ‘Programme report for 1952: note by Air

Ministry’, PDP/P (53) 3, 7 Feb. 1953, DEFE 7/670, TNA.

Sir Roy Fedden, Britain’s Air Survival: An Appraisement and Strategy for Success

(London: Cassell, 1957).

Edgerton, England and the Aeroplane, p. 89.

‘Machine tools for £4,700 million defence programme’, memorandum by the Minister

of Supply, CPC (51) 3, 5 Feb. 1951, CAB 134/115, TNA.

Peden, Treasury and British Public Policy, p. 458.

The impacts of the atomic bomb and the Cold War 253

order to increase exports. It became clear that there was no prospect of

the programme being completed by the end of March 1954, and that

defence expenditure would continue to rise until 1955/6. The defence

budget for 1952/3 was based on the hypothesis that the rearmament

period would have to be extended by one year. The Treasury tried to

secure an agreement with the Minister of Defence, Earl Alexander, that

expenditure in 1953/4 would not exceed £1,600 million, but, with a

system of annual budgeting, there was no means of ensuring that the

three service departments’ expenditure could be kept in check in future

years.

In May 1952 the Treasury produced a Cabinet paper pointing

out that Britain was spending a higher proportion of national output on

defence than in the late 1930s, and could no t continue to rely on

American aid. The paper point ed out the extent to which Britain’s

external ﬁnancial position had deteriorated since before the war, and

drew attention to preliminary studies that showed that defence was

placing too great a burde n on the metal-using industries. Butler was

supported by Cherwell, who said that he agreed with almost everything

in the Treasury’s paper. The Board of Trade reported that overstraining

the engineering industry was leading to increased prices and longer

delivery dates at a time when competitiveness on international markets

was paramount.

On 29 May the Cabinet asked the Minister of

Defence to examine the programme, in consultation with the Chancellor

of the Exchequer, and in the ligh t of the new strategic appreciation being

prepared for him by the Chiefs of Staff, and to report on how economies

could be secured and the pressure on the balance of payments eased.

This was the context for the Chiefs of Staff’s Global Strategy paper in

June 1952, the strategic aspects of which are dealt with in the next

section of this chapter. Costing of the Global Strategy paper indicated

that total expenditure for 1951/2 to 1953/4 would be £4,353 million,

compared with Labour’s £4,700 million programme for these three

ﬁnancial years, but another £3,724 million would be required over the

two years 1954/5 to 1955/6.

Cherwell advise d Churchill that the

Chiefs’ proposals were ‘quite beyond the bounds of practic al politics’, in

that the rise in the annual cost of defence would be the equivalent of 2s

G. R. M. Hartcup, ‘History of the defence budget, 1946–71’, Treasury Historical

Memorandum (1971), pp. 4–5, T 267/23, TNA.

‘Economic policy’, memorandum by the Chancellor of the Exchequer, C (52) 166, 15

May, minute by the Paymaster General to the Prime Minister, C (52) 171, 23 May, and

‘The export problem’, memorandum by the President of the Board of Trade, C (52)

175, 26 May 1952, CAB 129/52, TNA.

Cabinet conclusions, 29 May 1952, CAB 128/25, TNA.

‘The defence programme’, memorandum by the Minister of Defence, C (52) 253, 22

July 1952, CAB 129/54, TNA.

Arms, economics and British strategy254