been estimated at over £200 million in 1911–13.
42
The Treasury was
indifferent to the fact that Britain’s gold reserves were small in com-
parison with most other major countries as it was possible for the Bank of
England to attract gold by selling securities or by increasing its discount
rate (Bank rate).
43
The Treasury’s confidence was not shared by every-
one: the Secretary of the CID, Sir George Clarke, suggested in 1905 that
Britain should have a two- or three-power standard in gold reserves to
deal with international and domestic financial panics at the outbreak of a
war.
44
In the event, the Treasury and the Bank of England were forced to
extemporise emergency measures to cope with financial panic in August
1914. Even so, the strength of Britain’s external financial position proved
to be a major factor in sustaining Britain’s war effort.
If Britain was so wealthy before 1914, why did she not spend more
than she did on defence? It is worth pointing out that international
comparisons of defence expenditure are difficult. Calculations for years
before the Second World War based on percentages of national income
are anachronistic, in that politicians and administrators did not use
national income data before the 1940s. To complicate matters further,
various definitions of national income are used by historians: GDP,
GNP, and net national product (NNP), which is GNP less a deduction
for estimated capital consumption. On data used by Avner Offer,
defence expenditure, as a percentage of national income (of unknown
definition), was broadly similar in Britain and Germany from 1870 to
1914, apart from the years of the Franco-Prussian and Boer Wars,
averaging 2.95 per cent in the case of Britain and 2.86 per cent in the
case of Germany. John Hobson originally calculate d the avera ge per-
centages of NNP spent on defence in the period 1870–1913 as 3.1 for
Britain and 3.2 for Germany, but he revised his estimate for Germany to
3.8 in the light of new data which included items like strategic railways
that had been included in the civil budget.
45
Table 1.1 shows that
British defence expenditure rose year by year after 1908/9, but that the
percentage of national income devoted to defence was no higher in
42
Pollard, Britain’s Prime, p. 109.
43
‘Treasury memorandum on the gold reserves, 22 May 1914’, reprinted in R. S. Sayers,
The Bank of England 1891–1944, 3 vols. (Cambridge University Press, 1976), vol. of
appendices, pp. 3–30.
44
French, British Economic and Strategic Planning, p. 17.
45
Avner Offer, ‘The British Empire, 1870–1914: a waste of money?’, Economic History
Review, 46 (1993), 215–38, at 224–5; John M. Hobson, ‘The military-extraction gap
and the wary titan: the fiscal-sociology of British defence policy 1870–1913’, Journal of
European Economic History, 22 (1993), 461–506, at 479; John M. Hobson, The Wealth of
States: A Comparative Sociology of International Economic and Political Change (Cam-
bridge University Press, 1997), pp. 67–8, 171, 202.
Arms, economics and British strategy34