The Second London Conference was convened in March 1934 at the height of the commotion in naval circles caused by the reconstruction of the Russian battleship Frunze and her subsequent reclassification as a battle cruiser. In addition to this, there was the announcement of the construction of two new capital ships in Japan, one of which was subsequently cancelled, and the plans announced in Germany for the construction of a second ‘Panzerschiff’, much larger than the first. Plans for the new construction of capital ships were also well in hand in France, Italy and Japan. Therefore the British, instead of seeking to reduce the numbers of capital ships, attempted to limit their future size and power.
The opening British position was that a treaty where the maximum size of capital ship was limited to 35,000 tons with no 3000 ton modification clause would be satisfactory. However, their proposal to limit gun calibre to 14 inch was defeated when Japan and France rejected it. The Mosley government was not at all sanguine about the prospects for disarmament and had anticipated the failure of their proposals. The only concrete agreement reached was that the capital ship tonnage limit for new construction should continue to be set at 38,000 tons in January1935 and rise to 45,000 tons at the end of December 1937 if Japan did not sign the final treaty.
Japan did not sign, neither did France or Italy and there was much concern as to the plans of the USSR. The Treaty was effectively worthless and though the British stated their intention to produce treaty limited designs in the hope that other navies would follow suite they had no option but to resume new capital ship construction in 1935. The United States was the only other power to produce designs limited by the tenets of the treaty.
It must be noted that the French Richelieu class battleship design was of 45,000 tons standard displacement. It is therefore obvious that the French as well as the Japanese and Italians had no intention of accepting a 35,000 ton capital ship tonnage limit from the outset of the conference.
ANNEX 4: THE IMPACT ON TRADE AND INDUSTRY OF THE ECONOMIC POLICIES OF THE LABOUR GOVERNMENT
OF 1932 – 1938
From: Industry, Money and Government – Britain’s Economy in the First Half of the Twentieth Century, Michael Horvath, Hamish Horton 1997
When the Labour Party entered office in July 1932, they inherited a difficult financial position. Although World War I had ended more than a decade earlier, it had wrecked international trade while the recovery had been slow and fragmentary. The export trade in manufactured goods was seriously damaged as was the invisible trade of the United Kingdom. Both were as affected by the Great War as by the depression which had begun in 1929 and by the protectionism that was the principal feature of the economic landscape of the early 1930s.
In outline, Oswald Mosley’s Labour government of 1932 sought to revitalise the British economy with measures that were focused on manufacturing industry and would see significant job creation. Mosley’s strategy upon entering office was broadly based on his memorandum of 1931. This was a ‘New Deal’ style call for government intervention with high tariffs to protect British industries from international competition, nationalisation of industry and a programme of public works to solve unemployment. The government agenda was thrashed out with the chancellor, Hugh Dalton, and followed the advice of John Maynard Keynes in its advocacy of intervention by government in times of financial hardship. Keynes was often consulted by Mosley for his advice and opinion on economic matters. This was a sharp reversal of previous government policy, but was certain to be popular with Labour voters as it was designed to create an increase in employment.
The declining competitiveness of British manufacturing industry was apparent well before the start of the Great War, but the impact of that war and of the Great Depression accelerated decline by closing markets and stimulating import substitution. British exports of goods in the 1920s struggled to approach their pre-war levels in terms of volume. After a decade spent hoping that the pre-1914 situation could be re-established, it became generally accepted by 1932 that the staple industries of provincial Britain would never regain all of their former export success. While, in spite of rapid growth in output, competitive new technology-based industries like aircraft manufacture were unable to do well outside the Sterling area because of protectionism.
The problems of manufacturing industry were amplified by competitive failures in markets which had been vital to British exports before 1914. Invisible exports were also endangered by increased competition. New York proved to be an effective rival source of long-term international finance in the decade before 1929; however, in the 1930s neither London nor New York were able to lend abroad. In spite of the fact that its development was restrained more by limited opportunities than by competition; the City of London remained the locus of the largest commercial and financial bloc in the world – the Sterling area.
The decline in income from invisible exports such as credit and finance was equally severe. In the 1920s, the City of London was performing significantly more poorly than in 1913. Just as industry had become dependent on protection and Imperial markets, so the City too had to settle for dominance within a sterling bloc centred on the Empire. In this sense, the overseas interests of industry and finance converged markedly after 1914 though this was not fully appreciated until the 1930s.
The Labour Party’s policy of nationalisation of industry was not as seriously pursued as the left of the party wanted once Mosley gained office. The idea that the industrial engines of the country could be made to exert their strength on behalf of all of the people, rather than a small number of them, was politically seductive and certainly a vote catcher. But nationalisations were limited to the coal, steel and electricity supply industries while the expansion of the Royal Mail into telecommunications was also fostered. This shift in policy can be attributed to Mosley’s consultation with John Maynard Keynes, who, while advocating state intervention, had come to the conclusion that intervention itself had to be carefully constrained. [156]
Again, as in so many other areas, Mosley’s political philosophy was subservient to his hunger for power
The Reintegration of Finance and Industry
The strong growth the British economy’s manufacturing sector saw after 1933 was a direct result of government inspired ‘pump priming’ – but the financing of this venture was not limited to government money. Instead Hugh Dalton (the Chancellor of the Exchequer), aided (somewhat unwillingly) by Montagu Norman (Governor of the Bank of England), sought to cajole Britain’s banks and financiers to lend at home rather than abroad.
In contrast to the situation in the United States and Germany, relations between finance and industry in the UK were loose. British finance had traditionally found better profits abroad, but the decision in 1926 to ‘stay off Gold’ meant that lending from sterling assets outside the Sterling area was less profitable and more expensive. Because the pound was now subject to exchange rate fluctuations, the cost of lending and the expectation of profit were now hostage to the changeable value of sterling. In terms of the export of capital, this presented difficulties for both borrower and lender. Gold-backed American dollars were not subject to this problem. This had been the predicament that those who sought to ‘get back on gold’ had foreseen in 1926. But it also meant that demand for lending from within the Sterling area was now more likely to be met. In terms of the export of manufactured goods, the government were now in a position to manipulate exchange rates to make British manufactures cheaper in world markets.
For the Labour leadership, a way had to be found to invigorate the export industries and by so doing alleviate the heavy unemployment that characterised the northern industrial regions that were the heartland of Labour support. This was the central plank of the manifesto that had seen the party elected to office.
Montagu Norman, who had been Governor of the Bank of England since 1920 had launched a series of initiatives before Labour took office designed to bring the City and provincial industry together
. The Bank was aware of the mounting criticism of financial policy in the 1920s. Norman, in particular, was convinced that the failure of the financial sector to actively attempt to resuscitate the industrial sector would inspire politicians (he principally feared Labour politicians) to intervene with deleterious effects on the market system which the Bank oversaw. He was also aware that when opportunities for overseas investment were declining, the banks needed to tap the domestic market for business. As he put it in 1930:
“I believe that the finance which for 100 years has been directed by them abroad can be directed by them into British industry, that a marriage can take place between the industry of the North and the finance of the South.”
The Bank of England had urged the clearing banks to use their financial position with industry to impose rationalisation. One of the Bank’s primary goals was the creation of efficient big business. However, it is important not to overemphasise the Bank of England’s initiatives in this field. It was firmly opposed to providing much in the way of new finance for industry from its own resources and it saw its role as facilitating contacts with financiers and promoting self-help. Many of its schemes were, in fact, little more than gestures designed to divert criticism from financial policy. The small quantity of help the Bank of England and the Treasury did give before 1932 went to older industries because they were ailing. [157]
The Macmillan Committee’s verdict of 1930 was that “...in some respects the City is more highly organized to provide capital to foreign countries than to British industry...” The ascent of the Labour Party to power in 1932 can be easily characterised as Montagu Norman’s nightmare come true. But Mosley and Dalton, as advised by Keynes, had successfully identified that the two halves of British industrial capitalism – finance and manufacture – had become increasingly disengaged for the preceding half century. It was the new government’s policy to reverse that trend.
The new government’s initial approach to the problem was commendably subtle. When first elected, Oswald Mosley was widely admired in every strata of the British Establishment and he was able to use his charm and influence as well as an appeal to patriotism to overcome opposition to the new policy. The reduced opportunities available to British investment interests due to the fall in the value of the pound were also used as an argument to strengthen the incentive to invest in UK industry. When this worked only partially, Mosley raised the spectre of increasing taxation on the activities of the City – a move widely condemned in the City as ‘thuggery’ and ‘cajolery’ – but the outcome was a much healthier flow of capital to industry and a reinvigorated union between the two halves of capitalism.
It was certainly not the case that all British finance was now directed towards British industry or that profits from foreign loans were much reduced. Large holdings of loans abroad continued to bring in substantial returns and be one of the principal features of the British financial landscape, but it is the case that in the build up to 1939 and after, capital for industry was much more forthcoming from the City. The irony of the Labour Party seeking to accomplish this by forcing a Hilferdingian union between capital and industry on the City of London hardly needs emphasis. [158]
A Case Study in the Reintegration of Finance and Industry: Steel
In 1914, when British industry had gone over to the production of munitions, it was found that it was inadequate to the task. The shell crisis of 1915, and in particular, the inadequacy of naval shell as exposed by the Battles of Flamborough Head and Dogger Bank, further underlined the point of the embarrassing backwardness of the British steel industry. It was not that new and better shells could not be designed, tested and made ready for mass production quickly, they were; the problem lay in their manufacture.
Successful munitions provision for the type of total war ushered in by the conflict of 1914 to 1918 is not so much a question of the output of specialised armaments manufacturers, like Krupp or Vickers. It is the ability to convert the multifarious industrial and scientific assets that in peace allow a trading nation to build high quality manufactured goods to war production.
In the 20th century, iron and steel output was one of the key measures of national strength. Before the Great War, Britain produced half as much steel as Germany, but this quantitative deficiency was not as alarming as the technical backwardness of the industry. After 1914 there was a desperate shortage of high quality steel and it was discovered that supplies of many types of specialised steels had previously been obtained from Germany. The Iron and Steel Industries Committee, which convened in 1917, found that in Britain, modern steelworks were the exception, not the rule. The official History of the Ministry of Munitions put it thus:
‘British manufacturers were behind other countries in research, plant and method. Many of the iron and steel firms were working on a small scale, with old systems and uneconomical plant, their cost of production being so high that competition with the steel works of the United States and Germany was becoming impossible.’
Productivity too was poor, the annual output per man in pig-iron was 380 tons, in the United States it was nearly 600 tons per man. It was only the availability of imported shells and steel from neutral America that permitted the guns of the Western Front and of Britain’s capital ships at Jutland to keep firing.
Britain was also sorely lacking in the expertise of the new industries of the second phase of the industrial revolution, which occurred after 1870. There were too few light engineering factories equipped with the modern machine tools required to build sophisticated finished goods like tanks and aeroplanes. There were too few precision industries that could undertake the large scale manufacture of such items as shell and bomb fuses.
Although the problem was formidable, by 1916 Britain had succeeded in creating a light engineering industry practically from scratch. There were certainly difficulties in accomplishing this, not least of which was the dearth of modern machine-tool, electrical equipment and ball bearing manufacturers. The gap was bridged by the import of American, Swiss and Swedish goods.
Such a salutary example might have stood as a lesson for all time. Yet by the mid-1930s, with the continuation of the recession and the generally risk-averse attitude of British management, the steel industry, among others, was in danger of slipping back into its old ways. Several factors mitigated against this. The urgency of re-armament and the consequent oversight of weapons procurement by the armed services, the Admiralty and the Ministry of Supply cannot be understated. The setting up of the Ministry of Supply in 1936 was vitally important in that it co-ordinated much of the Country’s manufacturing effort. But, had it not been for the government induced willingness of British bankers to lend to industry, the War of 1940 might have produced a similar crisis to 1915. As it was, Britain was defeated anyway, but the stronger steel and manufacturing industry that emerged from 1935 to 1940 was the engine of success in the years that followed it.
Tariffs, Protection and the end of free trade after 1940
A second measure partly designed to propel a shift in the relative proportions of domestic and foreign investment by British capital, was a frankly protectionist tariff strategy that raised the rate of profit in the more important capital-intensive industries such as steel and shipbuilding. A subsidiary result was that the tariff restored a balance between the south with its light industry and services oriented economy and the north with its heavy industry by raising profit margins in the latter.
For the rank and file of the Labour Party, many of whom believed strongly that free-trade was in the consumer’s best interest, the prospect of tariffs, like the prospect of deflation, proved divisive. Support for the tariff was strong in sections of the Conservative party and again impelled closer cooperation between British finance and British industry.
Regions of informal influence also played a part in meeting Britain’s goals in the international economy. Their contribution could be seen in the influence exercised over the smaller European members of the sterlin
g bloc in the 1930s, as well as in the policies implemented towards South America and China. In these territories Britain worked tirelessly and with significant success in maintaining her financial interests. Commercially driven decisions, such as the backing given to Chiang Kai-shek in China, were made with such concerns in mind.
War brought with it serious challenges to the economic and social status quo. The war of 1914–18 had shaken the British notion of ‘Gentlemanly Capitalism’ this new conflict seemed set to all but extinguish it by questioning the stratified social order on which it had flourished.
The war certainly caused a shift in the balance of economic power from the City to industry and organised labour, because with national survival at stake, the status of the producing part of the nation was greatly enhanced. In fact, it can be said that the main result of the Labour government’s involvement in capital and industry was to create a more politically aware and vocal group of vested industrial interests. These were dependent on cartelisation and protection, and their power was often used to forestall change rather than to encourage it, but the emergence of the large corporation in British industry promoted the growth of a more coherent, politically aware, industrial interest which had more influence than in the past and was closer to the centres of power in London.
After 1940 the advocates of free-trade were in full retreat. The world had separated into trading blocs centred on the sterling area, the Reichsmark area and the United States dollar area. Ironically, the type of Imperial Free Trade Area, championed by Mosley at the Ottawa Conference in 1932, had come into existence after he had lost office and by force of circumstances rather than as the result of Imperial Policy. Competition for trade in the remaining territories was fierce but the ‘reconciliation’ of industrial enterprise and City finance led to a fundamental change in the relationship between the principal segments of capital in Britain and, as a consequence, now had an influence upon the distribution of power though it was not yet capable of exerting a determining effect upon economic policy.
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