Thus the British knew they could not defend their Asian empire if the Japanese attacked it; knew they could not defend Belgium and France if Germany struck westwards, much less Poland and Czechoslovakia if Germany struck eastwards; and knew, or thought they knew, that they could not defend London if Hitler sent his Luftwaffe across the Channel. By 1935, incredibly, they were so convinced of their own hopeless vulnerability that they did not even dare fight the Italian navy. In 1938 the Chiefs of Staff ruled out even ‘staff conversations’ with the French, since the very term ‘has a sinister purport and gives an impression… of mutually assumed military collaboration’. Perish the thought!
THE ECONOMIC CASE FOR APPEASEMENT
Could not these appalling vulnerabilities have been addressed by increased defence expenditures? No; all that more rapid rearmament would achieve, it was objected by the mandarins of the Treasury, would be to undermine Britain’s precarious economic recovery.
Fighting the First World War had increased the British National Debt by a factor of twelve. By 1927 it was equivalent to a crushing 172 per cent of gross domestic product. The interest on the debt accounted for more than two-fifths of public expenditure in the late 1920s. Budget surpluses and an overvalued exchange rate following Churchill’s decision, as Chancellor of the Exchequer, to return to the gold standard in 1925 were attained at the expense of jobs in manufacturing. The staple British industries of the late Victorian era – coal, iron, ship-building and textiles – had now been replicated all over the world; export markets for such British products inexorably shrank. Yet ‘invisible’ earnings from Britain’s still immense overseas investments, financial services and shipping were also under pressure. Less obvious but in some ways more profound was the damage that the war had done to the labour force. Under the system of volunteering that had been used to recruit the new divisions needed in the first half of the war, a great many skilled workers had been drawn into the armed forces, of which a substantial proportion were either killed or incapacitated. The official solution to post-war problems was essentially Victorian in conception: budgets should be balanced, the pound should return to gold and free trade should be restored. In the name of ‘retrenchment’, defence expenditure was reined in, so that as a share of total public spending it fell from nearly 30 per cent in 1913 to just over 10 per cent twenty years later. Baldwin told the International Peace Society: ‘I give you my word that there will be no great armaments.’ He meant it. The Ten-Year Rule amounted to a spending freeze for the armed services. Even when it was dropped in 1932, the Treasury insisted that ‘financial and economic risks’ militated against significant increases in the defence budget.
As Chancellor of the Exchequer, Neville Chamberlain had been one of the driving forces behind the creation of the Defence Requirements Committee, in the belief that a clear ordering of military priorities would make his life easier at the Treasury. He welcomed the identification of Germany as the biggest potential danger. Yet it was also Chamberlain who ruled out as impossible the additional £97 million that would be needed to create and maintain an adequate expeditionary force for use on the continent. His preference for a deterrent strategy based on bombers was motivated in large measure by the fact that it looked cheaper than the alternative. When the DRC proposed in November 1935 that its ‘Ideal Scheme’ of rearmament be financed by a Defence Loan, there was consternation in the Treasury; again Chamberlain insisted on cutting the spending bids of the navy and the army. But soon the RAF, too, started to look too expensive. As one Treasury official put it after Munich, ‘We think that we shall probably not be able to afford it [the Air Ministry’s latest proposals] without bringing down the general economy of this country and thus presenting Hitler with precisely that kind of peaceful victory which would be most gratifying to him.’ In fact, the RAF was the best treated of the three services (though Chamberlain was ready at any time to curb spending on it in return for an ‘Air Pact’ with Hitler). The Treasury gave even shorter shrift to the requests of the army and navy for additional funds. As for Churchill’s demands for much larger defence expenditures, which he first advanced in 1936, Chamberlain dismissed these out of hand. Only in 1937 was new borrowing undertaken to finance rearmament, to the tune of £400 million, and even then Chamberlain had initially tried to cover the increased costs by raising taxes. His successor at the Treasury, Sir John Simon, insisted that total defence spending from April 1937 to April 1942 should be capped at £1,500 million.
In any case, it was hoped that a policy of economic engagement with Germany might serve to divert the Nazi regime from aggression. On the one hand, officials at the Bank of England and the Treasury wanted to preserve trade with Germany and avoid a total German default on money owed to Britain. On the other, they deprecated the kind of economic controls that would undoubtedly be required if large-scale rearmament was to be undertaken without domestic inflation and a widening current account deficit. When the Secretary of State for Air, Viscount Swinton, pressed for skilled workers to be shifted from the civil to the defence sector in order to speed up aircraft construction, Chamberlain responded that this should be done by means of ‘mutual arrangements [between employers and employees], and with a minimum of Government interference’ – an echo of the old, failed maxim of ‘Business as Usual’. Traditional financial strength was supposed to be the ‘fourth arm’ of British defence, in Inskip’s phrase; hence the Treasury’s perennial preoccupation with the balance of payments and the exchange rate. The great fear was that in the event of a prolonged war Britain’s credit abroad would prove far weaker than between 1914 and 1918, for the current account deficits of the later 1930s were eating away at Britain’s net creditor position, her gold reserves and the strength of sterling. For all these reasons it was not until 1938 that defence expenditure exceeded 4 per cent of gross domestic product and not until 1939 that the same could be said of the government’s deficit (see Figure 9.1).
The economic arguments for appeasement reflected British economic strength as much as weakness. Compared with what had happened in Germany and the United States, the Depression in the United Kingdom had been mild. Once Britain had gone off gold in September 1931 and interest rates had been cut to 2 per cent by the Bank of England, recovery came quite swiftly – not, certainly, to the old industrial regions of the North, but to the Midlands and the South-East, where new industries and services were springing up. Cheap money also fuelled a construction boom in England south of the Trent. But for precisely these reasons, it was argued, significantly higher expenditure on rearmament would have created problems of overheating in the British economy, in the absence of matching tax increases or cuts in other government programmes. Keynes himself was to argue in How to Pay for the War that, in the event of large-scale defence expenditures, inflation and balance of payments problems could be avoided only if the economy were much more strictly controlled than it had been in the First World War, with severe taxation of consumption. Such an illiberal regime was inconceivable in peacetime. In April 1939 Keynes spelt out the constraints on pre-war rearmament: ‘The first is the shortage of labour; the second is the shortage of foreign
Figure 9.1 UK expenditure on rearmament and government deficit as percentage of GDP, 1933–1939
resources.’ For once he was articulating the conventional wisdom. Other eminent authorities – notably Sir Frederick Philips of the Treasury and Lord Weir, chairman of the engineering firm G. & J. Weir – said the same. Skill shortages were a potential problem not only in engineering but in construction. Keynes was only one member of the Economic Advisory Council, which reported in December 1938 that the balance of payments was ‘the key to the whole position’.
Yet these concerns were surely exaggerated. With the annual rate of growth in consumer prices peaking at just under 7 per cent in September 1937 and then rapidly declining (see Figure 9.2), and with long-term interest rates below 4 per cent until the outbreak of war itself, the Treasury had far more room for manoeuvre than it admitted. With
so much slack in the system – contemporaries with good reason feared a recession in 1937 – higher levels of borrowing would not have ‘crowded out’ private sector investment. On the contrary, they would probably have stimulated growth. As for skilled labour, that was only an issue because, for originally economic reasons, Chamberlain had committed Britain to a sophisticated airborne deterrent that turned out not to work; and because the government was almost superstitiously nervous of antagonizing the bloody-minded leadership* of the Amalgamated Engineering Union by ‘diluting’ the skilled labour force. In practice, the rearmament programme stimulated staple industries as well as the infant aeronautical engineering sector; even on limited budgets the navy needed ships and the army needed guns, tanks and uniforms, so the iron, coal and textile sectors all benefited from rearmament. Wages for skilled labourers did not jump upwards, as the Treasury pessimists had feared; on the contrary, wage differentials narrowed. A more rational policy, both economically and strategically, would have been to build more ships and more tanks and to conscript the unemployed – who still accounted for 14 per cent of insured workers as late as January 1939 (see Figure 9.2) – and prepare a British Expeditionary Force the Germans could not have ignored. Chamberlain was simply wrong to fear that Britain lacked the manpower ‘to man the enlarged Navy, the new Air Force, and a million-man Army’.
Finally, fretting about Britain’s financial ‘fourth arm’ of defence presupposed that foreign powers would lend to Britain in a war only if it were financially attractive to do so, whereas both the United States and the Dominions would have powerful strategic and economic incentives to lend to Britain if the alternative was a victory for the dictators and an interruption to Atlantic export shipments. In any case, the current account deficits of the later 1930s were trivial – equivalent to around
Figure 9.2 UK unemployment and inflation, 1928–1939
1 per cent of GDP a year, compared with net overseas earnings of at least 3.5 per cent on a total stock of overseas assets worth £3.7 billion ($17 billion). Britain was not broke in 1938. The crucial point, as we shall see, was that she might nevertheless be broke by 1939 or 1940 if her hard currency reserves continued to diminish.
Britain, then, might have rearmed with a vengeance. Instead, on the flawed premises of outmoded economics, the British adopted the principle of Dickens’s Mr Micawber. Oppressed by the thought of their own debts, they hoped against hope that something would turn up. The Depression inspired the Japanese, the Italians and the Germans to think of foreign conquest. It convinced the British that they could do little to stop them.
IGNOMINIOUS ISOLATION
It seemed staringly obvious to those who believed the strategic and economic cases for appeasement that Britain needed all the friends she could get. In the words of the Chiefs of Staff in December 1937:
We cannot foresee the time when our defence forces will be strong enough to safeguard our trade, territory and vital interests against Germany, Italy and Japan at the same time… We cannot exaggerate the importance from the point of view of Imperial Defence of any political or international action which could be taken to reduce the number of our potential enemies and to gain the support of potential allies.
But who might these potential allies be? Though the French had spent significantly more on armaments than the British since the 1920s, most of their investment had been in defensive fortifications, the psychological effects of which were anything but healthy. The French Foreign Minister, Louis Barthou, sought to create an ‘Eastern Locarno’ to secure the frontiers of Germany’s neighbours to the east and laid the foundation of the Franco-Soviet Mutual Assistance Pact of 1936. However, the British response was lukewarm; the feeling in London was that the French should be willing to make more concessions to the Germans on armament levels. By 1937 France’s Prime Minister Léon Blum had embraced the notion that concessions to Germany in both Eastern Europe and overseas were necessary if peace were to be preserved. But Chamberlain had little confidence in the French and did practically nothing to make joint Anglo-French action effective. The Soviet Union was viewed with revulsion by most Conservatives, Chamberlain among them, on ideological grounds. Even Churchill found it hard to contemplate having Moscow in his grand alliance, though that was clearly a logical inference to be drawn from his own analysis of the situation. Much hope was pinned on Mussolini, who in 1934 had appeared to take a firm line against an abortive Nazi putsch in Vienna; this was to exaggerate Italy’s strength and to underestimate Mussolini’s desire to overturn the status quo, which he revealed when he invaded Abyssinia and ignored all inducements to negotiate a settlement. The 1935 ‘Stresa Front’ of Britain, France and Italy proved to be just that: a front. When Italy defected, Britain and France could not agree what to do first: get Mussolini out of Abyssinia or keep Hitler out of the Rhineland. They did neither. This pattern of Anglo-French mal-coordination, not helped by the divergence of domestic politics in the two countries when France briefly had a Popular Front government, was to continue until the outbreak of war. Even after the Anschluss, Chamberlain could not bring himself to utter more than the most ambiguous hint of support for France in the event of a continental war. Unfortunately, there was just as much ambiguity in the French position after Édouard Daladier became Prime Minister in April 1938, not least because of the habitual cowardice of Georges Bonnet, his Foreign Minister. In Asia, meanwhile, Britain simply could not choose between her interests in China and the need to avoid war with Japan. The British nightmare was a German-Italian-Japanese combination. Yet the more they sought to avert it by diplomatic expedients rather than military counter-measures, the more likely it became.*
Among the great powers, that left only the United States. Yet the Americans were as eager to appease Germany as anyone in Britain. Franklin Roosevelt proposed the return of the Polish Corridor to Germany almost as soon as he entered the White House, sending Samuel L. Fuller as an unofficial emissary to Berlin in 1935 to sound out Hitler’s terms for a general peace settlement. His Secretary of State Cordell Hull repudiated the British model of economic appeasement – based on reaching bilateral economic agreements with Germany – in favour of a more ambitious multilateral approach to trade liberalization. But the net result was not so different. Between 1934 and 1938 American exports of motor fuel and lubricating oil to Germany nearly trebled. American firms supplied Germany with between 31 and 55 per cent of its imported phosphate of lime (for fertilizer), between 20 and 28 per cent of its imported copper and copper alloys, and between 67 and 73 per cent of its imported uranium, vanadium and molybdenum. Half of all German imports of iron and scrap metal came from the United States. US corporations including Standard Oil, General Motors, DuPont and even IBM all expanded their German operations. By 1940 American direct investment in Germany amounted to $206 million, not much less than the $275 million in Britain and far more than the $46 million in France. In Asia, the United States had already established a pattern of calling on others to take stands against aggression, while pursuing its own economic self-interest. When Roosevelt began to do the same in Europe too, Chamberlain concluded that Americans were ‘a nation of cads’. ‘It is always best and safest’, he told his sister Hilda, ‘to count on nothing from the Americans except words’ – hence his dilatory response to Roosevelt’s call for a general great-power conference in 1938. The feeling was mutual. ‘The trouble is,’ opined Roosevelt, ‘when you sit around the table with a Britisher he usually gets 80 per cent of the deal and you get what is left.’ American ambassadors like Joseph Kennedy Sr. in London and Hugh Wilson in Berlin saw no objection to giving Hitler a free hand in Central and Eastern Europe. Moreover, American policy-makers, Roosevelt in particular, harboured a thinly veiled ambition to see the British Empire broken up.
Yet merely hoping, in view of Britain’s excess of commitments and her insufficiency of funds and friends, to preserve peace by diplomatic concessions was not as sensible and pragmatic a strategy as it seemed. For it failed to contemplate the p
otential consequences of diplomatic failure. Duff Cooper, as First Lord of the Admiralty, was one of the few members of the Cabinet to grasp this:
The first duty of Government is to ensure adequate defences of the country. What these adequate defences are is certainly more easily ascertainable than the country’s financial resources. The danger of underrating the former seems to me greater than the danger of overrating the latter, since one may lead to defeat in war and complete destruction, whereas the other can only lead to severe embarrassment, heavy taxation, lowering of the standard of living and reduction of the social services.
Faster and greater rearmament in the mid-1930s might not look affordable to the Treasury, but how much more expensive would it be in the 1940s if Hitler were to succeed in dominating the continent and if Germany, Italy and Japan chose to make common cause against the British Empire? This hypothetical worst-case scenario was wished away by most decision-makers – an act of negligence, since politicians have an implicit moral obligation to those whom they represent regularly to contemplate the worst case, to attach to it both a probability and an estimated cost and then to insure against it. It was this that both Baldwin and Chamberlain failed to do – an irony, in view of their personal experience of business. An entire ‘nation of shopkeepers’* declined to cover itself against a risk that was both large and likely. The supreme irony is that the premium itself might have been quite small. Indeed, the British may even have been paying enough to be covered. But their leaders, captivated by their own wishful thinking, failed to make a claim until it was too late.
The War of the World: History's Age of Hatred Page 42