The Empire Project: The Rise and Fall of the British World-System, 1830–1970 (49 page)

This dramatic acceleration in global economic activity, and the active part played in it by Britain and the countries of the British world-system had important consequences for their stability and cohesion. For Britain's own role, the timing had been crucial. The fact that the great rise in industrial competition had occurred in a period of such exceptionally rapid growth in world trade sheltered British industry from its worst effects. Two other circumstances eased Britain's passage into a global economy in which competition was now ‘multipolar’. First, although the neatness of the boundaries should not be exaggerated, the three great industrial powers tended to concentrate in different markets and (to a lesser extent) to specialise in different exports. American exports to Europe were chiefly food and raw materials, like cotton. American competition with British manufactures was strongest in Canada, taking by far the largest share of that country's imports (Canada's total imports in 1913 were $692 million: $441 million from the United States, $139 million from Britain, and $14 million from Germany),
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and in Central America. In 1913, Germany's most important customers were in Europe, to which over three-quarters of her exports were consigned. Sixteen per cent went to the Americas, but only 8 per cent to Asia, Africa and Oceania combined.
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By contrast, two-thirds of British trade lay outside Europe. The Americas took 21 per cent of British exports; Asia, Africa and Oceania 43 per cent.
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Of course, in a hugely increased volume of trade, British exports no longer claimed the same overwhelming predominance even in old-established markets. But this had not prevented (as we have seen) a large increase in British exports. And, while Britain imported a growing proportion of manufactured goods, it was notable that German exports achieved a lower penetration there than in any other industrial country.
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Secondly, Britain retained, and perhaps even enhanced, her astonishing pre-eminence as the supplier of capital and commercial services. Here, too, we should not underestimate the importance of commercial rivalry. But no single grand challenger had emerged. The United States had barely begun to export capital, and except in Canada and Central America was of minor significance as a foreign investor. In Argentina, Brazil and Uruguay, where South American growth was strongest, American investment was negligible.
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The sole exception in the ‘Southern Cone’ was Chile. France, second to Britain in foreign investment, was far behind in industrial output and French capital was concentrated overwhelmingly in Southern and Eastern Europe and in Russia.
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There was little prospect of Britain's spheres being sucked into a French commercial
imperium
. German investment was much smaller in scale and, like France's, mainly found in Europe. Outside Europe, its infrastructure was underdeveloped. In Latin America, for example, German business found it easier to raise money through London.
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Where German capital competed most aggressively in the extra-European world, it was usually where government pressure had been exerted on German banks and the objects were as much political as commercial.
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In fact, the normal instinct of banks and investors in continental Europe was to cooperate with London and use its services. This was hardly surprising. So long as so much of world trade was financed by sterling bills (the medium for transactions between different national currencies) – and two-thirds of sterling bills in 1913 served trade between third parties – the City would be the natural magnet for short-term funds and foreign exchange.
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These in turn would draw the foreign banks and their deposits to London, swelling still further the mass of capital and credit located there.

In the long decade before the First World War, the impact of commercial change on the British economy had been to alleviate industrial competition and perhaps even to prop up industries – like cotton and coal – that were labour- not capital-intensive. Far from weakening London's grip on its commercial empire, it helped the City to ‘annex’ new provinces (like Argentina), to consolidate old ones (like India, South Africa, Australia and New Zealand), and to advance new tropical bridgeheads into West Africa and Southeast Asia. In the process, vast new assets were acquired and further claims piled up on the productive capacity of new regions. All this signalled a deeper and closer integration between Britain and the varied parts of the British world-system.

For Britain's associates, clients and subjects in that system, the common experience had been the enormous growth of their foreign trade and the inflow of new investment, much of it directed to the improvement of their transport and communications. The weight in their economies shifted further towards the international sector, oriented if not always on Britain as a market then on London as the hub of their trade and finance. In independent countries like Argentina and Brazil, the City's power was felt as keenly as in any colony. They had adopted the gold standard (with its guarantee of convertibility) to attract the foreign (usually London-based) investor. Having done so, they were forced to accept its ruthless discipline. When their imports outran their exports (as happened in the economic cycle), and their foreign credits dwindled, they had either to borrow more abroad or to rein in their home economies by monetary contraction, perhaps both. They dare not offend the money power in London: the consequences of an investment famine were too dire. Without capital imports, their export production would stagnate; without foreign credits (and access to sterling bills), trade would dry up; without foreign trade, public revenues would collapse.
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But the result was to transmit the fluctuations of export performance in exaggerated form into the internal economy: booms were wilder and contractions sharper. Moreover, gold standard countries on the ‘periphery’ soon felt the effects, if a correction was needed in the British economy, to check an adverse movement in foreign exchange. By raising interest rates, the Bank of England could swiftly draw gold and foreign credits into London at the expense of peripheral economies – a technique at which it grew very adept in the years before 1914. The City's pivotal role in world trade (with all its benefits) thus went hand in hand with its tightening grip on the economic life of extra-European states without money-markets of their own and dependent on foreign capital.

The dominions, India and Africa

The white dominions also saw large increases in their foreign trade and (with some variation) in their imports of capital between 1900 and 1913. Here, too, the result was to strengthen the pull of London and (in different ways) to reinforce their attachment to the British system. The most obvious case was Canada where ‘continental’ integration with the American economy had been the main competitor. But the creation of a wheat economy in the Prairie West after 1900 using largely British capital checked this continental drift. The transatlantic route, and its western extension to Winnipeg and beyond, grew busier. The great transport empire of the Canadian Pacific Railway (largely owned in Britain) prospered. Montreal, local metropole of the wheat economy, boomed. When reciprocity (free trade in natural products with the United States) was proposed in 1911 by Laurier's Liberal government, it drew furious opposition not just from Montreal and the Canadian Pacific Railway, but (fatally) from Laurier's Liberal allies in Ontario. For Toronto interests, as much as Montreal, now saw continentalism as a deadly threat to their vision of a national economy. The commercial tie with Britain was the best guarantee of Canadian autonomy, the continuing flow of British funds and the regional primacy of Central Canada in the confederation.
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In South Africa, finally unified in 1910, the London connection was no less critical to the dream of a ‘national’ future. Far more than wheat or wool in the other dominions, gold was the foundation of the South African economy, and the indispensable means of recovery from the catastrophe of 1899–1902. In the years up to 1914, production and employment on the Rand grew rapidly. Gold output rose from £16 million in 1898 (the last year before the War) to £38 million in 1912.
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The workforce followed suit.
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An authoritative estimate in 1914 claimed that gold mining contributed nearly half of government's public and railway revenue. It may already have given half the population its livelihood in what was otherwise (barring diamonds) an impoverished agrarian economy. It was gold that attracted foreign capital; gold that paid for the railway system; gold that made possible the Union of 1910 and the uneasy partnership of Boer and British. But the bonanza had strings. In the age of the gold standard, the international price of gold was fixed and invariable. Yet the cost of recovering the low-grade ores of the Rand rose remorselessly as the mines dug deeper. Profit depended upon driving costs lower, especially the cost of labour. Partly as a result, ownership of the mines was concentrated in the hands of a few large groups, of which the largest, the ‘Corner House’ group (Wernher, Beit, later the Central Mining Investment Corporation) controlled 50 per cent of production.
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Corner House was managed from London – the world centre of mining finance – to which its principals had retired. On its fortunes depended much of South Africa's commercial credit, and hence the experiment in white self-government embarked on in 1910.

Powerful as it seemed, mining capital depended upon the Afrikaner-led government of Botha and Smuts for political support. It faced an increasingly embittered white working class in Johannesburg furiously opposed to ‘dilution’ of the workforce by black or Chinese labour.
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Production, profits and share price were dangerously vulnerable to strikes and sabotage. White opinion (and almost all voters were white) was susceptible to
swaartgevaar
(‘black peril’): the fear of black competition for jobs and a black presence in the towns. Afrikaner opinion (and the majority of whites were Afrikaners) disliked and mistrusted ‘foreign’ capital and the ‘Randlords’. With their backs to this white wall, Smuts and Botha drove a hard bargain. They insisted on the expulsion of Chinese indentured labour – the red rag to the white bull – and encouraged the Randlords to replace foreign-born (largely British) mineworkers with local-born Afrikaners.
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In the Mines and Works Act of 1911, they imposed an industrial colour-bar on the Rand. But, in return, they outlawed strike action, crushed white labour militancy spectacularly in 1914 and sanctioned the huge increase in black migrant workers. Behind this compromise, we can see an anxious attempt to mitigate the political risks of exposure to external economic forces. But in no other dominion did the political and social structure (with all its racial conflicts and inequities) rest so completely on an industry bound so inflexibly to the London market. Nor on one so perilously close (or so it seemed until the mid-1930s) to commercial failure and terminal decline.

Australia and New Zealand had suffered badly in the 1890s when falling export prices, over-borrowing, a banking crisis (as overseas deposits were withdrawn and their London assets shrank) and monetary contraction plunged them into depression. The steady rise in commodity prices in the new century brought relief and recovery. Australian exports reached £80 million by 1913
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and an official commission rejoiced at the world's insatiable appetite for Australian products.
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Yet Australia failed to attract new British capital. In London, disillusionment after the crash of 1893 was reinforced by mistrust of the new Commonwealth's blend of economic nationalism and home-grown socialism. The widening sphere of wage arbitration, state enterprise and protective tariffs caused irritation in the City.
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Instead, Australians financed their capital needs and overseas debts from their rising export income. But none of this meant secession from the commercial world centred on London. Australian ‘socialism’ was not a reversion to autarky but (like the insistence on all-white immigration) a tactic to reduce the dominion's exposure to the external shocks felt so sharply in the 1890s. Economic realities dictated reliance on the British market for half of Australia's rising exports, and on the City for the short-term funds that lubricated trade. As growth picked up, so did the need for British capital. Whatever their ‘socialist’ leanings, Australian leaders showed faultless conservatism when it came to banking. The Commonwealth Bank, set up in 1912 to meet the need for a central bank, carefully followed the fiduciary practice of the Bank of England.
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Not coincidentally, perhaps, there was a sharp rise in British investment thereafter. In New Zealand, where the 1890s had been less painful, the British connection was even more important. Nearly 80 per cent of New Zealand exports were destined for Britain and perhaps 90 per cent of public debt was held there.
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Tariffs were moderate, compensating (if that) for the fall in ocean freights and import costs.
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Banking practice was cautious to an extreme lest the London investor be frightened again.
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Above all, New Zealand farming was adapted to meet the surging demand in Britain for frozen meat and dairy products. The reward was an astonishing burst of economic growth. Between 1896 and 1911, production rose by 60 per cent, the area under white occupation by 50 per cent and population by 40 per cent. The fruit of this closer integration was a virtual remaking of New Zealand society, forging a political economy that would last for more than fifty years.