How Britain Does It


So firmly implanted is the notion that in getting out of depression Britain has let nature take its course that a year ago President Roosevelt felt constrained to take notice of it. In one of his fireside talks to the nation he attempted to defend economic planning in a democracy by citing Britain’s example. The citation misfired. To the sensitive bankers it seemed as if he were using his story as a stick with which to beat the American banks. All that the President said in this connection was, ‘Let it be recorded that the British bankers helped.’

There may or may not have been an implication in that sentence. If there was an implication, it was wide of the mark. The American banks have helped the American Government more than the British banks have helped the British Government. In Great Britain the taxpayers foot the recovery bill; in the United States the reliance is partly upon the taxpayers, the bankers in the main financing the recovery budget. To this extent the American banks had no difficulty in proving that their record—whether willingly or otherwise — was far better than that of the British banks. But the fact that Britain has a budget balanced by the taxpayers does not destroy the President’s main contention. In this he was abundantly right; Britain is certainly not recovering on what Mr. Roosevelt called do-nothingness.

The use of the word ‘recovery’ in reference to Great Britain requires some statistical proof. In modern countries budget makers rely upon industrial production as the most representative single index of recovery, because industry will not produce without a market. In Great Britain this index is now above the 1929 level. The achievement might seem incredible to Americans, to whom 1929 has assumed the proportions of the unattainable. In Britain, however, the contrast is not so amazing as it sounds. The year 1929 was not the end of a prosperous, if somewhat gaudy, era in Britain as it was in America. Conditions across the Atlantic were still rated as subnormal. Then what is the best year on which to base British improvement? The year 1926, putative year of American normality, was the year of the general strike in Britain. That, therefore, must be ruled out. The next year, 1927, would be better. If we juxtapose the American record for 1926 and to-day, the British record may be seen in perspective. League of Nations figures are used.

1926 1927 1935 (August)

United Kingdom .... 101.2 109.9

United States ...97.3 . 77.5

As compared with the norm, then, Britain is nearly 9 per cent better off, while America is still 20 per cent behind. Since August both countries have improved their positions, with the United States probably leading in rate of improvement.

It is often said that the American crisis transcended the usual crisis associated with the business cycle. The statement, I believe, is valid. In dropping into the trough of the business cycle, the United States discovered that the settlement of the last horizontal frontier had robbed it of the traditional method of getting out of depression — namely, by moving west. One could await one’s turn for Upton Sinclair’s bounty. Or, as Stuart Chase says, one could carry a spear in Hollywood. But in 1929 America’s colonizing character had disappeared, and, consequently, for the first time it tailspun into a business down turn on the European capitalistic model. The realization created bewilderment. Policy backed and filled under Mr. Hoover. Confidence, or the spirit of enterprise, which Professor D. H. Macgregor, in his Enterprise, Purpose, and Profit, gives first place as a turning point in the business cycle, remained a will-o’-thewisp. It was made even shyer by Mr. Roosevelt’s reformism. Enterprisers were positively frightened, not to say repelled, while Mr. Roosevelt was putting the country through a kind of ‘European’ adjustment with such devices as unemployment insurance, collective bargaining, minimum wages, and relief, to which European enterprisers had already grown accustomed.

Britain, too, had its fundamental crisis transcending the business cycle. Just as the United States was faced with the problem of the change that had come over itself, so Britain was faced with the problem of the change that had come over the world. Britain found itself out on a limb in a very bleak world. Its system was the antithesis of what economists call a closed system. Upon an economic cosmopolitanism it had depended for its prosperity. When the nations started to shut themselves in and others out, Britain’s plight became desperate.


The world, as the British saw it in pre-crisis days, was well-nigh perfect. It was tied to specialization of labor. Will Rogers once illustrated this principle with a homely illustration. ‘If ten men went on a hunting trip,’ he wrote, ‘you would soon learn which was the best cook, and which the surest hunter to bring in the meat. You would find that each excelled in something useful to all. Now nations are just so many men like that. Each can produce something better or cheaper than the rest.’ It was the British way. While Britain ran the ships, the banks, the brokerage business, and fabricated machine-made goods for the world, it was quite content to allow other peoples to grow its food and mine the raw materials for its mechanized industries.

The arrangement was extremely profitable to Great Britain. It was rendered advantageous by the measure of the difference in the living standards between a banker and a miner or a field laborer. Nothing is wider of the mark than to say that Britain supported economic cosmopolitanism for the sake of cosmopolitanism. National policies respond to the demands of national well-being.

But the arrangement was fair as well as profitable, to the extent that the wider the market of exchanges, the more prosperous the exchangers. Consequently, with a perfect sense of national and world interest in mind, David Hume, the precursor of free trade, could say, ‘I shall therefore venture to acknowledge that, not only as a man, but as a British subject, I pray for the flourishing commerce of Germany, Spain, Italy, and even France itself. I am at least certain that Great Britain, and all those nations, would flourish more did their sovereigns and ministers adopt such enlarged and benevolent sentiments toward each other.’ Not only as a man, but as a British subject — Hume knew on which side the British as well as the world’s bread was buttered.

The perfection of this arrangement from the British standpoint is testified by my early life. No community could have been more provincial than my own in Yorkshire. There was a rigidity in our lives that turned people even in the next county into ‘foreigners.’ And yet in our economic habits we were completely cosmopolitan. Our county subsisted on foreign buying of our woolens. In return my mother, whose dislike of foreigners was intense, would load our table with practically everything foreign: Danish bacon, Irish potatoes, New Zealand lamb (the famed English lamb was too expensive for a big family), Ceylon tea, bread made of wheat from the United States and Canada. The British housewife, indeed, put a girdle around the world, as Professor Herbert Heaton phrases it. Only the eggs and the secondary vegetables, as I recall, were our very own. Even the wool that was used at the mill came from the Argentine. It was with such an exchange that large families were raised and well cared for. If the family grew too large, then one or other of the more adventurous would seek his fortune in the New World or the ‘Colonies.’ In the economic sense this human export was a kind of final balancer.

Perhaps this exchange system would have been disrupted without the war. But the war expedited the disruption. It divided two eras. With the home mills turned into munition making, other countries had perforce to make the manufactures that Britain had supplied, to fetch and carry for themselves, to rely on their own banking and brokerage services.

All would have been well if, after the war, these nations had dropped their new work and resumed their old work exclusively. But peacetime Britain entered a new world. To the old compulsion to do the work that Britain formerly did for these nations had been joined new pressures to continue to do it. The new goods were ‘poore things but mine own.’ That is to say, economic nationalism had become the new god. It combined as many economic functions as possible within the state even if the state itself had to go into business to obtain them. It was a pathological flowering of the romantic nationalism of the seventeenth and the eighteenth century.

The initial attempts of these countries to do for themselves what they had allowed Britain to do for them brought a wry smile to British faces. Just after the war, matches made in Japan would not strike; pencils were found with only bits of lead at either end; crates of foreign-style crockery would be opened with cups divorced from their handles; a Japanese ship had to be weighted on one side to keep it from keeling over. All industrial neophytes had gone through this experience. Mr. Gustavus Myers has just reminded us that at one time the English Parliament had to pass legislation forbidding spurious work by goldsmiths, by silversmiths, by weavers, by watchmakers. These watchmakers actually used to export watches minus the movements. But British salesmen are not historically-minded.

It was the spread of mechanical skill that made the first dent in the selfsatisfaction of the British. For some time they tried to comfort themselves with the explanation of cheap labor. Cheaper labor, however, counts only when it is united to efficiency. In 1868 Sir Charles Dilke, after a world tour, explained the main lesson gathered from his tour in these words: ‘I have seen everywhere the man whose food costs four shillings a day victorious over the man whose food costs fourpence.’ To-day the relative cost of the food remains more or less the same. But whereas a Lancashire weaver, whose work constituted Britain’s premier export, could turn out manyfold the work done by a Japanese, to-day there is nothing to choose between the mechanical skill of the two, and the Japanese thus finds his cheaper food a competitive advantage. The paralleling of skill is, of course, limited. But, in deference to the demands of an economic nationalism, a lack of aptitude in other pursuits did not prevent Japan from subsidizing them in order either to foster more aptitudes or to produce uneconomically for ‘national’ reasons.

After the war I noticed the change at first hand in the Far East. Textile men talked incessantly about the competition from Japan. Cotton men were positively afraid. Even the proud woolen men, drummers of the last British preeminence, saw a threat to themselves on the far horizon. Their number dwindled at the opulent clubs dotted on the China Seas from Yokohama to Singapore. Before I had left the Far East, British scouts were actually trying to find out the mysteries of improved looms installed in the Japanese mills. ‘The flight of the born leader from the Machine,’ warned the doleful Spengler, ‘is beginning.’ Adding insult to injury, the new industrial countries began to compete with Britain inside the British market.

I have used Japan merely as an example of what Britain’s traditional customers were doing in greater or less degree. America was, of course, a much mightier sign of the economic transformation that time and opportunity had wrought. After the war the United States had actually come to share the British throne in terms of economic strength and political power. Nor was the urge to do for themselves what had hitherto been done for them limited to the non-British world. Inside the Empire the same revolution was going on. The stocktaking after the crisis revealed its extent. Of the entire Australian production, formerly given over to wool and wheat, one third to-day is in manufactures. This figure is three times more than in prewar days. South Africa, with about the same output as Australia, shows an even greater increase, its manufactures being six times the pre-war total. Canada, the most industrialized of the Dominions, has more than doubled its industrial production. India is producing the bulk of its requirements of iron, steel, and cement; it has doubled its output of cotton yarn, and there is a twelvefold increase in the looms necessary to weave that yarn into piece goods. The same rapid industrialization is reported in New Zealand and in that country which had almost been incorporated into the economic empire — Argentina.

What this meant in the more human terms of exchange is plain. The British continued to buy their wool from Australia and Argentina, but they could not sell back the fabricated garments. The Dominions continued to import yarn, but only for the purpose of feeding looms tended by Dominion weavers. Iron and steel self-sufficiency left whole areas in the North of England so desolate as to inspire a macabre literature. This loss of ‘ rough ’ cargo laid up millions of tons of British shipping and re-created the wartime phrase ‘devastated areas’ to apply to the shipbuilding areas in North Britain. Shipping and shipbuilding form Great Britain’s greatest industry.


What was happening on the export side of the British ledger is fairly well known. The profound changes on the import side are not so generally appredated. For a long time British industrialization marched side by side with a heavily protected market in agricultural staples. This darkened the conditions of the masses so grievously that the 1840’s are still called in British history the ‘hungry forties.’ Out of the trouble sprang the great Cobdenite agitation, which ultimately resulted in the repeal of the corn (wheat) laws in 1846. From then on, Britain gradually threw off all its protective duties till its system had become part of the world system. The declared policy of the country consisted in obtaining food supplies for its inhabitants at the lowest possible figure in a free market.

To be safe the system depended as much on free competitive conditions in the world’s food market as on control of the seas. It was dangerous living. The war revealed the danger. Britain’s navy proved highly vulnerable to undersea warfare. At the height of the submarine campaign Britain found itself with only a two weeks’ supply of wheat. It was a narrow squeak about which those in the know still speak with wonder. After the war Britain resigned sea dominion for parity with America. That in itself upset one of the props of the British system. But what made more impression on economic thinkers than even this change was the metamorphosis in the marketing of foodstuffs upon which British households depended. Monopoly in the sale of food to Britain took the place of free markets.

Sir Samuel Hoare in his speeches about the Italo-Ethiopian crisis has revived interest in this vital subject. To him the monopolistic control of raw materials appears to be the basic cause of war. Italy had made the same statement in the same place as far back as 1920. In the Stevenson rubber scheme, Britain played this game as well as any other ‘have’ country. Tin is a present-day example. But Britain has had plenty of experience on the side of the victims. In wheat, of which it was importing 80 per cent of its requirements as late as 1928, it had to face a world where combines, with power to withhold supplies, had taken the place of free farmers. In Canada there was the Wheat Pool; in the United States, Mr. Hoover’s Farm Board; in Argentina, two dominant foreign firms; in Australia, more pools; and in Russia, a state trading organization. They introduced the device of the carry-over. As Mr. A. H. Hurst, in his book The Bread of Britain, says, ‘When free competition no longer obtains, not only is the buyer opposing marked cards, but there is no certainty that those cards may ever be called.’ Even now Britain is on tenterhooks as to the wheat-selling policy of Canada, which, in consequence of crop failures elsewhere, holds the dominant position in the export market.

National thought is less resilient than events. There is always what the economists delight to call a ‘lag.’ Britain either could not see its developing crisis or refused to see it. Slogans took the place of policies after the war. Back to ‘normalcy’ could be heard in Britain as in the United States. But normalcy for Britain was different from normalcy for the United States. Comparatively the tight little island was ‘chained in infirmity.’ Nevertheless, if America could go back to normalcy, so could Britain. I am never certain how much in British policy is due to the ostrich and how much to the defiant but battle-torn lion.

In 1925 the British added several more links to the chain by ‘looking the dollar in the face’ — that is, by tying the pound to the dollar at the pre-war value of $4.86. ‘Why the conditions of 1913 should be regarded as normal any more than those of 1927 or 1928 or any other dale has never been explained,’ commented the Right Honorable Reginald McKenna, leading British banker. The decision signilied the hoisting of Humpty Dumpty to an artificial eminence. Specifically British goods, hard enough to sell in a world of economic nationalism, were made even harder for foreigners to buy. By the same token, foreign goods became more expensive. In 1926 the late Lord Melchett, leading British industrialist, in his book Industry and Politics, said, ‘ It has been calculated — I think correctly — by various authorities that one result of the return to the gold export standard, a result of the rise in the pound in relation to the dollar, is to add between 1s. 9d. and 2s. to the price of every ton of coal we export from South Wales.’ No wonder that in the North of England one heard it said that peace ‘ broke out ’ when war ended.

What industry lost in the fateful decision, finance, of course, gained. Britain is a great creditor country, and the effect of adding a few cubits to Humpty Dumpty’s stature was to ensure the payment of overseas debts to Britain in more valuable pounds. It was the triumph of the City at the expense of industry — the triumph, that is, of finance internationalism. But the enterpriser is vastly more important to economic society than the bondholder. This slowly dawned on British minds. Looking back in 1931, the Macmillan Committee remarked: ‘The actual situation which was disclosed in the years following the return to gold marks that step as the beginning of a new series of difficulties for our trade and industry.’ By that time the British depression had run into the world depression.

Let us now recapitulate t he causes of the British crisis: (1) the breakdown in nineteenth-century world trade; (2) the return to a too high exchange for the pound; (3) the world depression — a triple shock from which the British system, traditionally as solid as the Rock of Gibraltar, was shaken as it had never been shaken since the height of its Victorian glory. The Macmillan Committee, reporting in midsummer 1931, proclaimed the British difficulty from the housetops. Its report became a best seller, especially among foreigners with investments in England. It was implied that Britain was living beyond its international income. Since 1913, imports of food and raw materials had grown by 18 per cent. The exports of manufactures with which these imports were bought, however, had gone down 32 per cent. Human labor as well as the results of it had been shut out. Services had gone down correspondingly. Foreigners noted at the same time that the British domestic budget was getting out of balance, as well as its international accounts. They rushed to withdraw their British holdings. The run became so great that at last the Bank of England closed its paying-out windows. No more gold could be had; Britain was off the gold standard. And on that day in September 1931 the British tore up its history, and began to write a new volume based upon an entirely new concept of national interest.


Britain has a habit of indulging in its crises calmly. At the time there is the minimum of excitement. The run on England’s gold in 1931 was different from that in other countries in that the natives held aloof from it. Paul Einzig believes that the British character is at its best in emergency because it is unaware that an emergency exists. An illustration of this trait came to my attention several days after the British severed the link connecting the pound with foreign currencies. A hotel clerk in London had been in the habit of giving guests departing for the Continent the gratuitous service of exchanging their pounds into continental money. He gave up the custom before the end of September, 1931. As he explained, ‘It’s become too difficult since those foreign currencies started to jump up and down!’ Here was an unawareness of anything untoward happening to the pound. But the unawareness was partly compounded of a blind faith that nothing could happen to the pound. Britons who had sworn by gold the day before changed their allegiance to the pound overnight. We all wondered at the obedience with which the British responded to the invitation of the Royal Mint to sell their golden trinkets for pounds that were just beginning to depreciate in terms of gold. Then came the line-up to pay income tax before due dates. That was a miracle!

A character such as this was a tremendous economic asset to a nation engaged in revamping its economic system. There are many economists who seek the explanation of the entire business cycle in ‘the mutual generation of optimism and pessimism.’ Others call the business cycle the credit — that is, confidence — cycle. How much more important is confidence in the staging of a revolution!

Another natural advantage accruing to Britain at this critical stage in its history lay in the possession of a permanent and expert Civil Service. In England no class or profession is held in higher respect than its government officials. The most gifted boy in school in Britain is marked out for official life. Cecil Rhodes imagined that the granting of Oxford scholarships to the cream of American youth would be sufficient in itself to lead them to Washington. He failed to realize the superior drawing power of business and the professions. Graham Wallas’s remark comes to mind when one thinks of the new economic responsibility with which democracies are saddling their government workers: ‘Britain’s solitary contribution to political theory lies in Gladstone’s establishment of the Civil Service Commission in 1870.’ Before that year England bad the same kind of ‘political clearance’ system as prevails under Farleyism. The source of jobs and jobbery was well called the Paymaster-General. An independent Civil Service is as fundamental to any economic enterprise guided by the state as mechanics are to machinery.

The task of the new Britain was twofold. In its international life it had once more to live within its income and to readjust itself in an economically nationalistic world. And recovery had to be forced by government action.

The British, freed from the fear of foreigners, began to use the off-gold, or national, pound as a weapon to improve their international balance. More exports had to be encouraged. Imports had to be impeded. To stimulate exports the pound was allowed to depreciate to a natural level. Some critics say that on occasion the pound has been beaten down below that level for the purpose of aiding British exports — that is to say, the British after 1931 have been suspected of going to the other extreme from that of 1925! The facts are screened behind the bland facade of the Old Lady of Threadneedle Street. One thing is clear. Monetary policy no longer is so imposed as to throttle the energies of enterprise. The Midland Bank of London considers this change the most important in the last twenty years. In its last review it notes that neither the British Government nor the Bank of England regards the maintenance of the sterling paper pound at its old parity with the gold pound — or, indeed, at any particular gold value — as the dominant objective of monetary policy. The pound has depreciated on the foreign exchanges 40 per cent without exciting even a sigh from Humpty Dumpty’s former guardians. At home it has stayed constant in purchasing power. Thus British goods have been produced at one price level and sold at a lower price level — just the reverse of the situation between 1925 and 1931. The benefits have been partly nullified by all manner of protective devices in the customer countries, but there has been a little improvement in foreign purchases of British goods.

The greatest improvement has occurred in sales to the countries which have tied their currencies to the British pound. So great was Britain’s power in the world market that a number of currencies flocked to its standard. But this was not the only reason for the attraction. The desire for inter-valutary relations with England even after the pound had toppled off its golden throne is a tribute to the fact noted by Knapp in his State Theory of Money that it was not the gold standard per se which spread after 1871, but the English monetary system. So around British policy there arose a new monetary world that the late Sir Basil Blackett called Sterlingaria. Countries which one by one were dragged off the gold standard gravitated to the paper pound as an anchor for their own paper currencies. Over one third of the world’s export trade is now conducted in sterling currencies. It is a new kind of monetary union which has the same effect in encouraging business as a customs union. From 1932 to 1935, Sterlingaria’s proportion of total British exports has risen from 12.4 per cent to 16 per cent. British management seems to have attained a measurable degree of success in this double-barreled effort to prevent home costs from rising to the point where they would nullify the cheaper pound abroad.

In the disrupted state of the world, however, the greater hope of creating a better balance in Britain’s international trade lay in limiting imports rather than in stimulating exports. This involved a most spectacular change in British policy. Britain abandoned Richard Cobden and free trade. Its own market became as protected as the markets from which British producers had been extruded. A tariff system is generally the beginning of economic planning, though, to hear some American manufacturers talk, one would imagine that it is the fundamental principle of laissez faire. No interference can be more comprehensive than that afforded by the tariff. The British, as will presently appear, faced this logic by using what Alexander Hamilton frankly called a bounty system for manufacturers as the justification for comprehensive interferences. They began by making the tariff a very flexible instrument. Under four heads they put a blanket duty on practically all imports, with the view of protecting home industry; negotiated a schedule of preferences with the Dominions; heavily protected key industries upon which the economic nationalism of the world had pressed most harshly; and negotiated particular bargaining rates with sterling standard and other countries.

The result has been a drop in imports (except food and raw materials) much sharper than the rise in exports. Thus the two sides of the ledger have again been brought into a comfortable balance. We can see as yet only the achievements on goods account; here the import surplus has been whittled down from the crisis year of 1931 by 30 per cent.

(How Great Britain shapes her policy to meet, transformed conditions will be explained by Mr. Elliston next month)