From 1929 onwards, the British system was caught up in the world's economic and geopolitical earthquake. Almost all the conditions on which its wealth and safety depended now looked much more uncertain. The threat of a great power a.s.sault on British interests or territory, a remote possibility before 1930, became increasingly real and imperial defence a more arduous task. The contraction of world trade, the ever-higher walls of protection, and the renewed war between currencies, wrecked the hopes of British exporters and shrank the 'invisible income' which made up the deficit on the balance of trade. Britain's wealth and prosperity, the core of its power, seemed to be dwindling away. As economic catastrophe loomed over much of the world, the virus of nationalism (as opinion in Britain was inclined to see it) spread wider and deeper. It infected the great powers on whose mutual restraint the British system relied if the costs of defence were to be kept within bounds. It encouraged the attack on foreign property and trade which the British (with more of both to lose than anyone else) had good reason to dread. Nationalist ideology corroded the 'steel frame' of colonial rule, challenged its systems of political influence and drove it w.i.l.l.y-nilly into costly coercion. As geopolitics, economics and nationalism converged, Britain's loose-knit empire, far-flung, ill-defended and so reliant on trade, looked like a hostage to fate. Secure in its 'Antonine Age' only twenty years earlier, by the mid-1930s the British system seemed plunged (to some observers at least) in a terminal crisis. 'The storm clouds are gathering', Churchill told the Conservative party in December 1934, 'others are ready and waiting to take our place in the world.'3 There were plenty of those who for partisan reasons foretold the early demise of British world power. Expectant Marxists, frustrated nationalists and embittered imperialists all wrote its obituary. Even sympathetic observers, peering in from outside, were deeply alarmed. 'England is beset by manifold dangers', wrote the German jurist, Herman Kantorowicz, in a book first published (in German) in November 1929. 'The economic foundation of her greatness grows narrower from day to day.'4 The Americans were richer, the Germans better trained, even the Russians more numerous. Britain's industries were outdated, its workforce overpaid, the recourse to tariffs a delusion. In the age of the aeroplane, it was no longer an island, and was too small geographically to be an effective air power. The British were also the main object of Muslim and Asian resentment, and the 'colonial epoch' was on its last legs. 'In this age of nationalism, it will be impossible to hold India'; Iraq and Egypt were already slipping the leash. Deprived of its empire, Britain would decline 'into a second Holland'. Much of Kantorowicz's warning was echoed by Andre Siegfried, a French political scientist of unrivalled prestige. In The Americans were richer, the Germans better trained, even the Russians more numerous. Britain's industries were outdated, its workforce overpaid, the recourse to tariffs a delusion. In the age of the aeroplane, it was no longer an island, and was too small geographically to be an effective air power. The British were also the main object of Muslim and Asian resentment, and the 'colonial epoch' was on its last legs. 'In this age of nationalism, it will be impossible to hold India'; Iraq and Egypt were already slipping the leash. Deprived of its empire, Britain would decline 'into a second Holland'. Much of Kantorowicz's warning was echoed by Andre Siegfried, a French political scientist of unrivalled prestige. In England's Crisis England's Crisis (1931), he emphasised industrial obsolescence, an unsustainable standard of living and the falling away of British foreign investment as the seeds of economic decline. The British depended upon international trade: they had no choice in the matter. Protection would do them no good. But economic nationalism posed a deadly threat. 'Caught between a "Fordised" America and a "cartelised" Europe, [Britain] will eventually have to enter an international economic alliance.' (1931), he emphasised industrial obsolescence, an unsustainable standard of living and the falling away of British foreign investment as the seeds of economic decline. The British depended upon international trade: they had no choice in the matter. Protection would do them no good. But economic nationalism posed a deadly threat. 'Caught between a "Fordised" America and a "cartelised" Europe, [Britain] will eventually have to enter an international economic alliance.'5 It was not strong enough to preserve a worldwide influence and 'stand alone as before'. It was not strong enough to preserve a worldwide influence and 'stand alone as before'.

For much of the decade after 1929, British leaders struggled to contain the effects of geopolitical change, economic depression and nationalist politics. For much of the time, they saw themselves as confronting the centrifugal forces that were pulling their system apart. Their aim, so far as consistent purpose can be seen, was to hold the centre: against the threat of strategic defeat, economic implosion or social upheaval. They wanted Britain to remain, so far as it could, at the centre of world trade. They were determined to keep it in its central position in its own world-system, by hook or by crook. They were also anxious to soften the social conflict at home that high unemployment might bring. But there was a limit to what they could achieve on their own. In the self-governing dominions, preserving the 'British connection' in more straitened conditions required the support of local political leaders acutely aware of their own public opinion. In India it was caught up in the four-cornered struggle between the Raj's 'steel frame' of British officials, the Congress politicians, the Muslims and the princes. London's survival as a centre of world trade would turn on how well it adapted to the new global economy of blocs, tariffs and barter. But what mattered most was beyond British control. The fate of their system, British leaders were beginning to learn by the late 1930s, might really depend on the unsated ambitions of the 'have-not' powers Germany, Italy and j.a.pan and their inscrutable leaders.

Imperial defence Before 1930, there had been good grounds for thinking that the British world-system had entered a phase of exceptional freedom from external a.s.sault. In no previous period since the 1880s, when the age of 'world politics' began, had British interests (or those of the dominions) appeared less exposed to the threat of a great power attack. Of course, it was true that mutual suspicion still governed the conduct of great power relations. There was much British resentment at the gratuitous expansion of the American navy (as it seemed in London) and the symbolic dethronement of the Royal Navy's supremacy that they had been forced to concede. Periodic tensions with France evoked the reminder that, in European terms (and especially in air power), the French would be a formidable enemy. The Italians were an irritant when they jostled and threatened on the frontiers of Egypt, and cast covetous eyes on Ethiopia and Yemen. The subversive activity of the Soviet Union, whose red hand was seen in the growth of working-cla.s.s militancy in both Europe and Asia, attracted much official attention. Russian agents were credited with anti-British activity in the Middle East (in Iran) as well as in China. The old imperial bogey of the Russian menace to India via the Northwest Frontier took on a new ideological meaning. The growth of j.a.panese power, bluntly restrained by Anglo-American pressure in 19212, required a watchful presence if Britain's large interests in East Asia were not to be squeezed. Indeed, the British suspected that j.a.pan and the Americans were both happy to see British interests bear the brunt of the Chinese nationalist attack on foreign privilege that was growing in virulence after 1925.

Yet this pattern of friction was actually quite rea.s.suring. For what it revealed was that the most dangerous connections in pre-war international diplomacy had fallen apart. Before 1914, the British had seen their main danger in the German domination of Europe. They relied by default on the alliance of Russia and France, and on winning the arms race against German naval expansion. Maintaining the European balance of power had been the main pillar of empire defence. But its far-reaching demands had been increasingly felt in every vicinity where European interests competed, in the Middle East and East Asia especially. Almost no local matter could be settled without reference to its effect on the European balance: and great power relations in Europe, with its high-voltage circuits of rumour and fear, quivered with the shock of remote detonations and consular outbursts on faraway bunds. The ghastly outcome of this 'old diplomacy' had revealed the fine thread upon which Britain's security (and imperial defence) had really been hung. But, once European peace had been a.s.sured at Locarno by the Franco-German reconciliation, Europe's balance of power was no longer the key to the peace of the world. Soviet Russia was isolated and geostrategically weak. j.a.pan was much stronger in its own sphere in East Asia, but had almost no prospect of finding a friend among the other great powers. The result was a 'de-linking' of the regional conflicts so dangerously linked up before 1914 to Britain's great strategic advantage. With a navy that was more than equal under the Washington terms to those of France and Italy combined, and much stronger than j.a.pan's, the British had little to fear from a Mediterranean dispute, or a j.a.panese attack on their interests in Asia, and no reason to fear that they might coincide. There was no likely combination of powers to prevent them from holding their own in Europe, the Middle East, the Indian Ocean or East Asia, nor from applying their power in the theatre they wanted and at the time of their choosing. It was not simply that the British were the one global power: no coalition against them had any chance of cohering.

This highly favourable turn owed a great deal to the path of American power. The British approached this leviathan with a volatile mixture of admiration, mistrust and judicious appeas.e.m.e.nt. Britain is faced, remarked a senior Foreign Office official (with an American wife) in late 1928, with a phenomenon for which there is no parallel in our modern history a State twenty-five times as large, five times as wealthy, three times as populous, twice as ambitious, almost invulnerable, and at least our equal in prosperity, vital energy, technical equipment and industrial science. This State has risen to its present stage of development at a time when Great Britain is still staggering from the effects of the superhuman effort made during the War, is loaded with a great burden of debt and is crippled by the evil of unemployment. with a phenomenon for which there is no parallel in our modern history a State twenty-five times as large, five times as wealthy, three times as populous, twice as ambitious, almost invulnerable, and at least our equal in prosperity, vital energy, technical equipment and industrial science. This State has risen to its present stage of development at a time when Great Britain is still staggering from the effects of the superhuman effort made during the War, is loaded with a great burden of debt and is crippled by the evil of unemployment.6 As Craigie's memorandum suggested, the American challenge to Britain's commercial and industrial power was just as potent as that to its maritime primacy. But, if yielding naval supremacy still stuck in the admirals' craw, and if the American 'style' in diplomatic exchange seemed designed to annoy, the transatlantic 'phenomenon' had done little real damage to British world interests. Perhaps the reverse. It was American capital (as we saw in the last chapter) that had smoothed the path of European peace, but without exacting the price in diplomatic allegiance another great power might have sought. America's maritime might, scaled against Britain's, was in practice deployed against the power that was thought to threaten them both. From 1922 onwards, the bulk of the United States Navy was placed in the Pacific.7 While 'War Plan Red' (for an Anglo-American war) gathered dust, 'War Plan Orange' (against j.a.pan) was real. Anglo-American tensions remained. They were fuelled by the old quarrel over 'belligerent rights': whether a naval blockade ( While 'War Plan Red' (for an Anglo-American war) gathered dust, 'War Plan Orange' (against j.a.pan) was real. Anglo-American tensions remained. They were fuelled by the old quarrel over 'belligerent rights': whether a naval blockade (the British weapon in a European war) could be used to prevent the traffic of 'neutral' (in practice American) trade; and by American pressure for a further reduction of fleet strengths. In London, governments of both parties accepted the case for a new naval agreement. The London Naval Conference of 1930 preserved the existing distribution of maritime power (including that of j.a.pan), extended the 'holiday' in battleship building until 1936, averted the threat of a race to build cruisers, and restored good relations across the Atlantic. British weapon in a European war) could be used to prevent the traffic of 'neutral' (in practice American) trade; and by American pressure for a further reduction of fleet strengths. In London, governments of both parties accepted the case for a new naval agreement. The London Naval Conference of 1930 preserved the existing distribution of maritime power (including that of j.a.pan), extended the 'holiday' in battleship building until 1936, averted the threat of a race to build cruisers, and restored good relations across the Atlantic.8 As it turned out, the conference was the swan song of the short golden age of post-war security. The lowering background to the naval agreement had been the deepening crisis in the world economy. The storm broke in East Asia. The acute dependence of j.a.pan on overseas trade, j.a.panese fears of exclusion from their markets in China (as Kuomintang rule was extended), and their long-standing suspicion of British and American commercial designs in East Asia, created an aggressive and panicky mood in j.a.panese politics.9 When the full force of depression was felt in early 1931, and with it the threat of violent social unrest, civilian politicians lost control of the army. China's huge northern province of Manchuria had been a target of j.a.panese economic penetration since before 1914. The 'South Manchurian Railway', its large 'railway zone', and the colonial army based on the Kwantung peninsula, were the means through which their regional power was a.s.serted. In September 1931, perhaps to pre-empt future resistance from the migrant Chinese now flooding into Manchuria, When the full force of depression was felt in early 1931, and with it the threat of violent social unrest, civilian politicians lost control of the army. China's huge northern province of Manchuria had been a target of j.a.panese economic penetration since before 1914. The 'South Manchurian Railway', its large 'railway zone', and the colonial army based on the Kwantung peninsula, were the means through which their regional power was a.s.serted. In September 1931, perhaps to pre-empt future resistance from the migrant Chinese now flooding into Manchuria,10 j.a.panese officers exploited a trivial fracas to impose the 'Kwantung' army's control over the whole of the province, to which their colleagues at home extracted Tokyo's a.s.sent. It was a gross contravention of the Washington treaties (the post-war charter of East Asian security), a ma.s.sive infringement of China's territorial integrity and (not least) an obvious breach of j.a.pan's obligations as a member of the League. j.a.panese officers exploited a trivial fracas to impose the 'Kwantung' army's control over the whole of the province, to which their colleagues at home extracted Tokyo's a.s.sent. It was a gross contravention of the Washington treaties (the post-war charter of East Asian security), a ma.s.sive infringement of China's territorial integrity and (not least) an obvious breach of j.a.pan's obligations as a member of the League.

There was thus every reason for a fierce British reaction. The restraint of j.a.pan had been a key part of the post-war peace settlement. It meant a great deal to the Pacific dominions, whose fear of j.a.pan was tightly bound up with their racial exclusiveness as white British societies. Among the Western powers with a stake in China's economy, the British had the most to lose with much more in investment and trade than the United States. Of the great hub of their interests, the port-city of Shanghai and its British-run enclave the 'International Settlement', the Foreign Office had remarked that 'no Chinese government is as yet fit to control the destinies of a city which...compares with London and New York'. Indeed, 'whenever real danger threatens the city...British interests...are so great that British troops must be sent to protect the Settlement, just as though it were a British possession'.11 j.a.pan's economic imperialism was unlikely to stay far away in the north: Taiwan, after all, was a j.a.panese colony, and the j.a.panese presence was already strong in Shanghai. London, however, was very reluctant to take the lead on Manchuria. 'Avoid at all costs an open breach with j.a.pan' j.a.pan's economic imperialism was unlikely to stay far away in the north: Taiwan, after all, was a j.a.panese colony, and the j.a.panese presence was already strong in Shanghai. London, however, was very reluctant to take the lead on Manchuria. 'Avoid at all costs an open breach with j.a.pan'12 was the watchword of policy. This was partly because a possible armed confrontation was extremely unwelcome at a time of enormous uncertainty in Britain's own politics in 19312. But it also reflected two other constraints whose force was compelling. The first was the doubt whether it was in Britain's real interests to oppose j.a.pan on Manchuria. The British had conceded (in 1926) that their extra-territorial privileges in China (symbolised by their treaty-port rights, in Shanghai above all) could not be maintained against the nationalist opposition in China. They had begun their retreat from the beleaguered outposts of the old treaty-port system. But they regarded the Kuomintang nationalism of Chiang Kai-shek as xenophobic and unstable, and dreaded a wholesale a.s.sault on British persons and property. 'A strong China is not a necessity to us; indeed the preservation of Hong Kong, and, as long as possible, of our remaining special rights in China, suffices to suggest the contrary', was the cold comment in London on an enthusiastic despatch from the Peking legation expressing the opposite view. was the watchword of policy. This was partly because a possible armed confrontation was extremely unwelcome at a time of enormous uncertainty in Britain's own politics in 19312. But it also reflected two other constraints whose force was compelling. The first was the doubt whether it was in Britain's real interests to oppose j.a.pan on Manchuria. The British had conceded (in 1926) that their extra-territorial privileges in China (symbolised by their treaty-port rights, in Shanghai above all) could not be maintained against the nationalist opposition in China. They had begun their retreat from the beleaguered outposts of the old treaty-port system. But they regarded the Kuomintang nationalism of Chiang Kai-shek as xenophobic and unstable, and dreaded a wholesale a.s.sault on British persons and property. 'A strong China is not a necessity to us; indeed the preservation of Hong Kong, and, as long as possible, of our remaining special rights in China, suffices to suggest the contrary', was the cold comment in London on an enthusiastic despatch from the Peking legation expressing the opposite view.13 Attacking j.a.pan on China's behalf thus had little appeal. The second factor at work was a well-merited caution. Coercing j.a.pan meant sending a fleet to Northeastern Asia at a time when the nearest fully fledged naval base was no closer than Malta. Few naval strategists would have needed reminding that sending a navy from Europe into the Sea of j.a.pan was an exceptionally hazardous business. For the Russians at Tshushima in May 1905 it had been a catastrophe. Attacking j.a.pan on China's behalf thus had little appeal. The second factor at work was a well-merited caution. Coercing j.a.pan meant sending a fleet to Northeastern Asia at a time when the nearest fully fledged naval base was no closer than Malta. Few naval strategists would have needed reminding that sending a navy from Europe into the Sea of j.a.pan was an exceptionally hazardous business. For the Russians at Tshushima in May 1905 it had been a catastrophe.14 Even courting a quarrel (by the imposing of sanctions on j.a.panese trade) might expose British interests to threats and reprisals that would be hard to fend off without a strong naval presence, and unsafe to embark on without large reinforcements to send if need be. Even courting a quarrel (by the imposing of sanctions on j.a.panese trade) might expose British interests to threats and reprisals that would be hard to fend off without a strong naval presence, and unsafe to embark on without large reinforcements to send if need be.

As a result, and with no hope of forging an Anglo-American front, the British response was carefully muted. j.a.pan was condemned by the League, but took little notice. However, the need to strengthen Britain's East Asian presence was taken up by the Admiralty which began its campaign for naval expansion and a fleet large enough to fight simultaneously simultaneously in Europe and the Far East. Hitler's accession to power in January 1933, and his open rejection of disarmament in October that year, hugely strengthened its case. Even those who believed that j.a.pan would only be dangerous if Britain were already embroiled elsewhere, now had to consider the renewed possibility of a conflict with Germany, by far the strongest (if only potentially) of the European powers. It was no longer a matter of an (improbable) war with France or Italy. If Germany resumed its old place as a great military power, the Navy would need to be able to impose a blockade (its weapon of choice) or contain a new German fleet built along pre-1914 lines. The Chiefs of Staff had already denounced (in March 1932) Britain's 'defenceless' position in East Asia. In November 1933, in the wake of Hitler's p.r.o.nouncement, the Cabinet approved the creation of a 'Defence Requirements Sub-Committee' to consider what extra spending was needed. in Europe and the Far East. Hitler's accession to power in January 1933, and his open rejection of disarmament in October that year, hugely strengthened its case. Even those who believed that j.a.pan would only be dangerous if Britain were already embroiled elsewhere, now had to consider the renewed possibility of a conflict with Germany, by far the strongest (if only potentially) of the European powers. It was no longer a matter of an (improbable) war with France or Italy. If Germany resumed its old place as a great military power, the Navy would need to be able to impose a blockade (its weapon of choice) or contain a new German fleet built along pre-1914 lines. The Chiefs of Staff had already denounced (in March 1932) Britain's 'defenceless' position in East Asia. In November 1933, in the wake of Hitler's p.r.o.nouncement, the Cabinet approved the creation of a 'Defence Requirements Sub-Committee' to consider what extra spending was needed.15 Its proceedings record the drastic alteration of the geopolitical scene since the halcyon days of 192631. But they also reveal the doubts and divisions over how best to respond to the (still dimly glimpsed) new patterns of power. Its proceedings record the drastic alteration of the geopolitical scene since the halcyon days of 192631. But they also reveal the doubts and divisions over how best to respond to the (still dimly glimpsed) new patterns of power.

The argument turned on the relative dangers posed by German and j.a.panese aggression. In the Admiralty's view, Britain had to be able to deter and defeat an attack by j.a.pan, which meant a strong Eastern fleet to match the j.a.panese navy. j.a.pan, after all, was now a great island empire that stretched from the Kuriles to Taiwan and since 1918 into the Central and South Pacific; and a mainland power that ruled over Korea and the client state of Manchukuo (as Manchuria was renamed). The disarmament terms of the Washington treaties had barred new fortified bases in East Asian waters a strategic boon to j.a.pan which had little to fear from Hong Kong or American bases in Guam and the Philippines.16 Even Singapore was poorly defended and lacked proper dry-docking facilities. Yet the Royal Navy had to defend Britain's interests in China (in an era when new markets had exceptional value), its commercial sea-lanes, its Southeast Asian possessions (and those of the Dutch, their strategic dependants), as well as two great provinces of the 'British world' in Australia and New Zealand. If it failed to do so, or suffered a setback in trying, the British world-system would suffer a staggering and perhaps irreversible blow. For, in a naval perspective, a defeat of this kind would quickly lead on to the loss of British control in the Indian Ocean, severing Britain's links with its most powerful possession of all, and opening the East and South African coasts to attack from the sea. The whole hinterland of British world power, that had helped Britain sustain the brutal struggle in Europe and the Middle East less than two decades earlier, would have been swept from its grasp. The rest would soon follow. This apocalyptic scenario was reinforced by the view that j.a.pan had become a new 'Prussian' state: aggressive, militaristic and set on regional domination Even Singapore was poorly defended and lacked proper dry-docking facilities. Yet the Royal Navy had to defend Britain's interests in China (in an era when new markets had exceptional value), its commercial sea-lanes, its Southeast Asian possessions (and those of the Dutch, their strategic dependants), as well as two great provinces of the 'British world' in Australia and New Zealand. If it failed to do so, or suffered a setback in trying, the British world-system would suffer a staggering and perhaps irreversible blow. For, in a naval perspective, a defeat of this kind would quickly lead on to the loss of British control in the Indian Ocean, severing Britain's links with its most powerful possession of all, and opening the East and South African coasts to attack from the sea. The whole hinterland of British world power, that had helped Britain sustain the brutal struggle in Europe and the Middle East less than two decades earlier, would have been swept from its grasp. The rest would soon follow. This apocalyptic scenario was reinforced by the view that j.a.pan had become a new 'Prussian' state: aggressive, militaristic and set on regional domination17 a suspicion that was strengthened by its further advance in North China. j.a.pan was a real and immediate danger, so this argument ran: the Germans would follow in several years' time. But what was urgently necessary was the decision to build up the navy to be able to deal with them both simultaneously. a suspicion that was strengthened by its further advance in North China. j.a.pan was a real and immediate danger, so this argument ran: the Germans would follow in several years' time. But what was urgently necessary was the decision to build up the navy to be able to deal with them both simultaneously.18 But not everyone believed in the scale or immediacy of the j.a.panese challenge, let alone the wisdom of confronting it militarily. Britain could not fight two wars at once, said the Treasury flatly. Other expert opinion saw the j.a.panese threat as more economic than military, and hobbled by the resistance of Kuomintang China. Still others insisted that the Germans remained the 'ultimate' enemy the phrase that crept into the Committee's report. If they were deterred, then the j.a.panese would not move. The fiercest attack on the navy's position came from Neville Chamberlain, now Chancellor of the Exchequer in the National Government. As Chancellor he was determined to keep defence spending within bounds, since the public finances were the bedrock of everything. But he was also (for a Chamberlain) surprisingly sceptical about the real threat from j.a.pan and the fear it evoked in the Pacific dominions. His favoured solution was a friendly approach to j.a.pan, perhaps even a pact.19 The much more urgent priority in Chamberlain's eyes was the protection of Britain in Europe, and against attack from the air. This was best done not by expanding the navy but by deploying a 'deterrent' a large force of bombers to cripple any potential a.s.sailant. When the Cabinet came to discuss the Committee's report, Chamberlain's campaign for an Anglo-j.a.panese understanding won little support. The objection was obvious that it would wreck Anglo-American relations with far-reaching effects on Britain's general position and also decisive. But there was no real agreement on how to proceed, perhaps because of the scale of the 'Eastern' commitment required. Instead, Chamberlain was allowed to draw up the final recommendations a chance he seized with a vengeance. The result was to cut back the sum proposed for the navy by some 60 per cent and put it instead towards expanding the air force. The much more urgent priority in Chamberlain's eyes was the protection of Britain in Europe, and against attack from the air. This was best done not by expanding the navy but by deploying a 'deterrent' a large force of bombers to cripple any potential a.s.sailant. When the Cabinet came to discuss the Committee's report, Chamberlain's campaign for an Anglo-j.a.panese understanding won little support. The objection was obvious that it would wreck Anglo-American relations with far-reaching effects on Britain's general position and also decisive. But there was no real agreement on how to proceed, perhaps because of the scale of the 'Eastern' commitment required. Instead, Chamberlain was allowed to draw up the final recommendations a chance he seized with a vengeance. The result was to cut back the sum proposed for the navy by some 60 per cent and put it instead towards expanding the air force.20 The sometimes angry debate in Committee and Cabinet exposed the strategic dilemma of the whole British system. If the East was neglected the whole empire might fall. If the West was exposed, Britain itself was at risk. If both were defended to the level required, Britain would be bankrupt. It was not surprising, perhaps, that policy-makers looked for less drastic solutions, and hoped to get by. The British and Americans both came to agree that the real restraint on j.a.pan was the Soviet Union, which had much more to lose from j.a.pan's East Asian imperialism, and had the military power to strike j.a.pan where it mattered.21 British officials worked hard to persuade the Americans that they shared the same view of j.a.pan as a threat and would not jeopardise Anglo-American solidarity by an approach to j.a.pan whatever Chamberlain said. They largely succeeded. When the naval agreements came up for review in 19345, President Roosevelt conveyed by a nod and a wink that no objection would be made to Britain's naval expansion: Atlantic rivalry was suspended. British officials worked hard to persuade the Americans that they shared the same view of j.a.pan as a threat and would not jeopardise Anglo-American solidarity by an approach to j.a.pan whatever Chamberlain said. They largely succeeded. When the naval agreements came up for review in 19345, President Roosevelt conveyed by a nod and a wink that no objection would be made to Britain's naval expansion: Atlantic rivalry was suspended.22 In Europe, meanwhile, the Admiralty won what it saw as a useful reprieve. Abandoning the fiction that the Germans were bound by Versailles, it got Hitler's agreement that a new German navy would be kept at just over one-third of Britain's own strength a concession that bought time for its own naval programme. In Europe, meanwhile, the Admiralty won what it saw as a useful reprieve. Abandoning the fiction that the Germans were bound by Versailles, it got Hitler's agreement that a new German navy would be kept at just over one-third of Britain's own strength a concession that bought time for its own naval programme.23 When the Chiefs of Staff reviewed the state of British defences at the start of 1935 (and before the agreement), they made the grudging admission that there was enough naval strength to fight Germany and j.a.pan at the same time as long as France was an ally. 'With France as our Ally, the naval situation in Europe would wear a different complexion, and the main British fleet would be available to defend our Empire in the East.' When the Chiefs of Staff reviewed the state of British defences at the start of 1935 (and before the agreement), they made the grudging admission that there was enough naval strength to fight Germany and j.a.pan at the same time as long as France was an ally. 'With France as our Ally, the naval situation in Europe would wear a different complexion, and the main British fleet would be available to defend our Empire in the East.'24 Six months later, their view was much darker. Six months later, their view was much darker.

What had happened in between was a third great shock to the geostrategic foundations of the British world-system. In late 1934, a fierce dispute had blown up between Italy and Ethiopia on the border between the Ethiopian Ogaden and Italian Somaliland. It soon became clear that Mussolini had no intention of reaching a peaceful resolution and was set on the partial or total acquisition of Haile Sela.s.sie's empire. The French government was concerned most of all to avoid friction with Italy (its long-standing Mediterranean rival) which would weaken its hand in dealing with Hitler. In January 1935, it agreed that Rome should be free to deal with Ethiopia as it wished. This confronted the British with an unpleasant dilemma. As the strongest League power and champion of collective security, Britain could hardly look on while one League member state set out to swallow another. But taking the lead to thwart the aggressor was just as unwelcome. Britain should not be manoeuvred 'into playing an isolated and futile role of opposition', said Robert Vansittart, the permanent head of the Foreign Office.25 It was perfectly obvious, said a chorus of voices, that the effort to do so would enrage Mussolini, and drive him out of the League and into a compact with Hitler. Vansittart dreamed hopelessly of an imperial deal: compensating an Ethiopian cession to Italy with a tract of British Somaliland. The crisis, he said, was really the fault of 'our hogging policy' in not giving the Italians one of the German lost colonies. 'I have long thought the distribution of this limited globe quite untenable and quite unjustifiable. Like fools we made it worse at Versailles...We are grossly overloaded.' It was perfectly obvious, said a chorus of voices, that the effort to do so would enrage Mussolini, and drive him out of the League and into a compact with Hitler. Vansittart dreamed hopelessly of an imperial deal: compensating an Ethiopian cession to Italy with a tract of British Somaliland. The crisis, he said, was really the fault of 'our hogging policy' in not giving the Italians one of the German lost colonies. 'I have long thought the distribution of this limited globe quite untenable and quite unjustifiable. Like fools we made it worse at Versailles...We are grossly overloaded.'26 There was no French support for such an exchange, and, by August 1935, the British were contemplating the cost if the League imposed sanctions to restrain Mussolini. There was no French support for such an exchange, and, by August 1935, the British were contemplating the cost if the League imposed sanctions to restrain Mussolini.

Quite apart from the danger of playing into Germany's hands, the risk of an armed confrontation with Italy was regarded with horror in the Admiralty. Britain was quite unprepared for a conflict, the First Sea Lord warned.27 The programme of replacements meant that the navy's strength would decline before it recovered at the end of the decade, so that even the loss of two or three large ships in a Mediterranean war would be calamitous. The programme of replacements meant that the navy's strength would decline before it recovered at the end of the decade, so that even the loss of two or three large ships in a Mediterranean war would be calamitous.28 Both he and Hankey, the powerful Secretary to the Committee of Imperial Defence, were determined that Britain should avoid being dragged into 'the miserable business of collective security' (Chatfield's phrase). What was needed was a two-power fleet to counter Germany and j.a.pan, and good relations with Italy. As matters fell out, the British had the worst of both worlds. Under pressure, the Cabinet decided to apply certain sanctions to show disapproval. But, fearing to take the decisive step of imposing sanctions on oil, in December 1935 it despatched Samuel h.o.a.re, the Foreign Secretary, to concert with the French on a new compromise offer that would give Mussolini effective control over much of Ethiopia: the infamous h.o.a.reLaval pact. Amid a huge public outcry (the government had just won re-election on a platform extolling its commitment to collective security), h.o.a.re was disowned, the pact cast aside and 'light' sanctions maintained. Amid continuing high tension in the Mediterranean, the means and the will were lacking to challenge Hitler's forced remilitarisation of the Rhineland in March 1936. 'If we are seriously to consider the possibility of war with Germany', declared the Chiefs of Staff on 1 April, 'it is essential that the Services should be relieved of their Mediterranean responsibilities, otherwise our position is utterly unsafe.' Both he and Hankey, the powerful Secretary to the Committee of Imperial Defence, were determined that Britain should avoid being dragged into 'the miserable business of collective security' (Chatfield's phrase). What was needed was a two-power fleet to counter Germany and j.a.pan, and good relations with Italy. As matters fell out, the British had the worst of both worlds. Under pressure, the Cabinet decided to apply certain sanctions to show disapproval. But, fearing to take the decisive step of imposing sanctions on oil, in December 1935 it despatched Samuel h.o.a.re, the Foreign Secretary, to concert with the French on a new compromise offer that would give Mussolini effective control over much of Ethiopia: the infamous h.o.a.reLaval pact. Amid a huge public outcry (the government had just won re-election on a platform extolling its commitment to collective security), h.o.a.re was disowned, the pact cast aside and 'light' sanctions maintained. Amid continuing high tension in the Mediterranean, the means and the will were lacking to challenge Hitler's forced remilitarisation of the Rhineland in March 1936. 'If we are seriously to consider the possibility of war with Germany', declared the Chiefs of Staff on 1 April, 'it is essential that the Services should be relieved of their Mediterranean responsibilities, otherwise our position is utterly unsafe.'29 In May, Mussolini declared the war in Ethiopia won. In June, the British abandoned their sanctions. But the hope of restoring Anglo-Italian amity proved very far-fetched. In May, Mussolini declared the war in Ethiopia won. In June, the British abandoned their sanctions. But the hope of restoring Anglo-Italian amity proved very far-fetched.

'There is now the possibility of a hostile Italy on our main line of imperial communications', reported the Defence Requirements Committee in November 1935.30 By the following year, although there was some disagreement over Mussolini's objectives, Italy's hostility (and its alignment with Germany) had become a new fact of geopolitical life. The result was to force a drastic revision of imperial strategy. There could be no question of a war on three fronts: the Navy would have its hands full in the East and at home. The implication was brutal. Unless French support was a.s.sured, the British could not hope to maintain their naval command in the Mediterranean if a crisis arose in the East. It was a tacit admission despite public denials that, faced with a war in the East, the route round the Cape and not the short route via Suez might have to be used. Britain's Middle East empire would have to fend for itself. By the following year, although there was some disagreement over Mussolini's objectives, Italy's hostility (and its alignment with Germany) had become a new fact of geopolitical life. The result was to force a drastic revision of imperial strategy. There could be no question of a war on three fronts: the Navy would have its hands full in the East and at home. The implication was brutal. Unless French support was a.s.sured, the British could not hope to maintain their naval command in the Mediterranean if a crisis arose in the East. It was a tacit admission despite public denials that, faced with a war in the East, the route round the Cape and not the short route via Suez might have to be used. Britain's Middle East empire would have to fend for itself.31 Of course, this was still just a grim calculation not an actual reality. But it hugely reinforced the sense of strain and anxiety that had begun to infuse British foreign policy as a whole. Of course, this was still just a grim calculation not an actual reality. But it hugely reinforced the sense of strain and anxiety that had begun to infuse British foreign policy as a whole.

It is important, however, not to exaggerate the scale of British difficulties as they appeared at this stage. In effect, what had happened was that, after the dream-like interval in which the peace of Europe had seemed safe, the British found themselves back in the world of compet.i.tive Weltpolitik Weltpolitik they had known before 1914. The need to withdraw from the Mediterranean to meet the German threat had been accepted once before in the great strategic rethink of 1912. The threat posed by Germany in 19367 was still modest indeed compared with that which had faced them in 1914. Of course, the real source of British, and especially naval, alarm was the new fact of dispersal. In 1914, the British could ma.s.s almost their whole fleet in the Orkneys, in the knowledge that the blockade of German sea-power would keep their Empire secure. Now they must divide their sea strength in two at opposite ends of the globe if their rivals coalesced. The most urgent requirement that followed from this was to ease the friction with Italy, while pressing on with the rearmament needed for a 'new standard' navy that could face down the Germans and the j.a.panese, simultaneously if need be. It was from this position of strength that British leaders hoped to restore 'discipline' to Europe's diplomacy, and persuade the Hitler regime that it would gain little by delaying a new general settlement. In the meantime, of course, they had to be cautious, and sometimes disingenuous as when they rea.s.sured the Pacific dominions that they would guard the Mediterranean as well as sending the fleet to Singapore, come what may. 'Singapore', said Lord Chatfield, the First Sea Lord and professional head of the navy, 'was first cla.s.s a.s.surance for the security of Australia.' they had known before 1914. The need to withdraw from the Mediterranean to meet the German threat had been accepted once before in the great strategic rethink of 1912. The threat posed by Germany in 19367 was still modest indeed compared with that which had faced them in 1914. Of course, the real source of British, and especially naval, alarm was the new fact of dispersal. In 1914, the British could ma.s.s almost their whole fleet in the Orkneys, in the knowledge that the blockade of German sea-power would keep their Empire secure. Now they must divide their sea strength in two at opposite ends of the globe if their rivals coalesced. The most urgent requirement that followed from this was to ease the friction with Italy, while pressing on with the rearmament needed for a 'new standard' navy that could face down the Germans and the j.a.panese, simultaneously if need be. It was from this position of strength that British leaders hoped to restore 'discipline' to Europe's diplomacy, and persuade the Hitler regime that it would gain little by delaying a new general settlement. In the meantime, of course, they had to be cautious, and sometimes disingenuous as when they rea.s.sured the Pacific dominions that they would guard the Mediterranean as well as sending the fleet to Singapore, come what may. 'Singapore', said Lord Chatfield, the First Sea Lord and professional head of the navy, 'was first cla.s.s a.s.surance for the security of Australia.'32 It was vital not to provoke their three possible enemies into a real (as opposed to rhetorical) combination. It was vital not to provoke their three possible enemies into a real (as opposed to rhetorical) combination.33 But, if they kept up their guard, and avoided a crisis, the long-run alignment of forces seemed set in their favour. 'Welfare states', remarked Alfred Zimmern (he meant the democratic states of Europe, the United States and the white dominions), 'enjoy an overwhelming preponderance of power, confirmed and increased by their command of the oceans, except for the time being the Western Pacific.' But, if they kept up their guard, and avoided a crisis, the long-run alignment of forces seemed set in their favour. 'Welfare states', remarked Alfred Zimmern (he meant the democratic states of Europe, the United States and the white dominions), 'enjoy an overwhelming preponderance of power, confirmed and increased by their command of the oceans, except for the time being the Western Pacific.'34 Rejecting economic concessions to Germany, Neville Chamberlain expected the improvement in world trade (and the rise in world prices) to force an eventual retreat from Hitler's policy of arms and autarky. Rejecting economic concessions to Germany, Neville Chamberlain expected the improvement in world trade (and the rise in world prices) to force an eventual retreat from Hitler's policy of arms and autarky.35 Indeed, almost as much as before 1914, the British expected that their commerce power would have the last word in any global confrontation as long as they played their cards well in the game of world politics. Indeed, almost as much as before 1914, the British expected that their commerce power would have the last word in any global confrontation as long as they played their cards well in the game of world politics.

The new economics of Empire At first sight, such confidence seems strange. After all, the British economy lived in the shadow of depression as much as any other. There were also good grounds for thinking that the British had been the great losers from the economic catastrophe of 192931 and the huge contraction in world trade that had set in thereafter just as they had prospered in the era of trade boom before 1914. Worse still, they had entered the depression from a position of weakness: burdened by debt; with their old staple industries of cotton and coal in decline; and with their exports held back by the high value of sterling. Because the collapse of world prices in 1930 was severest in commodities like grain, rice, rubber and minerals, it was primary producers that were hardest hit. As their incomes declined, so did their imports. For the British at home this meant a triple disaster. Much of their export trade was directed towards such primary producers, in their Empire especially. The great commodities traffic, and the reverse flow of manufactures, employed much British shipping a critical source of invisible income. And a huge amount of British capital was still invested in the infrastructure needed to bring primary goods to market (railways, harbours, freezing works, warehousing etc.) as well as in their actual production on plantations and in mines. The slump in world trade threatened British wealth on all fronts.

Indeed, it is easy to see the 1930s as marking the great watershed in Britain's capacity to meet the economic demands of imperial power, or to sustain a world-system of which it was the leader. As many contemporaries observed, the engines that had driven the long age of expansion up to 1914 now seemed worn out. British manufactures lost their compet.i.tive edge and also a large part of their market. The failure was most glaring in the sad condition of the textile industry, especially Lancashire cottons. Before 1914, textiles made up around 40 per cent of British exports by value; and the British supplied two-thirds of the world trade in cotton goods. By 1938, that figure had fallen to around a quarter.36 In India, by far Lancashire's best market in 1913, its sales had fallen by nearly 90 per cent by the end of the 1930s. In India, by far Lancashire's best market in 1913, its sales had fallen by nearly 90 per cent by the end of the 1930s.37 Overall, Britain's share of the world's manufactured exports fell from 25 per cent in 1913 to 19 per cent in 1937, partly reflecting the fact that its newer industries (like cars and pharmaceuticals) could not fill the gap left by the old and declining industries. Industrial weakness was bound to do damage to British trade and traders. Without compet.i.tive goods to sell, British trading companies that had played a large role in the organisation of commerce in Asia, Africa and Latin America found themselves under pressure from European, American and j.a.panese rivals. Some went to the wall and their misfortunes spilt over to affect London's place in world trade. Overall, Britain's share of the world's manufactured exports fell from 25 per cent in 1913 to 19 per cent in 1937, partly reflecting the fact that its newer industries (like cars and pharmaceuticals) could not fill the gap left by the old and declining industries. Industrial weakness was bound to do damage to British trade and traders. Without compet.i.tive goods to sell, British trading companies that had played a large role in the organisation of commerce in Asia, Africa and Latin America found themselves under pressure from European, American and j.a.panese rivals. Some went to the wall and their misfortunes spilt over to affect London's place in world trade.38 These difficulties in the export of goods were matched by the fall-off in the export of capital. Partly because of the effects of the slump in the traditional fields of British investment, partly because of public and private borrowing at home, the amounts raised in London for overseas issues fell to perhaps one tenth of their pre-1914 level These difficulties in the export of goods were matched by the fall-off in the export of capital. Partly because of the effects of the slump in the traditional fields of British investment, partly because of public and private borrowing at home, the amounts raised in London for overseas issues fell to perhaps one tenth of their pre-1914 level39 virtually all of it for sterling country destinations. In the harsh conditions of the 1930s, the British seemed to have abandoned the practice once regarded as vital to their commercial success: priming the pump of economic development in less-developed countries, and creating consumers for their export industries. Finally, as if all this was not enough, it looked as if the long surge of population growth in mainland Britain had finally petered out. The 'export surplus' of migrants would no longer pour out to the 'white dominions'. Perhaps even more serious was the clear implication that, as a market for foodstuffs (the staples of Canadian, Australian and New Zealand trade), Britain was now stagnant. virtually all of it for sterling country destinations. In the harsh conditions of the 1930s, the British seemed to have abandoned the practice once regarded as vital to their commercial success: priming the pump of economic development in less-developed countries, and creating consumers for their export industries. Finally, as if all this was not enough, it looked as if the long surge of population growth in mainland Britain had finally petered out. The 'export surplus' of migrants would no longer pour out to the 'white dominions'. Perhaps even more serious was the clear implication that, as a market for foodstuffs (the staples of Canadian, Australian and New Zealand trade), Britain was now stagnant.40 Perhaps the old mutual interest in markets, money and men between Britain and its 'invisible empire' of trade (inside and outside the 'visible' Empire) was just fading away. Perhaps the old mutual interest in markets, money and men between Britain and its 'invisible empire' of trade (inside and outside the 'visible' Empire) was just fading away.

The causes went deeper than the apparent shortcomings of the British economy. Much of Britain's prosperity before the First World War had been due to the relative openness of markets in Europe and Latin America, as well as in Asia, where free trade was imposed by rule (as in India) or by force (as in China). Free trading conditions encouraged the investment of capital, whose dividend could be paid from the proceeds of exports that reached the world market through London. They made it natural for many primary-product economies to rely on British shipping, insurance and banks to get their produce to market and manage its sale. But, after 1918, there was no real return to the age of free-ish trade. Instead, the disruptions of war, the burden of debt (requiring new revenue sources) and the break-up of empires in Europe and the Near East fostered economic nationalism: to safeguard domestic prosperity against external upheaval and (in new states especially) to reinforce weak political bonds with the glue of economic self-interest. Agrarian protection became almost universal in Europe.41 With the onset of slump, things got far worse. Soviet Russia and Germany became closed autarkic economies. The United States withdrew behind ma.s.sive walls of protection the SmootHawley tariff of 1930. Existing tariff barriers (as in the 'white dominions') rose higher. Exchange control became widespread, threatening the multilateral pattern of trade with bilateral bargains and barter. None of this boded well for British finance, trade and industry. Nor, at least in the short term, did another new feature of the global economy, the industrialisation of Asia. It was the intense compet.i.tion of j.a.panese cottons, combined with the growth of textile manufacture in India, which destroyed so much of Lancashire's market. Even in China, where mechanised production had developed more slowly, it was a similar story. There, British cottons sold barely 1 per cent of their 1913 figure in 1936. With the onset of slump, things got far worse. Soviet Russia and Germany became closed autarkic economies. The United States withdrew behind ma.s.sive walls of protection the SmootHawley tariff of 1930. Existing tariff barriers (as in the 'white dominions') rose higher. Exchange control became widespread, threatening the multilateral pattern of trade with bilateral bargains and barter. None of this boded well for British finance, trade and industry. Nor, at least in the short term, did another new feature of the global economy, the industrialisation of Asia. It was the intense compet.i.tion of j.a.panese cottons, combined with the growth of textile manufacture in India, which destroyed so much of Lancashire's market. Even in China, where mechanised production had developed more slowly, it was a similar story. There, British cottons sold barely 1 per cent of their 1913 figure in 1936.42 Despite all these setbacks, the decade of depression in the world economy did not bring a collapse in British economic power. But it did lead to big changes in the way that it worked. The impact of the crash on the New York stock exchange in October 1929, and the trade contraction that followed, were soon felt in London. Unemployment rose steeply from 1.2 million in 1929 to 1.9 million the following year and 2.6 million in 1931. The balance of payments grew less healthy and then crashed into deficit. Public spending shot up to meet the new burdens of borrowing and benefits. As American lenders began to call in their loans to meet obligations at home, they sparked a banking crisis in Europe where too much had been lent 'long' on the back of American funds. Soon, those who held sterling in London (attracted in part by the high interest rates offered there) became anxious to sell it or exchange it for gold (the pound was freely convertible) for similar reasons. By August 1931, the loss of gold was acute, while the 'unbalanced' budget stoked fears of financial collapse, as the government borrowed more to meet its current outgoings. Governing without an overall majority, Ramsay MacDonald accepted the need for an all-party coalition, a 'national' government to meet the emergency. What began as a temporary measure, to last for a few weeks, became a coalition regime that endured for a decade. Likewise, its emergency actions to forestall the danger of sterling's collapse shaped an economic regime that lasted until it was overcome by disaster after June 1940.

The National Government took two crucial decisions. The first was to abandon the fixed price of sterling in gold, allowing the pound to 'float' against other currencies. In effect, the pound was devalued. Since sterling was still the most widely used currency in international trade (and thus a source of great profit to the City of London), such a move might have seemed exceptionally risky, to be reversed as quickly as conditions allowed. But that is not what happened. Instead, sterling was left to float for the rest of the decade, while remaining convertible. For much of that time, between 1933 and 1938, its value was stable, and the pound kept its status as the princ.i.p.al medium of international exchange. There were two reasons for this.

The first was London's success in forming a large 'sterling bloc', whose members pegged the value of their currency to sterling, and kept much if not all of their reserves of foreign exchange as sterling. This formed a huge trading zone the largest in the world whose currencies enjoyed a stable relationship. Parts of this zone had little choice in the matter. The monetary affairs of Britain's colonial territories were run by local 'currency boards'. A colony's money supply was directly controlled by the size and value of its sterling reserve in London. When London devalued, so did the colony. Much the same was true although with considerably more argument in the case of India. India suffered badly from the fall in commodity prices and the fragile state of its public finances (with their heavy dependence on customs receipts and agrarian revenues) threatened to damage the value of the rupee a situation made worse by the protracted uncertainty over India's new const.i.tution. A further large complication was India's sterling debt the so-called 'Home Charges' made up of pensions, loan interest and the annual bill for the large British garrison, all of whose costs fell on the Indian budget. London insisted that the Home Charges be paid, whatever the price. It demanded that the rupee remained pegged to sterling, and vetoed any idea of reducing its value in sterling terms. The reason it could do so was that, although the Viceroy and his government enjoyed some fiscal autonomy (and would have liked more), ultimate control over India's external finances was kept firmly in Whitehall, even after the promise of dominion self-government in the 1935 Act.43 With other users of sterling, London relied not on rule but self-interest. In three of the six white dominions, Australia, New Zealand and South Africa, the local pound was now pegged to sterling, not gold.44 Here, the British market was all-important and commercial banking was too enmeshed with the City to make any alternative viable although South Africa's gold and its nationalist politics kept it on the gold standard until 1933. Canada might have followed with its dollar except for the scale of its debts in New York: the fall of sterling against the American dollar had made this too much of a risk. Two 'semi-colonies' did follow: Egypt, which sold almost all its raw cotton to Britain (and sold little else), and Iraq (a British mandate until 1932). Lastly, there was a group of European states the four Nordic countries and Portugal for whom Britain's huge share of their exports and their dependence on sterling receipts, made pegging on sterling the key to financial stability. Here, the British market was all-important and commercial banking was too enmeshed with the City to make any alternative viable although South Africa's gold and its nationalist politics kept it on the gold standard until 1933. Canada might have followed with its dollar except for the scale of its debts in New York: the fall of sterling against the American dollar had made this too much of a risk. Two 'semi-colonies' did follow: Egypt, which sold almost all its raw cotton to Britain (and sold little else), and Iraq (a British mandate until 1932). Lastly, there was a group of European states the four Nordic countries and Portugal for whom Britain's huge share of their exports and their dependence on sterling receipts, made pegging on sterling the key to financial stability.

Secondly, the attractions of sterling were greatly reinforced by the overall success of its management. This was jealously guarded in London and largely controlled not so much by the Bank as by the Treasury and the 'Exchange Equalisation Account' whose funds it supplied.45 The object of the Account was partly to prevent sterling rising or falling too sharply. But it was also meant to ensure that sterling's value was kept at a level that allowed 'cheap money' interest rates of around 2 per cent to prevail in Britain. A cheap money policy helped Britain recover from depression more quickly than most other economies (the main exception was j.a.pan) and much more quickly than the United States. Financially conservative governments (pursuing balanced budgets) rea.s.sured overseas holders of sterling. The result, so it seemed, was a virtuous circle. The willingness of sterling bloc countries to keep substantial balances in London helped to strengthen the pound. The balances allowed London to keep up sterling's value, despite the large deficit in Britain's balance of payments, without drawing down its investment overseas. Indeed, they even permitted some modest new issues to sterling countries abroad as the tacit pay-off for their discretion and loyalty. The object of the Account was partly to prevent sterling rising or falling too sharply. But it was also meant to ensure that sterling's value was kept at a level that allowed 'cheap money' interest rates of around 2 per cent to prevail in Britain. A cheap money policy helped Britain recover from depression more quickly than most other economies (the main exception was j.a.pan) and much more quickly than the United States. Financially conservative governments (pursuing balanced budgets) rea.s.sured overseas holders of sterling. The result, so it seemed, was a virtuous circle. The willingness of sterling bloc countries to keep substantial balances in London helped to strengthen the pound. The balances allowed London to keep up sterling's value, despite the large deficit in Britain's balance of payments, without drawing down its investment overseas. Indeed, they even permitted some modest new issues to sterling countries abroad as the tacit pay-off for their discretion and loyalty.46 In the depths of the crisis in 19312, the British government had taken a second decision no less far-reaching than 'going off gold'. At the Imperial Conference in 1930, the Labour government and its Cobdenite chancellor, Philip Snowden, had dismissed the idea of a graded tariff on imports to give dominion producers a privileged share in the British market. But, as economic prospects grew bleaker, the appeal of protection in Britain, once confined to sections of the industrial industrial economy, became almost irresistible. Even the City, where free trade sentiment had usually been strong, had now been won over. economy, became almost irresistible. Even the City, where free trade sentiment had usually been strong, had now been won over.47 Over the protests of its rump of free traders, the National Government (whose leaders had decided to seek an electoral mandate in October 1931) agreed to impose a new general tariff. The clinching