British 20 pound notes. Photo: Pixabay British 20 pound notes. Photo: Pixabay

The second in a three-part series, in which Chris Bambery takes a look at the intertwined history of the state and the City of London

But to return to the state created post-1688, it contained one obvious fault line and another which only became apparent once decline had really set in. The obvious one was Ireland’s uneasy place within the United Kingdom. The Irish Question dominated British politics from the 1880s until 1914, destroying the once dominant Liberal Party in the process, and thus allowing the pro-imperialist party of the landlords and brewers to become the party of British capital. The 1921 Anglo-Irish Treaty resolved the issue fundamentally, and when the gerrymandered partition state of Northern Ireland blew up in 1968-1969 the British state was able to contain and isolate the Troubles before reaching an accord with their Republican opponents. Northern Ireland remains an unstable political and economic slum but it will not come anywhere near doing what Home Rule did to Gladstone, the British state has accepted its possible departure.

The second fault line is Scotland. That this should be the case would have been beyond the ken of the Victorian or Edwardian bourgeoisie. Unlike Ireland, Scotland joined the UK on equal terms. Its industrialists, bankers and landowners were an integral part of the British bourgeoisie. Edinburgh was an intellectual hub beyond any English provincial city. Scots were to the fore in creating and ruling Empire and the British elite flocked there to shoot game, fish salmon and trout and play the golf links. All of this was epitomised by Queen Victoria choosing to stay each autumn at Balmoral, as the Queen still does.

Yet Scotland’s position was rather odd. It had a separate legal and education system, and a separate established Church, but political power was centralised on Westminster. It was neither a centralised French Republic nor a federal system as in the USA, Germany or the new Dominions such as Australia and Canada.

All of this was masked because from the Napoleonic Wars until the 1956 Suez debacle Scottish national identity could find popular expression in a celebration of Empire and imperial victory. But post 1918 and even more post 1945 Scotland had slipped from being at the cutting edge of the British economy. Its success in the 19th and early 20th century had depended on the staples of British industrialisation: coal, iron and steel, heavy engineering and shipbuilding. That dependence meant Britain’s industrial decline took a traumatic turn north of the border. Scottish capital was virtually wiped out in the inter-war years.

Beginning in the 1920s and 1930s the reaction to this was the emergence of modern Scottish nationalism. It took decades for it to reach the hegemony it enjoys in today’s Scotland, notwithstanding the 2014 referendum result, and relied on Labour failure and hatred of Tory Westminster governments with no mandate in Scotland to achieve success.

Where Anderson scores in his analysis of the UK state is by identifying the key real of the City of London, and its links to the 18th century elite which endure in so many ways. The Bank of England was established in 1694 as a private bank which lent money to enterprises like the Hudson’s Bay Company, the East India Company and slave traders, guaranteeing rich profits for the new bank. In the curse of the 18th century Britain was involved in a series of long and costly wars with France over which state would be the world’s number one power. The Bank of England became the government’s bankers, loaning out money to fund wars and being paid back through increases in taxation to pay the interest (National Debt also increased).

The City also become the centre for shipping insurance, foreign exchange transaction and much else, benefitting from its close connection to the Port of London, that great trading entrepot.

By the mid-19th century when Britain was the workshop of the world and dominated global trade the Bank of England was not just sole banker to the British government but also banker to other British banks, making loans to both. It also held Britain’s gold reserves – sterling could still, theoretically, be cashed in for gold – and issued bank notes, thus regulating the flow of money.

While Britain was the workshop of the world post-industrial revolution it is easy to overlook the rise of the City in the same period:

“Two economic sectors thus grew up side by side under the Pax Britannica, without intrinsic structural connexion other than a common imperial framework. At best, the City’s export of capital—some of it in reality re-export—helped finance foreign imports of British goods, mainly in the underdeveloped world, while its invisible earnings covered the trade deficit. The latter was the more important function, and threw into sharp relief the relations between industrial and commercial capital in Victorian England. For between 1820 and 1870, the heyday of the ‘workshop of the world’, London’s commercial and financial revenues alone—setting aside any investment income earned overseas—grew at a steadily faster rate than the export of manufactures. City profits were 30 per cent of the total value of exports in 1820: by 1880 the figure had risen to 50 per cent.” - Perry Anderson, The Figures of Descent, New Left Review I/161, January-February 1987

As Geoffrey Ingham points out: ‘no other industrialised society has ever acted as host to a centre which has undertaken such a large share of the world capitalist systems, commercial, banking and financial activities. Britain was not only the workshop of the world but also its clearing house.’ (Geoffrey Ingham, Capitalism divided?: the city and industry in British social development, Palgrave Macmillan, 1984, p. 40)

Anderson notes regarding the last quarter of the 19th century:

“The contrast with America was marked already by this date. There, heavy industry—railroads, steel, later petroleum, auto—generated fortunes incomparably larger than any agrarian wealth and overtopping those of the richest financiers as well. In absolute size, after the Civil War, the greatest US industrialists had left their British counterparts well behind; by the Gilded Age they dwarfed them. In Germany too, the summits of capital were uncompromisingly industrial, commanded by the Ruhr giants Krupp, Thyssen and Stinnes. It was the absence of figures like these which distinguished the Victorian economy.”

Industrial capital remained small in relation to its rivals, Stagnant and then falling productivity in comparison to its rivals was already a feature of British capitalism. The steel, chemical and electrical industries could not compare with the size of US or German plants, or their output. Increasingly British industry relied on imperial and captive markets: Glasgow’s Springburn locomotive plant for instance. As Anderson points out:

“This turn in the pattern of trade was accompanied by a surge of overseas investments. After 1870, capital exports regularly surpassed capital formation at home; by the last years before the First World War, their volume was twice as large. The value of UK holdings abroad in1913—no less than 43 per cent of the world total—was probably greater than that of US corporations in 1973. This enormous outflow generated rentier revenues that for a brief Edwardian spell even exceeded the City’s commercial and financial earnings.”

The British ruling class was aware that Britain had been surpassed by the USA and Germany, and a certain sense of gloom invaded its circles post-1914. But there was no clear strategy as to how to respond and restore British industrial dominance. There was an attempt to foster cartels but little emerged on the scale of its American and German counterparts. There was too an attempt to force down labour costs and living standards fell in the first decade of the 20th century. But there was no clear strategy for industrial revival. Meanwhile the City pressed ahead, and shadowing it continued imperial expansion, but now in dangerous rivalry with Germany, France and the USA. Facing this Britain could no longer ruled the waves and allied with Japan whose navy could protect Britain’s Asian possessions. It was also forced to break from a policy of no permanent treaties with European powers by signing up with France and Russia in case of war with Germany.

Politically things also changed.

After the repeal of the Corn Laws and the split that brought in the Tory Party the Liberals ruled, and seemed the natural party of government linking aristocrats and the bourgeoisie and able to rally those working class men who gained the vote as the century progressed. The Tories were not out, however. Disraeli showed how they could muster popular support by being the party of Empire, “Jingoism.” They were well placed to exploit the great political crisis of the late 19th century, Irish Home Rule. They fought this tooth and nail in alliance with Ulster Unionists and dissident Liberals, Joseph Chamberlain above all, and after defeating Gladstone, they held office under Salisbury and Balfour.

The Tories also won a significant social base in London and the South East (although Labour began at an early stage to colonise inner London), in alliance with the City and winning the support of the property owning middle classes, many relying on investments for their income. The Conservatives and the City formed a close, strategic, alliance:

“The City counted on the party to provide the climate of political stability essential for its role as the world’s financial capital; the party in turn relied upon the City for financial advice and support.” (Robert W. D. Boyce, British Capitalism at the Crossroads, 1919-1932: A Study in Politics, Economics, and International Relations, Cambridge University Press, 1987, p. 21)

This wasn’t without hiccups. When Chamberlain succeeded in forcing through support for ditching free trade in favour of imperial preference, creating a protected Sterling bloc, it effectively split the party and the British elite. The City was opposed for good reason but so too were the major industrialists dependent on imports of raw materials and on export markets. Industry was split with cotton, coal and shipbuilding, the three biggest employers supporting free trade. Textile accounted for more than half of the UK’s manufacturing exports, but these were largely to the Dominions, colonies and, above all, India. Protected markets. Coal was still a major exporter while shipbuilding relied heavily on naval orders. On the other hand the engineering industry championed protectionism. The City opposed it citing possible unrest if tariffs forced up food prices. The result was electoral defeat and the return of the Liberals in 1906.

Protectionism was a response to the global economic crisis which began in 1873. But it was only response. The others were a growth in the concentration of capital, the construction of monopolies and a fusion between the big banks and industry, finance capital. In Germany the banks lent money on a long term basis to firms who responded by giving them a seat on the board. These three measures helped US and German capital to recover from the late 1880s onwards and to move forward in terms of penetrating the global market at Britain’s expense.

British industry remained based on a large number of small to medium sized firms who feared monopolisation and jealously defended their independence. They had never relied on the City for finance rather they used their own retained profits or local banks in the north and Midlands.

In captive foreign markets, dependent on British investment profits could still be made using old plant and techniques. Neither was their need to splash out cash on research and development.

In this sense, British capitalism was a victim of its own success. It had not needed state intervention to industrialise. Germany, Japan and other states needed to help foster industrialisation. So Germany constructed a system of technical education. British employers could rely on the successful ways of the past.

The fact industry did not speak with one voice continued even after the Federation of British Industry, today’s CBI, was founded in 1916. The divisions were apparent over the post-war debate on returning to the Gold Standard. In this sense, Britain contrasted with Germany where industry formed a very effective lobby in pursuit of its own interests.

The majority of the British ruling class hung onto free trade despite its rivals using protectionist measures to foster newer and more efficient industry.

The First World War was a decisive turning point, one which British industrial capitalism missed. Being on the victor’s side and seeing the Union Jack fly over even greater parts of the globe could not mask Britain had lost financial as well as industrial dominance to the USA and was no longer the global hegemon. The country was heavily in debt and faced an embittered working class at home and a rising tide of resistance in the Empire. It could not afford the costs of policing that.

The Lloyd George government, a coalition the Tories of his supporters among the Liberals, did address what strategy was needed for the economy, but the magic talisman they sought was a return to the Gold Standard when Sterling could nominally be redeemed in gold. This orthodoxy was accompanied by the prioritising of balancing the books, eliminating the budget deficit.

As A.J.P. Taylor pointed out:

“… men, reared in the stable economic world of the later nineteenth century, assumed that a country could not flourish without a balanced budget and a gold currency.” (A.J.P. Taylor, The Origins of the Second World War, Penguin, 2001, p. 15)

The Treasury and the Bank of England were the embodiment of that belief.

Already, in January 1918, a committee of inquiry into post-war currency and exchange policy formed, in January 1918, by the Ministry of Reconstruction, chaired by the Governor of the Bank, Lord Cunliffe. Alongside him was the government’s chief economics adviser and Treasury official, Sir John Bradbury, the Cambridge University Professor of Political Economy, Arthur Cecil Pigou and ten international bankers. Virtually every witness they heard came from the City with the exception of the Federation of British Industry’s representatives who, while accepting a return to the Gold Standard, argued the priority was more the balance of trade.

This was simply ignored in the committee’s report which stressed inflation as the key danger. It supported the immediate restoration of the Gold Standard. If this did not happen the committee warned of mounting inflation, a flow of gold from the City and that the UK’s trade would be put at risk.

In 1919, faced with a mounting working class insurgency, the Lloyd George postponed returning to the Gold Standard until 1925 and also baulked at the other measure of economic orthodoxy, balancing the books and eradicating the budget deficit.

But in the spring of 1920, as the strike wave waned, the government felt confident enough to push through severe cut backs in government spending. It also raised interest rates in a move which helped create economic deflation.

The old staple industries of the British economy – coal, iron and steel, cotton and shipbuilding – were badly hit by the collapse in international orders and greater competition. Between 1920 and 1929 the share of total employment accounted for by these staples fell from 30 to 25 percent.

In the course of 1920 unemployment rose to 10 percent, and it did not fall below that until the Second World War.

High interest rates also meant the cost of servicing government debt rose which required higher taxes and that affected domestic consumer demand.

In October 1924 the Tories under Stanley Baldwin were returned to office. Winston Churchill, who had just re-joined the party, was made Chancellor of the Exchequer.

As Chancellor Churchill aimed for an immediate return to the Gold Standard and to ensure Sterling be kept at a fixed exchange rate in relation to the US Dollar, with one pound equalling $4.85. Unemployment already stood at one million but Churchill, with the support of the Cabinet, the Governor of the Bank of England, Montagu Norman, and the City, decided on a policy of deflation to bolster the exchange rate.

In April 1925 he announced the UK would return to the Gold Standard. The move was insured by US financial support, $200 million from the Federal Reserve and $100 million from J.P. Morgan. In both the UK and the US there was confidence that this move would boost international trade. The problem was pre-1914 the Gold Standard had been based on Britain’s financial strength, now it was based on foreign borrowing, the withdrawal of which would bring it down. Secondly, the £4.85 to £1 exchange rate was disastrous for British exports.

Coal had been a key export pre-war but Britain had not regained its old markets in Europe and the mining industry lacked investment and suffered from low productivity. Maintaining, let alone boosting, coal exports required, as a consequence wage cuts, which precipitated the 1926 General Strike and subsequently yearlong miners’ strike before starvation brought its defeat.

All of this contains strong echoes of the Thatcher years.

Chris Bambery

Chris Bambery is an author, political activist and commentator, and a supporter of Rise, the radical left wing coalition in Scotland. His books include A People's History of Scotland and The Second World War: A Marxist Analysis.