the ‘welfare state’.[41]
Even more important were financial and commercial services – another aspect of Britain’s economy often neglected by narratives of rise and decline that focus on heroic industrialism. This service sector coexisted with the development and mutation of industrialisation; indeed these processes were often complementary because goods can be derived from services just as much as services from goods – exemplified by innovations across the centuries ranging from bills of exchange and actuarial tables to barcoding and computerised trading.[42] Britain’s merchant navy, most of it serving non-British customers, headed the list of ‘invisible’ earnings, supported by insurance and banking. Together with profits from overseas assets such as railways, plantations, utilities and oil concessions, these earnings were equivalent to around 75 per cent of the earnings from exports of domestic merchandise in the 1890s.[43] These more than covered the gap between Britain’s imports and exports, and they provided a ‘war chest’ on which British governments drew in both world wars. Indeed, during the 1930s, the Treasury referred to Britain’s financial position as the ‘fourth arm’ – as central to waging a future war as the three armed services.
The other response to sharper economic competition was to shift from free trade to protectionism. In the 1900s, Joseph Chamberlain may have failed in his campaign for tariff reform, but in 1932, at the nadir of the world depression after Britain had abandoned the gold standard, his son Neville – then Chancellor of the Exchequer – steered it through the Commons with Joe’s widow watching proudly from the gallery. In a trading economy now protected by tariffs, ‘Imperial Preference’, meaning preferentially lower rates, was accorded to countries of the British Empire. An embryonic Sterling area was also formed during the 1930s, and then consolidated during the Second World War. This overlapped with Imperial Preference but was not coterminous. Canada, though enjoying preferential tariffs, was outside the Sterling Area; countries in Latin America and Scandinavia belonged to the latter but not the former. Between 1913 and 1938 the empire’s share of British exports rose from 22 per cent to 47 per cent, and during the interwar years the empire attracted far more new British foreign investment than non-imperial countries – a contrast with the pre-1914 story.[44] The empire/Commonwealth and the Sterling Area became the framework for British foreign economic policy – a privileged market for goods and capital which tried to insulate the domestic economy from international competition from the thirties to the late sixties.
The end of imperial preference and Britain’s entry into the EEC broadly coincided with the demise of the Sterling Area, the onset of the oil crisis and the collapse of the post-war boom. The long 1970s recession accelerated the process of deindustrialisation for all Western European countries, but Britain’s experience of it was exacerbated by the ferocity of class politics in the Thatcher era. Within this complex nexus of global economic change, it is no simple task to isolate the historical consequences of joining the EEC. Suffice to say here that a crude declinist narrative fails to take account of the country’s adaptive economic changes since the 1970s: an accelerating shift into services and the success of the financial sector, which adjusted particularly well to the post-imperial era.
‘As the good ship sterling sank, the City was able to scramble aboard a much more seaworthy vessel, the Eurodollar.’[45] This term signified dollar assets held not in the USA but in Europe – starting with those created by Middle Eastern states from the profits of the 1970s oil shocks. They were attracted to the City of London by the tax benefits on offer and by the deliberately more relaxed regulatory environment than Wall Street. But this was not the ‘old’ City, geared to sterling and the British economy, but a ‘new’ City, ‘externally orientated’ and ‘foreign-owned’ (dominated by US, Japanese and continental European banks) and which ‘flourished as long as it was left alone by the authorities’.[46] This externalisation process accelerated when the Thatcher government ended exchange controls in 1979 and encouraged the ‘Big Bang’ deregulation of the stock market. In 1981 only 3.6 per cent of the UK stock market was owned by foreigners but the proportion then rose to 43.1 per cent in 2010 and 53.9 per cent in 2016. There are, of course, still plenty of British players in this business – Jacob Rees-Mogg, for instance, made his multimillion fortune as a hedge-fund manager – but in large measure the City had adapted to change by becoming an immensely lucrative offshore banking sector through which foreigners, not least post-Soviet Russian oligarchs, could move their money without too many questions or impediments.[47]
So the erosion of Britain’s relative advantage in manufacturing did not mean that the country became a minor feature of the world economy. On the contrary: today it is the tenth-largest global exporter and fifth-largest global importer; it ranks second or third in both inward and outward direct foreign investment. In economic terms Britain is roughly where one might expect for a country of its size, resources and historic commercial expertise. What has changed is that Britain’s relative power internationally has diminished because, over the last century, other states have generated economies that are equal or superior to it.
What mattered even more for the country’s place on the world stage was the changing nature of geopolitics. International rivalries intensified from the 1860s, after a half-century of peace since the defeat of Napoleon. And then revolutions in the technology of warfare over the subsequent century negated many of the benefits of Britain’s insular position.
Despite what is a common belief, ‘European peace in the nineteenth century did not derive to any great degree from Britain’s maintaining a continental balance.’[48] That equilibrium stemmed from the exhaustion of Europe in 1815, after more than two decades of ruinous war, and the acceptance of the post-Napoleonic peace by all the continental powers except defeated France. Rather than the Pax Britannica sustaining the peace it was peace that sustained the Pax. Indeed Britain was almost a free rider – allowed to concentrate its resources on global expansion because of the unusual tranquillity of Europe, which was in marked contrast to the eras of Philip II, Louis XIV and Napoleon.
When continental states once more resorted to war as an instrument of policy – resulting in the unification of Italy and then Germany between 1859 and 1871 – Britain could do little to affect the outcome. Its trump card, the Royal Navy, was largely impotent in the face of fast-moving crises in the hinterland of Europe, and the British did not adopt the continental practice of large standing armies sustained by military conscription. In 1871, during the Franco-Prussian war, Lord Salisbury reckoned that whereas the Austrians and the Germans could each put over a million men into the field, and the Russians 1.5 million, Britain’s ‘utmost strength’ for ‘foreign action’ was 100,000. Little wonder that Otto von Bismarck, the Prussian chancellor, reportedly scoffed that if the British army landed on the German coast, he would send the local police force to arrest it.[49] Bismarck’s new German Empire – created through successive victories over Denmark, Austria and France – became the greatest military power on the continent, dominating Central Europe. Benjamin Disraeli called the Franco-Prussian War of 1870–1 ‘a greater political event than the French Revolution … The balance of power has been entirely destroyed and the country which suffers most … is England.’[50]
Even more important for future geopolitics was the outcome of the American Civil War. At the start, in 1861, Britain declared its neutrality: 80 per cent of Britain’s cotton imports came from the Confederacy, supporting a textile industry that employed 4 million people. And the ethical issues looked confused: the Federal government claimed to be fighting to preserve the Union, not to abolish slavery, and many English liberals saw the Confederate cause as a war for national liberation, like the recent secession
