IN ANY attempt to form an opinion of future changes some concept of normality is an intellectual necessity. For men of my generation, men born before 1890, there is an almost irresistible tendency to take as normal the position in the twenty years before 1914. This is especially the case when one considers a subject like that here discussed -- the economic position of the United Kingdom. We are apt to think of the First World War as a disturbing influence; of the difficulties of the inter-war period as marking the abnormality of that period; of the late war as another disturbance! After the first war, British economic policy was directed to getting back as quickly as possible to prewar arrangements -- as by the return to free trade and the gold standard. I think I discern signs, not only in the United Kingdom but in America as well, that the same undefined but not uninfluential concept of normality is widely held today. I myself now believe any return to pre-1914 conditions to be wildly improbable. I believe that the pre-1914 epoch, far from being normal, was a unique experience in the economic life of the race in historic times, a sort of golden age which no one now living will ever see again. If I am wrong in attributing to others the fallacy of which I used to be guilty, it may still be worth while to glance at the characteristics of this past age, and to examine the effects of two world wars upon it, before attempting to frame a conception of the economic future we have to face.

The economic policy and arrangements of the United Kingdom in the twenty years before 1914 were unique. At no other time and in no other country have these essential characteristics been reproduced together. To take the most obvious: there was almost complete free trade, complete freedom of transfer of funds, an immediately available gold reserve of only 30,000,000 to 40,000,000 pounds sterling; and yet there was a confidence in the stability of the sterling exchanges which we have never enjoyed since 1914. Such unrestricted freedom points to underlying conditions which have since been lost -- a fundamental equilibrium in the trade and financial relations between the chief countries of the world; a degree of confidence in the maintenance of that equilibrium which it is hard to realize today; a strength in the United Kingdom's economic relations with other countries which is also now only a memory.

The external relations reflected, and reacted on, the domestic position of British industry. The basis was a high degree of specialization on export industry and the services that are connected with international trade. The predominant industries -- those which were growing, which offered the best wages and profits and commanded most political influence -- were the industries most engaged in export, namely textiles, coal, engineering and shipbuilding. The typical British manufacturing industry did not merely export a surplus over domestic needs; it produced primarily for export, incidentally satisfying domestic needs, a state of things common enough with the agricultural and mining products of a colonial economy but rare if not unique in a developed industrial country. The concentration on industry for export had two effects. Along with the immense import trade which it made possible, it encouraged the development of ancillary services -- shipping, international banking and insurance, long-term overseas lending -- which in turn assisted exports. And it compelled industrialists to follow tendencies and developments in the overseas countries which provided them with their markets. Together, these in turn led to the development of a great network of overseas merchandizing and banking houses, agencies, shipping facilities, which provided a material embodiment of the pervasive interest in external trade. It was a system which exploited to the full the natural and historic advantages of the United Kingdom -- its insular position at the meeting point of all the world trade routes to Europe; its wealth of harbors; its riches of coal, easily got and accessible to tidewater; the start it had gained in nineteenth century manufacture; the steady stream of its emigrants, temporary and permanent, to every part of the world.

The correlative of this efficient, expanding and closely integrated industrial and financial economy was the other characteristic which made the United Kingdom unique among the great countries of the world -- its neglect of agriculture. In the United Kingdom the proportion of the occupied population engaged in agriculture was only 7 percent. In no other great country was agriculture left so destitute of protection and government help and with so little political influence.

So much for the domestic aspect of Britain's international position; the aspect it presented to the outside world was of equal importance. In 1914 the United Kingdom was still the greatest trading country in the world. Its industries still retained some of the advantages of the early start in modern industrial methods which its insular position and freedom from war had given it. It was still a cheap producer -- the cheapest, in the industries on which its exports depended most. It had normally a favorable balance of payments equivalent to a quarter or a third of its merchandise imports. It had a strong creditor position on long-term which increased yearly. For all those reasons, its financial capital, London, was the repository for a large part of the liquid reserves of a large part of the rest of the world, and the main part of the business of clearing international payments was done in sterling through London. In this way London was the financial capital of a community wider than the United Kingdom and wider than the British Empire. It linked together the credit and clearing arrangements of a large part of the world's international trade, focussed them in a single center and provided them with a uniform currency. British trade was relatively large enough to perform a similar service of coordination and unification. The open United Kingdom market, the largest import market in the world, linked intimately with London and Liverpool most of the specialized agricultural producers of the world and much mineral and industrial production.

Thus the United Kingdom was the nucleus and center of a real international economic community, which enjoyed freedom of movement for goods, funds and men, extending into every corner of the world even if it included only a fraction of many countries. Such a community had not existed since the Roman Empire; a succession of two world wars raises doubt whether it will exist again in our lifetime.


It is doubtful whether even now the effect of the First World War on this unique economy is fully understood. The dislocation it caused was both direct and indirect, and was the greater since the war probably concealed and accelerated a fundamental change of trend in economic development which was due to take place. The United Kingdom could not have expected, even if there had been no war, to continue for long to do two-thirds of the world's aggregate export trade in cotton manufactures, four-fifths of the world's total export of coal, and more than half of the world's shipbuilding.

The most obvious effect of war is to divert resources from peacetime purposes to war needs and to create a problem of demobilization and settlement when the war is over. This effect, however, need not alter the direction and relations of the country's normal economy; once the readjustment is effected, prewar trends may be resumed. Thus, in the United Kingdom the great diversion of labor into the metal and engineering group of industries during the war was corrected by the end of the twenties. So far as the long-range trends of the British economy were concerned, the chief effect of this primary dislocation was to divert attention from more persistent and fundamental changes to which the country would have to adjust itself. These arose mainly from the interruption war involved in normal relations and processes. It interrupted contact between United Kingdom industry and its overseas market for four years, lengthened to six by the unfortunate postwar boom; and it interrupted the process of continuous adaptation to change, which normally tempers the wind of change to the shorn entrepreneur. The result was that in 1921 British industry was suddenly confronted with the results of six years' cumulative change in its markets, and forced to begin to plan the necessary readjustment in the middle of a trade depression. Its prewar markets had been forced to look elsewhere for supplies for so long that they had made themselves independent of British supplies, and the prosperous and expanding export industries of the country had now a large element of redundant labor and plant.

This was the position already in 1921. For ten years, however, the fundamental change in the country's economic position was overlooked and its effects attributed to cyclical trade depression, credit policy, anything except a permanent shift in comparative advantages. Meanwhile, the change was confirmed and perpetuated by protection of local industries in overseas markets as soon as British industry was able to resume supplies. The full effects were not felt at once, because the business of restocking and reëquipping after the great war sustained demand for British exports for many years; and the world was in an expansionist phase. Yet even in the twenties the so-called "depressed areas" were differentiating themselves -- areas specialized to export industries which had lost a substantial part of their markets. When the depression came in 1929 it was clear enough that their difficulties until then had not been due to cyclical depression and would not be removed by cyclical recovery. But little was done to adjust industry to the changed conditions.

This failure to perceive and act on the need of permanent and drastic readjustment in the twenties illustrates very well the influence of the concept of prewar normality. So far from trying to adapt the country to a changed situation, the chief aim of economic policy was to get back to the prewar system. The element of wartime protection which might have nursed into existence new industries was swept away; the hard exigencies of the gold standard were restored. This policy was not mere unthinking conservatism. It represented a deliberate election of the prewar world economy as an ideal in preference to a narrower, more self-regarding policy of concentrating on domestic development behind a protective tariff, insulated further by a fluctuating exchange rate. It was a political as much as an economic choice, and offered the best chance of restoring a truly international order such as the world had enjoyed before 1914. But Britain was not strong enough unsupported to reëstablish such an order, and the main political and economic currents in the world were nationalist, not international.

This tendency to look to the past for aims of economic policy, however, was not the only obstacle to effective readjustment to the new conditions. Economic policy offered other obstacles, in the postwar extension of innovations for which the government in office just before the war was responsible. The chance of rapid adaptation to changed conditions depended on effective mobility of labor and ready access to funds to finance new development. Economic policy offered great hindrances to both.

The outlines of a comprehensive scheme of social services, including unemployment insurance, had been drawn before the war. This the postwar Government extended and developed. In theory, a generous system of maintenance in unemployment need have no reaction on the mobility of labor; in practice, it is almost certain to reduce it. Certainly it had this effect in England, and this experience leads one to doubt whether a policy based on free trade and the old type of gold standard is compatible with a generous system of maintenance in unemployment. No popularly elected government can be relied on to enforce by administrative measures the ruthless transfer of labor from one occupation or area to another, which is called for if a country is to leave its industries without any protection against foreign competition and defend its currency by productive efficiency alone.

If this change had not been decisive, the fiscal changes caused by war expenditure would have been. British industry depends almost wholly on profits earned and retained in the business to finance expansion, experiment and new development. The contribution made by the London capital market to industry's needs in the way of new long-term capital has always been negligible, that market being concerned mainly with the export of capital and, so far as it took any interest in domestic industry, with the transfer of existing capital assets from family to widely diffused ownership. When, therefore, income tax on all trading profits was increased from 5 or 6 percent before 1914 to 25 and 30 percent, and when, in addition, the trading profits of privately controlled businesses (the vast majority) were subjected to a further surtax ranging up to 17.5 percent, a dangerous inroad was made into the stream of funds available to reorganize, reconstruct and redirect British industry. This taxation of the profits out of which alone the necessary process of change could be financed is a good example of the chief defect of English governmental administration -- its departmentalism. The revenue-raising departments performed their task of raising revenue with courage and efficiency, but were not concerned with the incidental result of their action -- which was, in short, that they handicapped and delayed the reorientation of industry without which the recovery of the depressed areas was impossible.

Under the strain of the world depression, superimposed on the prolonged difficulties of the depressed areas, English economic policy underwent a revolution. The external and obvious signs of it were, we have seen, the suspension of the gold standard and the final jettisoning of free trade. These, however, symbolized the revolution rather from the point of view of other countries. Until then, it had always been possible to raise good foreign exchange by dumping surpluses into the ever-open United Kingdom market. After 1933 this was no longer possible, an incidental result being that discussions about reducing trade barriers have been much more serious than they were before. In the United Kingdom the real change was much more gradual. It took the form of a steady and continuous shift from production for external markets to production for the domestic market. It can be traced in the proportion of industrial production for export in successive years: 33 percent in 1907; probably 40 percent in 1912, though the census was not completed; 27 percent in 1924; 22 percent in 1930; 16 to 18 percent in 1935; and, using such indices as are available in the inter-census years, probably 15 percent in 1938.

This shift, which halved the proportion of industrial activity for export, was accompanied by a similar decline in the proportion of services directed to overseas demands. It was the outcome of a number of converging influences. The chief was the extension of protection in the rest of the world. Before 1914, the spread of protection had not checked the expansion of British exports, because there were always alternative markets. India was kept open by British political control -- in the interests of the Indian consumer at least as much as of the European and American exporter; China by unilaterally imposed conventions. The new countries were not yet in a position to meet their own industrial needs. It followed that the exclusion of some British exports from an overseas market would result usually in their diversion (at a cost) to some alternative market. When Europe had been closed to British manufactures, America was open; when America was closed, the Dominions and the east were open. There were so many gaps in the wall of tariffs with which the flood of British exports was faced that a raising or extension of the wall at one point only diverted the flood without diminishing its amplitude. The war had changed all this. By forcing countries to be more self-sufficing, it encouraged them to protect their local industries. The United Kingdom could still endeavor to maintain its total of exports, but only by a continual shift from excluded goods to new goods; the whole burden of adjustment to change was thrown back by the tariffs and subsidies of other countries onto the United Kingdom, which, for the reasons indicated, had lost the adaptability needed for such sudden and extensive change.

Almost everywhere British trade now turned it met tariff barriers. There were no large gaps in an almost continuous wall. Nor was this development surprising, or necessarily uneconomic. The industries which British export dominated before 1914 were very largely the industries which any country with civilized labor could practice; if Lancashire's cotton exports went down, Lancashire's exports of textile machinery have expanded, though not to a compensating extent. The change in Britain is the correlative of the change in the countries with which Britain used to exchange manufactures for agricultural produce; as the agricultural countries industrialized themselves, the United Kingdom was driven to pay attention to its depressed agriculture. British foreign trade was unique in Europe in being predominantly an exchange with agricultural rather than with other industrial countries. It may begin to grow again, once a new equilibrium of industry and agriculture has been established. But that is not yet.

Similarly the change in monetary standard, not adopted voluntarily with any idea of relieving the depression, which it did in fact help to relieve, but forced on the country by the panic withdrawal of foreign funds, was no more than an assimilation of British practice to the almost universal practice of other countries. For a decade, external economic relations had been conducted (except by some smaller European countries) with almost complete disregard of the responsibility which every country shares for the stability of exchanges and the free flow of trade. After America's withdrawal from the business of foreign lending in 1929, the strain concentrated on London proved too much for a country still suffering from fundamental industrial and commercial dislocation caused by war. The feeling of freedom and ease which ensued on the changes of 1931 and 1932 is a serious obstacle to any return to an international standard, much as the more experienced elements in public and private finance desire it.

The gold standard went in the autumn of 1931. Although it reappears as a sort of eschatological appendix in formulations of commercial and monetary policy, no British Government has seriously considered restoring it. Even if the conditions had been propitious, it may be doubted whether Parliament could have been induced to sanction its restoration. Free trade went a little later. The immediate effects of foreign tariffs in restricting British exports have been exaggerated. What, for example, are the exports which the United Kingdom would have sent to America if the Hawley-Smoot tariff had not been enacted? But the domestic effects of the tariffs imposed by other countries in stimulating new enterprise in the protected industries became obvious. In the United States the steel industry showed the most spectacular recovery, because it was organized to take advantage of protection and was on the edge of a new period of capital investment; but a host of smaller industries also benefited and responded to the stimulus. The chief influence of the American tariff on British industry was to make its leaders feel that they had been fools not to insist on tariffs long ago. That temper is still almost universal in British industry -- even Lancashire is now protectionist. With the reversal of commercial policy went a policy for reviving agriculture. They went together, because the policy of keeping open the United Kingdom market for all the world's surpluses had been the chief obstacle to doing anything for agriculture. Industrialists no longer oppose special measures for assisting agriculture; they cannot deny to agriculture what they enjoy themselves, and they are more concerned with the volume of economic activity than with the nineteenth century aim of cheapness. It is beginning to be understood that the theory that imports create a simultaneous demand for exports and cannot therefore cause local depression and unemployment belongs to the same school of nineteenth century ideas as the theory that saving and inventions do not cause unemployment or that the provision of work by governments in bad times merely diverts a corresponding amount of employment from private enterprise. Perhaps democracies take too short a view of the effects of economic policies; but even statesmen cannot disregard immediate effects, when revolutionary propagandists of the Right and Left are both looking out for opportunities of representing temporary depressions as long-run failures.

The other great influence accounting for the shift from external markets to the home market was the change in consumption habits and in the distribution of income. With the levelling up of incomes there coincided a new demand for transport, light and heat, local services, furnishings and all the other elements in the material equipment of an urban home. The building industry displaced coal as the largest employer among industries; distribution services grew out of all proportion to any increase in production. Entertainment, sports, restaurants and hotels, education and local government, the newer forms of transport, all increased their importance. Thus the home market exerted an attractive influence which would have drawn over to it productive resources even if they had not simultaneously been forced out of the older export industries by the changed overseas environment.

Add to this a steady increase in the volume of expenditure, directly or indirectly financed by government. A small trickle of this reached the export industries; but it is so much easier for the government to spend its money at home, to stimulate activity within its own boundaries, that the growth of government expenditure incidentally meant a further stimulus to production for the home market.


Let us turn from this retrospect to the future. What are likely to be the effects of the second war? Can there be any doubt that they will be similar in kind, though probably greater in degree, than those of the first war? There has been an even greater interruption of normal contacts and processes. Overseas markets have been compelled to supply their own needs, and have been assisted and encouraged by the United Kingdom to do so. India may well be found to have a larger cotton industry than Lancashire, able to undercut Lancashire in the few remaining markets not reserved for domestic producers. Australia already has a steel industry which is cheaper over a wide range than the English industry on which it used to draw, and (this also is true of India) a metallurgical and engineering industry brought into existence by the war. The war has involved a far more extensive dislocation of normal employment; the problem of reabsorbing in regular industry the men and women at present engaged in war industry or the armed forces will be even greater than after the last war. Thus the country will be faced with the double task of reversing the war's effects, and resuming the interrupted task of effecting a long-term readjustment of industry to changed conditions of markets and comparative advantages.

These are the direct and obvious effects of war. They must tend to concentrate the attention of postwar governments on the country's employment problem. It is conceivable that a policy might be adopted of enlarging employment by expanding exports. The obstacles are the loss of mobility due to social security, the loss of adaptability due to high taxation of the funds needed to finance adaptation, and the greater ease of stimulating employment in the home market. It is therefore more probable that government measures will favor the home market. Certain indirect effects of the war will tend in the same direction. There will be an amount of physical reconstruction, of deferred repairs and normal additions, to provide a volume of work for the building industry even greater than the demand for new houses in the years before the war. This war again has given a new importance in the mind of both politicians and people to certain industries which have proved necessary to security. After the last war, protection on security grounds was afforded to a handful of small industries, but without conviction and in the face of much ridicule and opposition. Rearmament, when the need arose, was handicapped by an inadequate range of machine tools, by an inadequate optical and instrument industry, and by the contraction between the two wars of the country's shipbuilding capacity. There will be a demand for some form of protection on security grounds for these and other industries. Most of all has the attitude of the country to agriculture changed. While the expansion of arable land has done little more than replace the loss since 1918, and the proportion of the population engaged in agriculture is even smaller than then, government policy has resulted in a great increase in output and in a very great improvement in the condition of the land. Sentimental reasons will reinforce the demands of security in seeking to retain a large part of this increase by one form of government assistance or another.

Behind and pervading all these material changes is the change in social ideas, the substitution of security for enterprise, employment for cheapness, greater equality for increase in aggregate income as the unconscious assumptions of social expediency guiding governments. All converge in an acceleration of the prewar shift from an economy specializing in external trade to an economy based on the expansion of a protected home market. England will remain a great trading country, but I cannot see her main centers of industry ever again concentrating on vast exports, with the home market as a dependent and residual client. Such exports as continue will consist mainly of surpluses over domestic needs. They may in the aggregate be large, but they are not likely to be decisive in the economic fortunes of great populated areas as they were before 1914 and again in the twenties. In other words, the United Kingdom will make a further large move in the direction of the type of economy characteristic of the other great industrial countries of Europe and America.


An objection to this line of argument will have occurred to readers, and it must be faced. Britain's preoccupation with external trade, it will be argued, is not a matter of choice but of necessity; with a population of 47,000,000 the United Kingdom can neither feed herself nor supply her industries with essential materials without a large import, and therefore a large export, trade. The objection is well founded. Against any policy which aimed at making the United Kingdom self-sufficing, it would be decisive. But no responsible person has suggested such an aim, and this essay is an attempt to forecast probabilities, not to formulate a policy. We have seen reason to expect that British exports will decline, certainly relatively to total production and probably (apart from a postwar restocking boom) absolutely, until a new distribution of resources has been achieved and the old specialized export industries have been largely replaced by other industries depending primarily on the home market. Must the country's need of imports check this development?

We should note in the first place that the decline in the proportion of industry carried on for export has hitherto been accompanied, not by any lowering in the standard of life of the population, but by a substantial improvement. It is not to be inferred that the decline in exports is a cause of the improvement, but it is evident that the two are compatible. The mass of the population was much better off with the proportion of export industry reduced to a sixth than they were when it was a third, and it is hard to believe that the rich minority were any worse off. Obviously there is a limit to the possible contraction of a country's foreign trade, but it is not obvious that the limit had been reached in 1939. The self-equilibrating power of a free economy is not what it was in the nineteenth century, but it remains considerable.

Next we may note that the war has revealed possibilities of adaptation that were unexpected. Imports of dry cargo were reduced from a prewar average of 55,000,000 tons to 26,400,000 in 1943. The quantum (i.e. value corrected for a change in prices) of domestic food production increased by 30 percent. The country's production of health food was maintained, an enormous output of munitions was achieved, and the armed forces supplied. It is easy to underestimate the potentialities of technical science in making economic calculations. Again, it is not to be inferred that the efforts and sacrifices involved would, or should, be tolerated in peace; war experience is cited only as evidence of adaptability under pressure. A shift from imports to domestic sources of supply, effected over a period of years under the pressure of a large adverse balance of payments, is not impossible. It might be small in relation to any one industry but, extending over all industries subject to the direct or indirect competition of imports, important in the aggregate. The retention of part of the increased agricultural output of wartime, and of other wartime increases on security grounds, added to the protective measures already employed in 1939, would not cost so much as to excite serious opposition and would be popular in a community which places employment, not cheapness, as the first aim of economic policy.

A long-term tendency for foreign trade to become relatively less important is then not improbable. But it is not possible to envisage Britain's external payments being balanced by curtailment of imports alone. A temporary gap may be bridged by borrowing; but the loss of foreign investments, the accumulation already of an enormous external indebtedness, losses of shipping, and the stimulus given by war to competitive production in so many markets, point to a persistent gap which neither borrowing nor restriction of imports will bridge. If, as is probable, no conscious and deliberate policy of marrying imports and exports is adopted, the necessary balance will be restored by two influences which do not depend on government action -- the relative movement of import and export prices, and the self-equilibrating tendency in current payments, which loans only postpone.

In the past, the chief gain that Britain secured from its free trade policy was the cheapness of its imports. So many producers were dependent on the British market that they had to take what Britain could pay or not sell their produce at all. This was shown most clearly when sterling depreciated in 1931; countries like Denmark and New Zealand were so dependent on their sales to Britain that when the value in their own currency of the sterling they received was suddenly reduced, they were forced to depreciate their currency to restore the old return. Actually most of them depreciated their currencies not only to the same extent as sterling had depreciated on gold, but went further and depreciated their currencies on sterling in order to increase the return of their exports to Britain. If, therefore, other countries still seek an outlet for their produce in the British market, when British exports have been curtailed by the spread of protection in former markets, the terms of trade are likely to move in favor of Britain, and the British population obtain the same amount (or an amount not proportionately decreased) for a diminished volume of exports. British policy in this matter is completely passive. There has never, to my knowledge, been any attempt to force a change of the terms of trade to Britain's advantage; on the contrary, the policy has been directed to the opposite aim -- the increase of British exports and restriction of imports -- even at the cost of raising import and depressing export prices.

That is one possibility. If it is realized, it will involve a relative depression in world agricultural prices, similar to the fall from 1929 to 1932 when the world's agricultural surpluses were being dumped into a British market with a diminished capacity to pay for them. The effect might be moderated by bilateral agreement between the importing and exporting countries; but it arises fundamentally from the decline in the United Kingdom's capacity to pay for imports without any corresponding contraction of production for the British market in exporting countries.

The other possibility is that British imports will induce the exports necessary to pay for them, without any deliberate action by the British Government. The free trade policy so long accepted assumed that imports did in this way automatically lead to exports. The policy was discarded when the electorate was forced to perceive that there was not this necessary connection.

Between the two wars imports were maintained, but not exports. Imports were offset in the balance of payments in several ways: by repayment of previous British loans; or by the accumulation of unused sterling balances to the credit of the countries supplying the imports; or by the transfer of the ownership of British assets at home and abroad to other countries; or by the drain of gold and foreign exchange reserves from London. None of these methods of paying for imports provided the employment which exports would have done. In the future, however, capital transfers of all kinds will be controlled in the interests of exchange stability. None of the methods of paying for imports listed above will be permitted (or will be permitted only by special license) except the last, and that only within the limit of the power provided by limited resources, supplemented by the International Monetary Fund. The exporter in another country who supplies British imports will be unable to use the sterling proceeds of his export for any purpose except to buy British exports. He might hold the sterling unused, but he will be discouraged from doing so by the knowledge that it may have its exchange value reduced by 10 percent without notice and by even more with the consent of the International Monetary Fund. The conditions will be established under which imports do automatically lead to exports, and this may operate as a pressure sustaining British exports at prices higher than those of alternative supplies; in the long run it may equally lead to the curtailment of British imports by their suppliers.

The nature of this support to British exports is brought out by the British Trade Agreement policy of the years 1933-1938. These agreements were aimed at utilizing overseas dependence on the British market to secure openings for British exports, which they did by tying access to the British market by quotas to access for British exports to overseas markets. They made it possible to direct a certain quantum of overseas demand to the depressed industries, cotton textiles and coal, and similarly, perhaps, to direct British demand to the relief of depressed or threatened agricultural industries in the other countries. Such bilateral quantitative agreements are now frowned on; but the underlying influence of the dependence of the overseas producer on the British market is not removed by the elimination of bilateral agreements. It operates with the same force as before, but to support British exports generally instead of exports by particular depressed industries. Operating in this way, it should hasten the decay of the declining industries, and encourage the development of alternative exports, a desirable adjustment.

The decline in the importance of British overseas trade which I expect to see has limits. It is unlikely also to be sudden or catastrophic. The restocking demand in the world may well sustain the exports even of declining industries for five years. When that demand is exhausted, we are promised the substitute of an expansionist policy in the world as a whole. It is not clear that an expansion in the purchasing power of the overseas world for cottons will make them prefer British goods at higher prices to Japanese or Italian goods at lower prices, or British coal to cheaper Polish coal. It may, however, by expanding world demand as a whole for each important commodity, make things easier for the declining British export industries -- and to that extent lead them to defer any attempt to adjust themselves to a contracted market and the emergence of cheaper competition.


In connection with the publication of the terms of the Anglo-American financial agreement of December 6, 1945, the question arises whether the agreement will so alter the international position of the United Kingdom that the trends discernible in its development between the wars are likely to be reversed. A definite answer is impossible, but one may doubt whether the agreement will make much difference. The agreement recognizes the special difficulties in which the United Kingdom finds itself on the termination of hostilities and makes a generous contribution toward removing them. During the war, in order to save tonnage, the United Kingdom diverted to North America an overwhelming proportion of its demand for imports. This diversion cannot be reversed overnight; and until it is reversed the United Kingdom will find it difficult if not impossible to pay for its imports. Even when this diversion has been corrected, the United Kingdom will still have to meet abnormal expenses of overseas establishments in occupied countries and elsewhere, while its industries will still be handicapped by the wholesale application of manpower and all other productive resources for six years to temporary war needs. The estimate published in the White Paper accompanying the agreement puts the cumulative deficit in the country's balance of payments in the next five years at five billion dollars, so that the American loan, generous as it is, will leave a considerable deficit to be met. This is a transitional problem. It would be even greater if we could not expect a restocking boom throughout the world which will make it easy to sell exports.

The problem to which this article is addressed is the long-term problem which will still face the United Kingdom when the transition from war to peace has been completed -- the problem of establishing a balance in external relations. The proposed loan itself is likely to be exhausted before the transition is complete, but the conditions attached to it will continue to have effect. By ruling out any policy of tying exports with imports bilaterally they will deprive British exports of a certain support they enjoyed in the thirties. Taken with Article eight, Section four, of the Bretton Woods Agreement, they subject British monetary policy once more to the requirements of convertibility which will compel a prompter balancing of imports than was necessary when sterling was inconvertible.

On the whole, then, the effect of the agreement is more to postpone than to ease this long-term problem of Britain's. The increase in the volume of exports required to restore a reliable equilibrium is estimated in the statistical White Paper at nearer 75 percent than 50 percent of the prewar level. A 50 percent increase would bring the volume of exports about to their level in 1913, the point at which we began this examination; a 75 percent increase would bring it to well above that point. Such an increase is not impossible, but it will require a different world as well as a different Britain.


To sum up: the future economic position of the United Kingdom in the world is likely to be less important than before the war. Even if the decline in the volume of its foreign trade is only moderate, the character of that trade will be different. Exports will no longer consist of the output of a few industries specialized to export, but mainly of smaller contributions from a larger range of industries, each contributing a relatively small surplus over domestic needs. The home market will be the main field of enterprise; the spontaneous trend of development will be in that direction, and it will be aided by the policy of government, under the impulse of an almost morbid fear of any unemployment, to maintain employment by government-financed expenditure. London may be larger than ever, and the center of larger transactions; but these will be predominantly domestic transactions. The characteristic functions of the international London -- acceptance and bill booking, foreign exchange, the issue and marketing of overseas loans -- will have shrunk to a small fraction of its total activities.

In a word, the transition will be completed from the unique economy, based on world trade and world finance with a maximum disregard of political frontiers, to the normal condition of every other mature economy -- a condition in which a protected home market is the basis of enterprise, and foreign trade is confined mainly to the export of surpluses and the import of commodities which it is not practicable to produce at home. The change is one that affects the world as a whole at least as much as it does the United Kingdom, since it calls for the creation of new agencies, new institutions, and new foci for international transactions to take the place of those which the United Kingdom provided before 1914 and tried hard to restore in the twenties. The United Kingdom can and will coöperate in the task of building up world trade again; but it can hardly provide again the nucleus and nerve system of a world economy that it did before 1914.

I have discussed this change in relation to the two world wars because these wars have been the decisive influence; but the change is deeper and older than a mere readjustment of resources to a changed market situation. The war has involved the loss of the creditor position which provided a foundation for the international banking and clearing functions of London. Shipping, the other great international activity, will suffer a similar decline. The British mercantile marine was subjected to nearly six years of intensive attack; the admirable new tonnage which replaced these losses accrued mainly to the American flag. Even more fundamental are the population changes of the last generation. Before 1914 the United Kingdom population was increasing at over 1 percent per annum after providing a steady stream of emigrants to the new countries; it is faced now with the prospect of a stationary or declining population, and in the decade before this war a substantial part of such increase as occurred was due to a considerable and persistent net immigration.

Outside the United Kingdom, the changes in the world combine to force British industry back on itself. It is significant that in the present century we have substituted the term dominion for colony in popular as well as legal phraseology; the change signifies a transition from economic dependence to independence. Whatever their political future, India and China too have been withdrawn from the colonial sector in the world's economy. All the countries in the world are set on developing their own resources and reserving for themselves their own markets, and there is no longer room for a country which stakes its existence on world trade as the United Kingdom did before the last war.

There is no need to repine over this change. The economic problem with which the present generation is preoccupied is the problem of security. The first need for security is to regularize the flow of income and production, and governments will make that their first aim. Since governments are national, the first steps in any policy of regularization must be directed to domestic markets, and the better individual countries look after their own affairs the more they will contribute to the welfare of other countries. Even before this war, it had become obvious, I think, that the greatest service a country like America or England could render to international trade was to maintain purchasing power in its own market; there was no comparison between the effects on international trade of fluctuations in the domestic activity of American or British industry and changes in tariffs, unfortunate as the latter often were.

You are reading a free article.

Subscribe to Foreign Affairs to get unlimited access.

  • Paywall-free reading of new articles and a century of archives
  • Unlock access to iOS/Android apps to save editions for offline reading
  • Six issues a year in print, online, and audio editions
Subscribe Now
  • HENRY CLAY, Warden of Nuffield College, Oxford; Economic Adviser to the Bank of England, 1933-1944; formerly Professor of Social Economics in the University of Manchester
  • More By Henry Clay