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Ignoring the truth in the Thirties – Imperial Britain was broke

Posted in Historical articles, History, Industry, Politics on Thursday, 29 March 2012

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This edited article about the Thirties originally appeared in Look and Learn issue number 679 published on 18 January 1975.

Labour Exchange, picture, image, illustration

A Labour Exchange in Britain

You may have heard of Walter Mitty. He was a character in a short story by James Thurber which became a popular film. He became famous because he was like the ostrich which is alleged to bury its head in the sand. He filled his mind with dreams and fantasies about the state of things going on around him – ideas that were always totally unrealistic.

In the nineteen-thirties, of all the people in the world who suffered from the delusions of a Walter Mitty, there were none so numerous as the British. In those halcyon years, for instance, in almost every State school classroom there hung a large map of the world, facing the rows of pupils. One-third of the countries on it were always coloured red.

From time to time a teacher would point to the map and tell the pupils, “One-third of the world is coloured red. All those red parts make up the British Empire.”

No one who went to school in the ‘Thirties was left in any doubt about what that message meant. It meant that Britain was the mightiest, most powerful nation in the world.

You did not have to be a schoolboy or a schoolgirl to nurture that belief. Almost everyone in Britain in the ‘Thirties believed that nothing could shake the rock upon which the Empire was built. Thus, when Mussolini invaded Abyssinia, Japan attacked Manchuria, and Hitler invaded the Rhineland; when the Geneva disarmament conference failed and the League of Nations stood revealed as a useless institution, the intellectuals demanded passionately that Britain should act, should show “them”, should demonstrate either by force or gentlemanly example that a third of the world was not coloured red for nothing.

Few stopped to think why Britain never did act in these circumstances. The truth was not simply that she did not want another war but that she was a pauper. By the end of the First World War, Britain was hopelessly in debt – debt that rapidly reduced her status as a first class power in the world. The ‘Thirties were an illusion, a Walter Mitty world that somehow was sustained through a whole decade until the Second World War and even greater war debts shattered the illusion for all time.

War Debt. It was a phrase as much on the lips of people in the ‘Thirties as the word inflation is today. It arose out of the 4,277 million dollars borrowed by Britain from America to help pay for the First World War.

By the beginning of 1934 Britain had repaid nearly 2,025 million dollars (¬£400 million), yet still had to pay 4,368 million dollars, because the pound had meanwhile been devalued. In other words, Britain’s debt was considerably bigger, despite the already huge repayments, nearly 20 years after it was first incurred.

Here is a simple story to illustrate how all this happened. In it you will recognise that John is Britain; Fritz is Germany; Pierre is France; Antonio is Italy and Sam is the United States.

Imagine that one day in 1914 Fritz brought a violent legal action against John and some of his friends, who included Pierre and Antonio.

Suppose then, that in order to raise the funds for their defence, John and his friends went to Sam, a third party. He was also in danger of having a legal action brought against him, so he agreed to provide the money to help John and his friends contest theirs, on condition that they paid him a high rate of interest and that the greater part of the money was to be spent in his shop.

Further, having taken a good look at John and his friends and seen that they did not seem to be a very well-to-do lot, and that they were likely to be a good deal poorer by the time the lawsuit ended, Sam insisted that John, the wealthiest of all the borrowers, should guarantee the money borrowed by all the rest.

The legal action (or the War) came at last to an end – and the question now was, “How is Sam to be repaid?”

The answer seemed easy, at first sight. “Fritz caused the trouble. He lost the action. Let him find the money.”

But Fritz had spent everything he had in the struggle that was now over. Because he could not pay in money, he had to pay in goods. But before he could pay in goods he had first to rebuild all his factories, to install new machines, to put up flats for his workers, to improve his transport.

In order to enable him to do this, Sam, John and all their friends lent Fritz vast sums of money – borrowing it from each other in order to gain the extra rate of interest they could secure from Fritz.

No sooner were Fritz’s new factories in working order than he began to flood the world with the goods he was now able to produce – ruining the trade of the very people who had lent him money.

They protested. “But,” said Fritz, “you insisted on my paying you. Now, when I send you goods, you put up tariff barriers and declare that I am ‘dumping’.”

“Either you must let me off my debts, or else you must stop all my trade, ruin my factories – and, incidentally, lose all the money you have lent me for rebuilding.”

Fritz’s debts were twice scaled down, and finally it was decided to let him off the original debts altogether, in order to enable him to go on paying interest on the new, and mainly private, debts.

But if Fritz could not pay John, Pierre, Antonio and all the rest, neither could they pay Sam – for they had been counting on Fritz’s money to settle their debts to him.

They could not pay in gold, for nearly all the gold was already in Sam’s hands. They could not hand over vast sums of paper currency – for it would immediately fall away in value the moment any attempt was made to convert it to the currency of the person (or nation) receiving it. Nor could they pay in goods, for the very reason that Fritz could not pay them, because it would have ruined Sam’s own trade to have had millions of tons of low-priced foreign goods left on his doorstep. And although in the end Sam did hint that he might take payments in kind, he had already introduced tariffs which made this virtually impossible.

What were the friends who had borrowed to do? There was only one thing they could do – and that was to forget about the whole thing.

For, until they did that, their world was at a complete standstill. Their businesses were handicapped; their expansion and development was held up, their trade between each other was restricted by doubts and fears, because none of them knew what calls upon his money he might have to face.

So it was that, crippled by debt, John made his last repayment to Sam in December, 1933. He hadn’t even paid back half the amount at that time, and because the interest on the loan was increasing all the time, the amount to be repaid was even bigger than the amount he had borrowed.

Indeed, John, who had to find or guarantee vast sums of money, was a born loser. You can soon see that by taking a look at how everyone else fared.

Fritz, who caused the trouble by bringing the lawsuit, had had his country rebuilt for him at the expense of those he injured.

Pierre and Antonio, who stood to lose most by the attacks of Fritz, had reduced his military power with money they never had to find.

Sam had had his lawsuit to a great extent fought for him. He had enjoyed for many years a state of unrivalled prosperity due to the purchases made from his shop by the rest. He had certainly got back as much as he could ever have hoped to get back of the millions of dollars credit created by the banks to finance the purchases from him.

Poor John! He had helped everyone, and now he was broke. For him, it was a case of, “Oh, what an expensive war.” But he continued to hold up his head, and to keep his whiskered upper lip stiff, because he was like that. His suit was worn and threadbare; he didn’t notice it himself, so he didn’t know if anyone else did.

He was deep in his Walter Mitty world.

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