I have been told by many acquaintances that the loss of the thirteen colonies actually BENEFITED the UK. Their claim is that the UK no longer had to pay for the colonies' defence and administration and whilst the tax loss was regretable, the colonists were not taxed very high anyway (thus why parliament voted to increase taxes in the US). On the other hand, trade boomed as the colonists prefer to do business with someone who speaks their language and has their customs.
Is there any truth in this statement? Were the 13 colonies really not profitable (i.e. defence + admin costs > tax revenue)? If so, then why do states bother with colonies at all, if a majority of the time they're not profitable?
There are three big questions there, with the second, on profitability of the colonies, a tricky one which can plunge us into discussion and the last, on why states bother, quite broad. Others may like to weigh in on them and I'll focus on your first part, "I have been told by many acquaintances that the loss of the thirteen colonies actually BENEFITED the UK… Is there any truth in this statement?"
The historical consensus seems to be a resounding yes to the broader question of general benefit in the long run.
The most recent restating of this I found is by Maya Jasanoff in her 2012 book Liberty's Exiles. Though it is primarily on the loyalists, she sums up some of the benefits of the loss of the conflict to Britain in her opening section on what she calls the "spirit of 1783," some of which speak directly to your interest in the economic aspects in particular:
- As a result the British empire significantly expanded - with the loyalist exiles she focuses on as agents and advocates [1:12]
- 1783 serves as a dividing line between old and new empire with new focus on Asia etc., the “swing to the east” [1:12], also similar point in 2:76, which says the loss “helped to consolidate a new focus of empire, and an empire that was markedly different from that which had gone before”
- there was a renewed commitment to authority but one that “joined liberal principles with hierarchical rule” [1:13] - others have described how, in particular this is seen in the case of its flexible response to a crisis in Ireland that enabled it to remain in power there, as well as new approaches to its other dependencies
The chapter on the impact on Great Britain in The Impact of the American Revolution Abroad concludes with:
The expansionist forces released by the Revolution worked, surprisingly, for the benefit of Britain. The growth of the American economy made for the vastly increased profit of Britain and enabled her to sustain a long and expensive war against France and Napoleon. [2:76]
You might want to have a look over this short summary on About.com about this as well:
About.com: The Effects of the American Revolutionary War on Britain
Note: The short-term calculations of economic benefit would be a trickier thing to work out, especially because fundamental transformations are in the works that are not directly tied to the course of events in the US and would be difficult to filter out. This comes through in the opening chapter "England 1783-1846: a preview" in A Mad, Bad, and Dangerous People?: England, 1783-1846 which lays out the foundations for the "Great Transformation" that is about to take place. At any rate, the historians in various sources I scanned over not cited here all focus on the broader long-term picture of renewed trade with the US and a shift in empire, which I think is appropriate when looking at the impact of a world-historical event like this.
Citations above in form [Source:Page Number]
Maya Jasanoff, Liberty's Exiles: American Loyalists in the Revolutionary World (New York: Vintage Books, 2012). On Google Books
Library of Congress, The Impact of the American Revolution Abroad (The Minerva Group, Inc., 2002). On Google Books
Boyd Hilton, A Mad, Bad, and Dangerous People?: England, 1783-1846 (Oxford: Oxford University Press, 2008). On Google Books
While the UK 'lost' the 13 colonies, it still 'possessed' Canada. Therefore it still had trade opportunities and defense commitments in North America, and similar arrangements in Australia and New Zealand. The character of these in particular is that they were sparsely populated by aboriginals, they were at a significant distance from the 'mother country', and they were colonized largely by 'their own people'. India doesn't fit this description - India already had both advanced social orders and had been 'civilized' for thousands of years.
While the colonies were 'revolting', the British had other things on their mind, in particular the Industrial Revolution. Many of their more immediate concerns was the construction of steamships and railroads, dealing with the social costs of rapid industrialization, and restructuring the political order to deal with the emerging merchant and professional classes. In this respect Britain was trying to 'straddle the fence': they had both an external and internal focus. The colonial adventures were an attempt to secure raw materials, which often didn't work out as planned.
Britain granted Canada 'independence' in 1867 - without much more than a ceremony and signing some agreements. In short, it didn't take even another 100 years to realize that attempts at ruling North American territories wasn't worth it. Much of this would have been due to the massive investments needed to, for example, built railroads across 3000 mile expanses of wetlands, plains, and mountains. While resources were there, manpower wasn't. Populating North American involved massive waves of immigration from nearly every other country on Earth, a process that continues to this day.
Two very good answers while I was thinking about this and trying to find sources. I cannot match the scholarship of either of the other answers, but I want to provide some contextual backdrop. These are some lessons I've learned over my years of studying the American Revolution; things that surprised me because I hadn't put them together.
Great Britain had just finished the Seven Years War (known in the colonies as the French and Indian War). This was arguably the first world war - pretty much every nation that had the ability to project power beyond their borders was involved. Although the war was over, each of the nations retained the desire to create, maintain and exploit colonies. (There is an easy book here on the history of empire). 1. Britain acquired an Empire. Defeat of the French on North America (Quebec) can be considered the beginning of the British Empire. There was a huge difference in the obligation to protect colonies against indigenous forces vs the requirement to protect colonies against other superpowers. The French/Indian alliance also made it clear that although the American Indians didn't have artillery, they could still participate in logistics and in what would later become known as asymmetrical warfare. 2. Britain acquired the deficit spending that comes with Empire. The seven years war cost Britain so much money that the resulting economic crisis lasted until the Napoleonic wars.
3. Britain had to demobilized a huge military force. Although they didn't have modern economic theory, they knew that demobilization can lead to social instability. Furthermore, every officer had to be placed on half pay or retired. (Everyone with an interest in history should read the Aubrey/Maturin novels that detail Jack Aubrey's pathetic existence on half pay; it sounds like a good solution, but it wasn't.) One solution was to move the most valuable units to North America, use them to defend the colonies against the Native Americans and as a guard against the colonial ambitions of France (et. al.). The nice part being that the colonies could be convinced (forced by fiat) to pay for the support of the troops. 4. Remember that the Glorious Revolution wasn't that long ago. England hadn't yet finished designing the parliamentary government. Issues like the King's right to a standing army, and "taxes are the free gift of the people to the government" were far from settled. The King and Parliament were not arguing from a particularly long precedent, and precedent is much more important in the English "pure common law" system than it is in the American constitutional system that we have today.
One last point - OP asks if England benefitted economically; I think that is an unanswerable question. At the time England's economic policy was mercantilist. Mercantilists understand economic benefits in a way that doesn't map very well to our modern notion (informed by Smith, Keynes et. al.) I think it is safe to say that shifting the costs of troop maintenance to the colonies seemed to Parliament to be a solution to a problem. I think it overstates things to say that this was a policy.
Slavery, Atlantic Trade and the British Economy, 1660-1800
The relationship between slavery, colonialism, capital accumulation and economic development has long been an issue that has exercised political economists and economic historians, though it is perhaps fair to say that it tends to be neglected in standard university courses for undergraduates. Kenneth Morgan's booklet in the Cambridge New Studies in Economic and Social History series should go some way towards redressing this imbalance between academic research and undergraduate appreciation of recent work in this field. Indeed, it provides a useful and accessible introduction for undergraduates to what has been one of the most provocative modern theses relating to British industrialization, namely that articulated by Eric Williams in his most famous work Capitalism and Slavery . Published in 1944, Williams's study set out the explore the impact of African slavery on British economic development, his most celebrated claim being that profits from slavery helped to fertilize the British Industrial Revolution. Although not the first to discern a connection between slavery and capital accumulation - Marx and Hobson, among others, had been there before him - Williams was perhaps the first explicitly to attribute British industrialization to the gains from enslavement of Africans in the Americas. A second, equally provocative, theme articulated by Williams involved the impact of industrialization on British attitudes and policy towards the slave trade and slavery and included the claim that, contrary to then received interpretation, it was economic self interest, not humanitarianism, that drove nineteenth-century British antislavery. Seen in the context of wider academic and political concerns in the West over issues relating to race, inequality and economic development from the late 1950s onward, it is perhaps not surprising that Williams's work has attracted widespread and continuing interest among historians over the last forty years, provoking various debates over the impact of slavery on British industrialization and over the nature of British antislavery from the 1780s onward. It is on the first set of issues that Morgan focuses in his booklet.
Given the intensity of historians' reaction to Williams's work and the centrality of British industrialization to historical scholarship, it is curious that there has not been until now a publication relating to Caribbean slavery, Atlantic trade and British industrialization in this popular Cambridge series. This may partly be explained by the fact that the majority of scholars working on British industrialization tend to be highly skeptical of the ‘Williams thesis'. As Morgan himself observes, the "insights and evidence" offered by Williams in Capitalism and Slavery are "much contested", though the study still remains "seminal" (p. 113). There remain, however, scholars for whom Williams's claims about the profits from slavery and British capital accumulation retain much merit. Moreover, others, including Morgan, have sought to explore more thoroughly than Williams other possible lines of connection between slavery, external trade and British industrialization. In this respect, the debate between slavery and the British Industrial Revolution that Williams helped to ignite almost sixty years ago remains very much alive. Whether, as Morgan hopes, his booklet succeeds in prompting fresh research (p. 5) rather than simply providing an accessible summary of current debates for students, is open to question.
Morgan's purpose is to enquire into connections between the growth of the Atlantic empire and the development of the British economy between 1660 and 1800. His goal is "to keep students and teachers abreast of the leading debates" but also to produce a synthesis that "has something of its own to say" and that is, therefore, a contribution to "an ongoing discourse about the economic benefits of imperial trade and slavery" (p. 2). Specifically, he seeks to address three questions. What financial rewards did Britain reap from slavery and Atlantic trade in the century or so after 1660? To what extent did the gains from such activity stimulate British industrialization? And how far did the Atlantic trading complex provide an impetus for economic change in Britain? As Morgan admits these "seemingly straightforward questions … are not susceptible to easy answers".
His search for answers to these questions leads Morgan to explore various issues as he reminds us that British Atlantic trade not only grew substantially in scale and relative importance between 1660 and 1800 but also became "more complex, specialized and interdependent". Two chapters deal specifically with the relationship between the profits and wealth generated by slavery and the American plantation complex and British capital accumulation and industrial investment. In another chapter he explores linkages between American markets and British industry, arguing that "a strong case" can be made for exports to America "as a generator of growth in the second half of the eighteenth century" (p. 70). In yet further chapters he focuses on the impact of Atlantic trade on British financial institutions and commercial practices and on the economic fortunes of particular British ports, notably Bristol, Glasgow, Liverpool and London. In the course of his discussion, he accepts that Eric Williams and his followers probably exaggerated the profitability of the slave trade and slave plantation complex. But he also takes issue with so-called ‘small ratios' arguments that purport to deny slavery and colonial trade a major role in British capital accumulation and industrial growth, claiming that such arguments rely on estimates of profits from slavery that are "subject to regular revision" and have limited value conceptually in understanding the dynamics of change in eighteenth-century Britain. He also makes a plea for more detailed studies of slave prices (sometimes used to estimate slave trade profits) and of financial links between trade and industry, while also suggesting that the links between slavery, colonial trade and British industrialization extended well beyond issues of capital accumulation. For Morgan, the real significance of Atlantic trade lay in its impact on institutional change, regional and city growth, and the expansion of new industries whose dependence on export markets for sustained growth was evident even before the close of the eighteenth century. Recognizing that claims that slavery and sugar made a substantial contribution to British capital accumulation have yet to be proven (p. 95), he nevertheless argues that slave-based Atlantic trades made "an important, though not decisive, impact on Britain's long-term economic development", though as much for their stimulus to industrial, commercial and financial innovation as for "their direct impact on capital investment and national income".
Morgan accepts that many of the institutional effects of Atlantic trade "are not always quantifiable", but still insists that they "contributed much to the commercial dynamism of Britain" (p.74). Evaluating the impact of Atlantic trade - and more specifically transatlantic slavery - on British industrialization, however, involves more than quantification or accumulating examples of how Atlantic slave-based trades appear to have stimulated growth in certain industries, whether in the manufacturing or service sector. It also involves conceptual issues that Williams and his followers tend to neglect and that, sadly, Morgan bypasses in his otherwise useful review of the literature. A critical problem for Williams was his failure properly to locate the British experience of colonialism, transatlantic slavery and industrialization into comparative perspective - an issue that, for example, Robin Blackburn ( The Making of New World Slavery: From the Baroque to the Modern 1492-1800 (London, 1997)) and David Eltis ( The Rise of African Slavery in the Americas (Cambridge, 2000)), albeit from different points of view, have recently sought to address. Williams's failure was perhaps excusable, if only because data on the scale and profitability of transatlantic slavery were very patchy at the time he wrote. But the quantitative revolution that since the 1960s has swept through studies of transatlantic slavery, the Atlantic slave trade and economic history more generally means that there is now much less excuse for not trying to place the relationship between British capitalism and colonial slavery into a wider international context. A crucial test for the Williams thesis, as Stanley Engerman observed in 1975 (‘Comments on Richardson and Boulle and the "Williams Thesis"', Revue Francaise d'Histoire d'Outre-Mer , LXII, p. 333) and reminded scholars again in 1995 (‘The Atlantic Economy of the Eighteenth Century', Journal of European Economic History , 24, p. 169) is to explain "Britain's lack of uniqueness" in relation to transatlantic slavery but its "uniqueness" in terms of early industrialization. In fairness to Morgan, he does acknowledge this challenge. Indeed, he recognizes that other European nations were involved in transatlantic slavery and accepts that this "had very small effects" on their industrialization (p. 34), yet at no stage does he seek to address this issue further or even to place Britain's relationship to colonial slavery and the slave trade in comparative perspective. In this respect, he misses a real opportunity to move forward the debate about the Williams thesis and thus to make the contribution to debates over imperial trade, slavery and the British Industrial Revolution to which he aspires. Students reading this booklet will undoubtedly acquire a good overview of much of the literature provoked by Williams's Capitalism and Slavery , but it is an overview largely framed by Williams's own original perspective rather than one influenced by the broader, Western European perspectives adopted by some more recent scholars.
Britain spent a huge amount of money fighting the Revolutionary War, sending the national debt soaring and creating a yearly interest of nearly 10 million pounds. Taxes had to be raised as a result. The trade that Britain had relied on for wealth was severely interrupted. Imports and exports experienced large drops and the following recession caused stocks and land prices to plummet. Trade was also affected by naval attacks from Britain’s enemies, and thousands of merchant ships were captured.
On the other hand, wartime industries, such as the naval suppliers and the part of the textile industry that made uniforms, experienced a boost. Unemployment fell as Britain struggled to find enough men for the army, which caused them to hire German soldiers. British "privateers" experienced as much success preying on enemy merchant ships as almost any of their opponents. The effects on trade were short term. British trade with the new U.S. rose to the same level as trade with the colonies by 1785, and by 1792 trade between Britain and Europe had doubled. Additionally, while Britain gained an even larger national debt, it was in a position to live with it, and there were no financially motivated rebellions like those in France. Indeed, Britain was able to support several armies during the Napoleonic wars and field its own instead of paying for other people. It's been said that Britain actually prospered from losing the war.
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Most economists have little doubt that Britain’s membership of the EU has translated into more trade.
Daniel Vernazza of UniCredit has shown that UK trade with EU partners grew faster after 1973 than it did with the remaining countries in the European Free Trade Association, the grouping to which Britain previously belonged. His work underlines that harmonising regulations — an effort at the heart of the EU endeavour — was often much more effective in boosting trade than was lowering tariffs.
Professor Nick Crafts of Warwick University, Britain’s pre-eminent economic historian, adds that opening to trade allowed the UK to bounce back after falling behind its neighbours. 𠇋ritain’s really, really big problem in the 1960s was very weak competition,” he said. “Trade liberalisation was a major factor in improving competition . . . It removed weak firms, made management better and improved industrial relations — more than Thatcher.”
Data compiled by Rebecca Driver of the consultancy Analytically Driven highlight a causal link between Britain’s greater openness to trade since 1973 and its subsequent specialisation in high productivity sectors, including finance, high-tech manufacturing and business services. Ms Driver said the 11 per cent of British companies that trade internationally are responsible for 60 per cent of the UKs productivity gains.
“These companies prefer large geographically concentrated markets with strong unified regulations,” she adds. 𠇏or the UK, that is the EU”. In other words, trade drives competition and growth. Since 1993, the UK has been the bloc’s top recipient of inward foreign direct investment, according to the UN.
How Did Britain Benefit From the Slave Trade?
Britain benefited from the transatlantic slave trade by using African slaves to work British-owned plantations in the colonies, particularly in the Caribbean islands. Profits from the slave trade also supported banks and factories, which helped fuel the Industrial Revolution.
British slave traders took part in what was known as the triangular trade, because the ships traveled to three points and had goods at each leg of the journey. Factories in England produced textiles, weapons, gunpowder and other goods that the ships carried to Africa. Once there, they traded those goods for slaves. The ships carried the slaves to the Americas, where they were sold to plantation owners and other wealthy colonists. The ships were then loaded with agricultural products such as sugar and tobacco, which they carried back to England.
This triangular trade was highly efficient and allowed many people to make money. The high demand for manufactured goods to trade for slaves caused an increase in factory production, which employed many people. Plantation and ship owners were able to make a large profit, which allowed some of them to finance a political career. The money that Britain made on the slave trade allowed it to keep its hold on some of its colonies longer than it might have otherwise, and helped finance wars with other European powers.
Did Great Britain benefit economically from the loss of America? - History
The growth of the British Empire was due in large part to the ongoing competition for resources and markets which existed over a period of centuries between England and other European countries — Spain, France, and Holland. During the reign of Elizabeth I, England set up trading companies in Turkey, Russia, and the East Indies, explored the coast of North America, and established colonies there. In the early seventeenth century those colonies were expanded and the systematic colonization of Ulster in Ireland got underway.
Until the early nineteenth century, the primary purpose of Imperialist policies was to facilitate the acquisition of as much foreign territory as possible, both as a source of raw materials and in order to provide markets for British manufactured goods. Britain imported food and raw materials for her factories from all over the Empire, while selling back manufactured goods. A profitable balance of trade, it was believed, would provide the wealth necessary to maintain and expand the Empire.
After ultimately successful wars with the Dutch, the French, and the Spanish in the seventeenth century, Britain managed to acquire most of the eastern coast of North America, the St. Lawrence basin in Canada, territories in the Caribbean, stations in Africa for the acquisition of slaves, and important interests in India. The loss in the late eighteenth century of the American colonies influenced the so-called “swing to the East” (the acquisition of trading and strategic bases along the trade routes between India and the Far East).
In 1773 the British government was obliged to take over for the financially troubled East India Company, which had been in India since 1600, and by the end of the century Britain’s control over India extended into neighbouring Afghanistan and Burma.
Australia was the last continent to be discovered and developed, and its development was very slow until it had become of sufficient importance in itself to be the terminus of regular trade roads to and from the Old World. This isolation was no disadvantage for the first use to which Australia was put, that of a convict settlement. Since 1786 it served as a penal colony, and between 1786 and 1840, thousands of the British convicts were transported there. In spite of the brutal treatment, many of them became self-supporting farmers and artisans when their sentences expired. Other escaped into the interior to become bandits and bushrangers.
Originally there had been a scheme for the creation of a country of small farms, on which the сonvicts might settle after their release. This plan, however, was presently abandoned in favours of one for the formation of huge sheep ranches. These were planned deliberately on a large scale during and after the Napoleonic Wars when the British factories had great difficulty in obtaining sufficient supplies of wool. Vast tracts of land were made over to rich capitalists who owned tens and thousands of thousands of sheep. These “squatters” soon became a powerful Australian aristocracy, and bitter conflicts grew up between them and the poor settlers who found much of the best land appropriated by the squatters who often owned more than they were able to use.
The struggle of the mass of the Australian colonists against the squatters came to a head in 1854. The discovery of gold at Ballarat in 1851 attracted thousands of diggers from all over Europe. The squatters who saw in these immigrants a menace to their vast holdings of land, and found that the rush to the gold-fields made it hard to obtain shepherds and sheep shearers used their influence with the British government to have heavy taxes and all kinds .of irksome police restrictions placed upon them.
A Gold Diggers’ Union was formed which put forward both economic demands and a democratic political programme almost identical with that of the Chartists. This programme was actually won to a very considerable extent, which accounts for the early development of an advanced form of political democracy in Australia. The government was forced to reduce taxation, and in 1858 a new constitution with universal manhood franchise was conceded.
The gold deposits gave out after a few years, but the population continued to increase from about 200,000 in 1840 to 2,308,000 in 1881. Sheep farming and mining continued to be important, but with the growth of railways considerable industries developed in Australia.
With the end, in 1815, of the Napoleonic Wars, the last of the great imperial wars which had dominated the eighteenth century, Britain found itself in an extraordinarily powerful position, though a complicated one. It acquired Dutch South Africa, for example, but found its interests threatened in India by the southern and eastern expansion of the Russians. (The protection of India from the Russians, both by land and by sea, would be a major concern of Victorian foreign policy). At this time, however, the empires of Britain’s traditional rivals had been lost or severely diminished in size, and its imperial position was unchallenged. In addition, Britain had become the leading industrial -nation of Europe, and more and more of the world came under the domination of British commercial, financial, and naval power.
This state of affairs, however, was complex and far from stable. The old mercantile Empire was weakened during the late eighteenth and early nineteenth centuries by a number of factors: by the abolition in 1807 of slavery in Britain itself, a movement led by the Evangelicals by the freeing in 1833 of slaves held elsewhere in the Empire by the adoption, after a radical change in economic perspective (due in large part to the influence of Adam Smith’s “The Wealth of Nations”), of Free Trade, which minimized the influence of the old oligarchical and monopolistic trading corporations and by various colonial movements for greater political and commercial independence. The Victorians, then, inherited both the remnants of the old mercantile empire and the more recently acquired commercial network in the East, neither of which they were sure they wanted, since Smith maintained that under the existing system of management Great Britain derived nothing but loss from the dominion which she assumed over her colonies.
During the Victorian Age, however, the acquisition of territory and of further trading concessions continued (promoted by strategic considerations and aided or justified by philanthropic motivations), reaching its peak when Victoria had been crowned Empress of India. Advocates of the imperialist foreign policies justified them by invoking a paternalistic and racist theory which saw Imperialism as a manifestation of “the white man’s burden”. The implication, of course, was that the Empire existed not for the benefit — economic or strategic or otherwise — of Britain itself, but in order that primitive peoples, incapable of self-government, could, with British guidance, eventually become civilized. The truth of this doctrine was accepted naively by some, and hypocritically by others, but it served in any case to legitimize Britain’s acquisition of portions of central Africa and her domination, in concert with other European powers, of China.
At the height of the Empire, however, growing nationalist movements in various colonies presaged its dissolution. The process accelerated after World War I, although in the immediate post-war period the Empire actually increased in size as Britain became the “trustee” of former German and Turkish territories (Egypt, for example) in Africa and the Middle East. The English-speaking colonies, Canada and Australia, had already acquired dominion status in 1907, and in 1931 Britain and the self-governing dominions — Canada, Australia, New Zealand, South Africa, and the Irish Free State — agreed to form the “Commonwealth of Nations”. The Dominions came to the aid of Britain during World War II, but Britain’s losses to the Japanese in the Far East made it clear that it no longer possessed the resources to maintain the old order of things. The Americans were in any case ready, and indeed anxious, to replace British influence in many areas of the world.
Britain’s hold on India had gradually loosened. India achieved qualified self-government in 1935 and independence in 1947. Ireland, which had at last won dominion status in 1921 after a brutal guerrilla war, achieved independence in 1949, although the northern province of Ulster remained a part of Great Britain. The process of decolonization in Africa and Asia accelerated during the late 1950′s. Today, any affinities which remain between former portions of the Empire are primarily linguistic or cultural rather than political.
Britain controlled about one-fourth of the Earth's land surface and one-fifth of the world's population in 1939. Fifty years later, its holdings outside the British Isles had become trivial, and it even faced an insurgency in Northern Ireland.
Britain spent the intervening years developing strategies to cope with what poet Rudyard Kipling called its "recessional," or the transient nature of Britain's imperial power. It has spent the last 20 years defining its place not in the world in general but between continental Europe and the United States in particular.
The Rise of Britain
Britain's rise to its once-extraordinary power represented an unintended gift from Napoleon. It had global ambitions before the Napoleonic Wars, but its defeat in North America and competition with other European navies meant Britain was by no means assured pre-eminence. In Napoleon's first phase, France eliminated navies that could have challenged the British navy. The defeat of the French fleet at Trafalgar and the ultimate French defeat at Waterloo then eliminated France as a significant naval challenger to Britain for several generations.
This gave Britain dominance in the North Atlantic, the key to global power in the 19th century that gave control over trade routes into the Indian and Pacific oceans.
This opportunity aligned with economic imperatives. Not only was Britain the dominant political and military power, it also was emerging as the leader in the Industrial Revolution then occurring in Europe. Napoleon's devastation of continental Europe, the collapse of French power and the underdevelopment of the United States gave Britain an advantage and an opportunity.
As a manufacturer, it needed raw materials available only abroad, markets to absorb British production and trade routes supported by strategically located supply stations. The British Empire was foremost a trading bloc. Britain resisted encroachment by integrating potential adversaries into trade relationships with the empire that it viewed as beneficial. In addition, the colonies, which saw the benefits of increased trade, would reinforce the defense of the empire.
As empires go, Britain resembled Rome rather than Nazi Germany. Though Rome imposed its will, key groups in colonial processions benefitted greatly from the relationship. Rome was thus as much an alliance as it was an empire. Nazi Germany, by contrast, had a purely exploitative relationship with subject countries as a result of war and ideology. Britain understood that its empire could be secured only through Roman-style alliances. Britain also benefitted from the Napoleonic Wars' having crippled most European powers. Britain was not under military pressure for most of the century and was not forced into a singularly exploitative relationship with its empire to support its wars. It thus avoided Hitler's trap.
The German and U.S. Challenges
This began to change in the late 19th century with two major shifts. The first was German unification in 1871, an event that transformed the dynamics of Europe and the world. Once unified, Germany became the most dynamic economy in Europe. Britain had not had to compete for economic primacy since Waterloo, but Germany pressed Britain heavily, underselling British goods with its more efficient production.
The second challenge came from the United States, which also was industrializing at a dramatic pace &mdash a process ironically underwritten by investors from Britain seeking higher returns than they could get at home. The U.S. industrial base created a navy that surpassed the British navy in size early in the 20th century. The window of opportunity that had opened with the defeat of Napoleon was closing as Germany and the United States pressed Britain, even if in an uncoordinated fashion.
The German challenge culminated in World War I, a catastrophe for Britain and for the rest of Europe. Apart from decimating a generation of men, the cost of the war undermined Britain's economic base, subtly shifting London's relationship with its empire. Moreover, British power no longer seemed inevitable, raising the question among those who had not benefitted from British imperialism as to whether the empire could be broken. Britain became more dependent on its empire, somewhat shifting the mutuality of relations. And the cost of policing the empire became prohibitive relative to the benefits. Additionally, the United States was emerging as a potential alternative partner for the components of the empire &mdash and the German question was not closed.
World War II, the second round of the German war, broke Britain's power. Britain lost the war not to Germany but to the United States. It might have been a benign defeat in the sense that the United States, pursuing its own interests, saved Britain from being forced into an accommodation with Germany. Nevertheless, the balance of power between the United States and Britain completely shifted during the war. Britain emerged from the war vastly weaker economically and militarily than the United States. Though it retained its empire, its ability to hold it depended on the United States. Britain no longer could hold it unilaterally.
British strategy at the end of the war was to remain aligned with the United States and try to find a foundation for the United States to underwrite the retention of the empire. But the United States had no interest in this. It saw its primary strategic interest as blocking the Soviet Union in what became known as the Cold War. Washington saw the empire as undermining this effort, both fueling anti-Western sentiment and perpetuating an economic bloc that had ceased to be self-sustaining.
From Suez to Special Relationship
The U.S. political intervention against the British, French and Israeli attack on Egypt in 1956, which was designed to maintain British control of the Suez Canal, marked the empire's breaking point. Thereafter, the British retreated strategically and psychologically from the empire. They tried to maintain some semblance of enhanced ties with their former colonies through the Commonwealth, but essentially they withdrew to the British Isles.
As it did during World War II, Britain recognized U.S. economic and military primacy, and it recognized it no longer could retain its empire. As an alternative, the British aligned themselves with the U.S.-dominated alliance system and the postwar financial arrangements lumped together under the Bretton Woods system. The British, however, added a dimension to this. Unable to match the United States militarily, they outstripped other American allies both in the quantity of their military resources and in their willingness to use them at the behest of the Americans.
We might call this the "lieutenant strategy." Britain could not be America's equal. However, it could in effect be America's lieutenant, wielding a military force that outstripped in number &mdash and technical sophistication &mdash the forces deployed by other European countries. The British maintained a "full-spectrum" military force, smaller than the U.S. military but more capable across the board than militaries of other U.S. allies.
The goal was to accept a subordinate position without being simply another U.S. ally. The British used that relationship to extract special concessions and considerations other allies did not receive. They also were able to influence U.S. policy in ways others couldn't. The United States was not motivated to go along merely out of sentiment based on shared history, although that played a part. Rather, like all great powers, the United States wanted to engage in coalition warfare and near warfare along with burden sharing. Britain was prepared to play this role more effectively than other countries, thereby maintaining a global influence based on its ability to prompt the use of U.S. forces in its interest.
Much of this was covert, such as U.S. intelligence and security aid for Britain during the Troubles in Northern Ireland. Other efforts were aimed at developing economic relationships and partnerships that might have been questionable with other countries but that were logical with Britain. A good example &mdash though not a very important one &mdash was London's ability to recruit U.S. support in Britain's war against Argentina in the Falkland Islands, also known as the Malvinas. The United States had no interests at stake, but given that Britain did have an interest, the U.S. default setting was to support the British.
There were two dangers for the British in this relationship. The first was the cost of maintaining the force relative to the benefits. In extremis, the potential benefits were great. In normal times, the case easily could be made that the cost outstripped the benefit. The second was the danger of being drawn so deeply into the U.S. orbit that Britain would lose its own freedom of action, effectively becoming, as some warned, the 51st state.
Britain modified its strategy from maintaining the balance of power on the Continent to maintaining a balance between the United States and Europe. This allowed it to follow its U.S. strategy while maintaining leverage in that relationship beyond a wholesale willingness to support U.S. policies and wars.
Britain has developed a strategy of being enmeshed in Europe without France's enthusiasm, at the same time positioning itself as the single most important ally of the only global power. There are costs on both sides of this, but Britain has been able to retain its options while limiting its dependency on either side.
As Europe increased its unity, Britain participated in Europe, but with serious limits. It exercised its autonomy and did not join the eurozone. While the United States remains Britain's largest customer for exports if Europe is viewed as individual countries, Europe as a whole is a bigger customer. Where others in Europe, particularly the Germans and French, opposed the Iraq war, Britain participated in it. At the same time, when the French wanted to intervene in Libya and the Americans were extremely reluctant, the British joined with the French and helped draw in the Americans.
Keeping its Options Open
Britain has positioned itself superbly for a strategy of waiting, watching and retaining options regardless of what happens. If the European Union fails and the European nation-states re-emerge as primary institutions, Britain will be in a position to exploit the fragmentation of Europe to its own economic and political advantage and have the United States available to support its strategy. If the United States stumbles and Europe emerges more prominent, Britain can modulate its relationship with Europe at will and serve as the Europeans' interface with a weakened United States. If both Europe and the United States weaken, Britain is in a position to chart whatever independent course it must.
The adjustment British Prime Minister Winston Churchill made in 1943 when it became evident that the United States was going to be much more powerful than Britain remains in place. Britain's willingness to undertake military burdens created by the United States over the last 10 years allows one to see this strategy in action. Whatever the British thought of Iraq, a strategy of remaining the most reliable ally of the United States dictated participation. At the same time, the British participated deeply in the European Union while hedging their bets. Britain continues to be maintaining its balance, this time not within Europe, but, to the extent possible, between Europe and the United States.
The British strategy represents a classic case of a nation accepting reversal, retaining autonomy, and accommodating itself to its environment while manipulating it. All the while Britain waits, holding its options open, waiting to see how the game plays out and positioning itself to take maximum advantage of its shifts in the environment.
It is a dangerous course, as Britain could lose its balance. But there are no safe courses for Britain, as it learned centuries ago. Instead, the British buy time and wait for the next change in history.
Cotton and population
From the time of its gaining statehood in 1817 to 1860, Mississippi became the most dynamic and largest cotton-producing state in America. The population and cotton production statistics tell a simple, but significant story. The growth of Mississippi’s population before its admission to statehood and afterwards is distinctly correlated to the rise of cotton production. The white population grew from 5,179 in 1800 to 353,901 in 1860 the slave population correspondingly expanded from 3,489 to 436,631. Cotton production in Mississippi exploded from nothing in 1800 to 535.1 million pounds in 1859 Alabama ranked second with 440.5 million pounds.
White “Free Colored” Slave Total
1800* 5,179 182 3,489 8,850
1810* 23,024 240 17,088 40,352
1830 70,443 519 65,659 136,621
1840 179,074 1,366 195,211 375,651
1850 295,718 930 309,878 606,526
1860 353,901 773 436,631 791,305
*Mississippi Territory (present-day Mississippi and Alabama)
MISSISSIPPI COTTON PRODUCTION
(millions of pounds)
Source: Cotton and the Growth of the American Economy: 1790-1860
Mississippi and its neighbors – Alabama, western Georgia, Louisiana, Arkansas, and Texas – provided the cheap land that was suitable for cotton production. Cotton provoked a “gold rush” by attracting thousands of white men from the North and from older slave states along the Atlantic coast who came to make a quick fortune. Slaves were transported in a massive forced migration over land and by sea from the older slave states to the newer cotton states. In 1850, twenty-five percent of the population of New Orleans, Louisiana, was from the North and ten percent of the population in Mobile, Alabama, was former New Yorkers.
Mississippi attracted investors as well as residents. Auctions of cheap Indian lands as a result of cessions of land by the Choctaw and Chickasaw nations drew bidders from the South and East. For example, in the 1830s, the largest purchasers of Chickasaw land in Mississippi were the American Land Company and the New York Land Company. The two companies represented investors or speculators from New York, Boston, and other New Englanders.
New York City, not just Southern cities, was essential to the cotton world. By 1860, New York had become the capital of the South because of its dominant role in the cotton trade. New York rose to its preeminent position as the commercial and financial center of America because of cotton. It has been estimated that New York received forty percent of all cotton revenues since the city supplied insurance, shipping, and financing services and New York merchants sold goods to Southern planters. The trade with the South, which has been estimated at $200,000,000 annually, was an impressive sum at the time.
It is hard for those who did not live through it to grasp the full force of the worldwide depression. Between 1930 and 1939 U.S. unemployment averaged 18.2 percent. The economy's output of goods and services (gross national product) declined 30 percent between 1929 and 1933 and recovered to the 1929 level only in 1939. Prices of almost everything (farm products, raw materials, industrial goods, stocks) fell dramatically. Farm prices, for instance, dropped 51 percent from 1929 to 1933. World trade shriveled: between 1929 and 1933 it shrank 65 percent in dollar value and 25 percent in unit volume. Most nations suffered. In 1932 Britain's unemployment was 17.6 percent. Germany's depression hastened the rise of Hitler and, thereby, contributed to World War II.
The depression is best understood as the final chapter of the breakdown of the worldwide economic order. The breakdown started with World War I and ended in the thirties with the collapse of the gold standard. As the depression deepened, governments tried to protect their reserves of gold by keeping interest rates high and credit tight for too long. This had a devastating impact on credit, spending, and prices, and an ordinary business slump became a calamity. What ultimately ended the depression was World War II. Military spending and mobilization reduced the U.S. unemployment rate to 1.9 percent by 1943.
With hindsight it seems amazing that governments did not act sooner and more forcefully to end the depression. The fact that they did not attests to how different people's expectations and world politics were in the thirties. The depression can be understood only in the context of the times. Consider four huge differences between then and now:
- 1. The gold standard. Most money was paper, as it is now, but governments were obligated, if requested, to redeem that paper for gold. This "convertibility" put an upper limit on the amount of paper currency governments could print, and thus prevented inflation. There was no tradition (as there is today) of continuous, modest inflation. Most countries went off the gold standard during World War I, and restoring it was a major postwar aim. Britain, for instance, returned to gold in 1925. Other countries backed their paper money not with gold, but with other currencies—mainly U.S. dollars and British pounds—that were convertible into gold. As a result flexibility of governments was limited. A loss of gold (or convertible currencies) often forced governments to raise interest rates. The higher interest rates discouraged conversion of interest-bearing deposits into gold and bolstered confidence that inflation would not break the commitment to gold.
2. Economic policy. Apart from the gold standard, economic policy barely existed. There was little belief that governments could, or should, prevent business slumps. These were seen as natural, therapeutic, and self-correcting. The lower wages and interest rates caused by slumps would spur recovery. The 1920-21 downturn (when industrial production fell 25 percent) had preceded the prosperous twenties. "People will work harder, live a more moral life," Andrew Mellon, Treasury secretary under President Herbert Hoover, said after the depression started. "Enterprising people will pick up the wrecks from less competent people," he claimed. One exception to the hands-off attitude was the Federal Reserve, created in 1913. It was charged with the responsibility for providing emergency funds to banks so that surprise withdrawals would not trigger bank runs and a financial panic.
3. Production patterns. Farming and raw materials were much more important parts of the economy than they are today. This meant that lower commodity prices could cripple domestic prosperity and world trade, because price declines destroyed the purchasing power of farmers and other primary producers (including entire nations). In 1929 farming accounted for 23 percent of U.S. employment (versus 2.5 percent today). Two-fifths of world trade was in farm products, another fifth in other raw materials. Poor countries (including countries in Latin America, Asia, and Central Europe) exported food and raw materials and imported manufactured goods from industrial nations.
To view the Great Depression as the last gasp of the gold standard𠅊s economic historians Barry Eichengreen and Peter Temin suggest𠅋ridges the gap between two popular explanations. The best-known, advanced by economists Milton Friedman and Anna Schwartz in A Monetary History of the United States, 1867-1960, blames the Federal Reserve for permitting two-fifths of the nation's banks to fail between 1929 and 1933 (or 10,797 of the 25,568 banks in 1929). Since deposits were not insured then, the bank failures wiped out savings and shrank the money supply. From 1929 to 1933 the money supply dropped by one-third, choking off credit and making it impossible for many individuals and businesses to spend or invest. Friedman and Schwartz argue that it was this drop in the money supply that strangled the economy. They consider the depression mainly an American affair that spread abroad.
In contrast, economist Charles Kindleberger, in The World in Depression, 1929-1939, sees the depression as a global event caused by a lack of world economic leadership. According to Kindleberger, Britain provided leadership before World War I. It fostered global trade by keeping its markets open, promoted expansion by making overseas investments, and prevented financial crises with emergency loans. After World War II the United States played this role. But between the wars no country did, and the depression fed on itself, Kindleberger argues. No country did enough to halt banking crises, and the entire industrial world adopted protectionist measures in attempts to curtail imports. In 1930, for example, President Herbert Hoover signed the Smoot-Hawley tariff, raising tariffs on dutiable items by 52 percent. The protectionism put an extra brake on world trade just when countries should have been promoting it.
With the passage of time, both the Friedman-Schwartz and Kindleberger views seem correct. Inept monetary policy explains the depression's severity, as Friedman and Schwartz argue. But because the gold standard caused many governments to make similar errors, the effects were worldwide, as Kindleberger contends.
The start of the depression is usually dated to the spectacular stock market crash of 1929. The Dow Jones industrial average hit its peak of 381 on September 3, up from 300 at the start of the year. After sporadic declines, the roof fell in on October 24 (Black Thursday). Stock prices dropped 15 to 20 percent before being supported by buying from a pool of bankers. Although the market closed with only a small loss (down 6 to 299), trading was nearly 12.9 million shares, about triple the normal volume. The selling panic resumed the next week. On Monday the Dow fell 38 points to 260, then the biggest one-day drop ever. The next day (Black Tuesday), it slid another 30 points. By November 13, the Dow was at 198.
There had been warnings. Many commentators complained before the crash that the market was driven by speculation. A lot of stock was bought on credit. Between the end of 1927 and October 1929, loans to brokers rose 92 percent. At the start of October, loans equaled nearly a fifth of the value of all stocks. But by itself the stock market crash did not cause the depression. By year's end the Dow Jones industrial average had actually rebounded to 248 (down 17 percent from the beginning of 1929). It continued rising in early 1930.
The depression is often blamed on the passivity of President Hoover and the Federal Reserve. This view is simplistic. True, Hoover's commitment to a balanced budget—the orthodoxy of the day—precluded big new spending programs. And his decision in 1932 to combat a budget deficit by raising taxes sharply is widely viewed as a major blunder. But it is not true that Hoover and the Federal Reserve stood idly by and did nothing as the depression worsened. After the crash Hoover instituted a tax cut equal to 4 percent of federal revenues. He urged state and local governments to raise their spending on public works projects. Hoover also created the Reconstruction Finance Corporation, which provided loans to shaky banks, utilities, and railroads. In 1931 he suspended collection of foreign-debt payments to the United States, which he thought were impeding recovery of the international economy.
Nor was the Federal Reserve entirely passive. During the crash the Fed lent liberally to banks so they could sustain securities lending. Interest rates were allowed to drop rapidly. The discount rate (the rate at which the Federal Reserve lends to commercial banks) fell from 6 percent in October 1929 to 2.5 percent in June 1930. The money supply (cash in circulation plus checking and time deposits at banks) declined only slightly in the next year. Tighter Federal Reserve policy in 1928 and early 1929—intended to check stock market speculation—may have helped trigger the economic downturn. But the Federal Reserve was not stingy in early 1930 and was not driving the economy into depression at that time. It was not until 1931 and later that the Federal Reserve failed to act as the "lender of last resort" and allowed so many banks to fail.
The truth is that, until the summer or early fall of 1930, almost everyone expected the economy to recover, just as it had in 1921. Unfortunately, almost everyone underestimated the forces pulling the economy down. One was the drop in trade that resulted from collapsing commodity prices. Kindleberger has argued that the price collapse was worsened by the stock market crash. The connection lay in a drying up of credit. Many loans used to buy stock had come from foreigners and big corporations, and they demanded repayment when stock prices plummeted. New York banks assumed some of the loans, but they cut loans to the importers of raw materials. Demand for these products (rubber, cocoa, coffee) dropped, and prices fell. Strapped for funds, countries that exported commodities reduced their imports of manufactured goods from industrial nations. The drop in trade was deepened by Smoot-Hawley, which provoked massive retaliation by other nations.
What made matters worse was a big drop in U.S. consumer spendingr more than can be explained by the stock market crash. The drop may have been a backlash to the rise of installment lending (for cars, furniture, and appliances) in the twenties. The prevailing practice allowed lenders to repossess an item if the borrower missed just one payment. People may have stopped making new purchases to reduce the risk of losing things they already had bought on credit. Whatever happened, the slump soon fed on itself. Weak spending depressed prices, which meant that many farmers, businesses, and nations couldn't repay their debts. Rising bad debts prompted banks to restrict new loans and sell financial assets, usually bonds. Scarce credit led to less borrowing, less spending, lower prices, and more bankruptcies. Trade and investment spiraled downward. Confidence crumbled, and as it did, bank runs—people clamoring to convert deposits into cash𠅎nsued.
Why could no one stop this spiral? In the United States there were waves of bank failures in 1931 and 1932. Friedman and Schwartz maintain that the Federal Reserve could have prevented them by lending directly to weak banks and by aggressive "open market" operations (that is, by buying U.S. Treasury securities and thereby injecting new funds into banks and the economy). This action would have halted the depression, they argue. They blame the Federal Reserve's timidity on the 1928 death of Benjamin Strong, the president of the Federal Reserve Bank of New York. Strong had dominated the Federal Reserve System, which consists of twelve regional banks and a board of governors in Washington. He firmly believed that the Federal Reserve had to prevent banking panics and sustain economic growth. When he died, power in the Federal Reserve passed to officials in Washington, whose ideas were murkier. Had Strong lived, Friedman and Schwartz contend, he would have averted the banking collapse.
Maybe𠅊nd maybe not. In fact, the Federal Reserve faced conflicting demands to end the depression and to protect the gold standard. The first required easier credit, the second tighter credit. The gold standard handcuffed governments around the world. The mere hint that a country might abandon gold prompted speculators and international depositors to change local money into gold or a convertible currency. Deposit withdrawals spread panic and squeezed lending. It was a global process that ultimately forced all governments off gold. In May 1931 there was a run against Creditanstalt, a large Austrian bank. The panic then shifted to Germany and, in late summer, to Britain, which left gold in September.
The United States was trapped by the same forces. After Britain went off gold, for instance, the Federal Reserve raised interest rates sharply to stem gold outflows. The discount rate went from 1.5 to 3.5 percent, which, considering the condition of the economy, was a huge increase. The best evidence that the gold standard fostered the depression is that once countries abandoned it, their economies usually began growing again. This happened in Germany, Britain, and, after Roosevelt left gold in March and April 1933, the United States.
Although self-defeating, the defense of gold was a product of law as well as custom. The Federal Reserve had to ensure that every dollar of paper money was backed by at least forty cents of gold. Once Congress ended the obligation to exchange gold for currency, the Fed was largely liberated from worrying about gold. This may have been the most important part of the New Deal's economic program. The economy did improve. Between 1933 and 1937, the unemployment rate dropped from 25 to 14 percent before a new recession pushed it back up to 19 percent in 1938. The 1937-38 recession is widely blamed on the Federal Reserve's mistaken decision to raise bank reserve requirements in August 1936 and early 1937. (Reserves are funds that banks keep as vault cash or as deposits at the Federal Reserve.)
Many economists now believe that the New Deal, apart from its gold policy, probably had little impact on economic activity. At the heart of the early New Deal were the National Recovery Administration (NRA) and the Agriculture Adjustment Act (AAA). Created in Roosevelt's first hundred days, they sought to promote recovery by propping up prices. The idea was to improve incomes and halt bankruptcies. The AAA tried to eliminate agricultural surpluses (pigs were slaughtered, crops destroyed) and paid farmers not to plant. The NRA allowed companies in the same industry to set wages, prices, and working hours in an effort to check "destructive competition." This approach rested on a remarkable contradiction: the way to get recovery, which requires more production, is to have less production. There never has been much evidence that it worked, and the Supreme Court found the NRA unconstitutional in 1935.
The New Deal did relieve suffering. Perhaps 10 million to 12 million Americans worked at some time on public works or in relief jobs (through the Public Works Administration, the Works Project Administration, and the Civilian Conservation Corps). People had their bank deposits protected with the advent of deposit insurance. The Securities and Exchange Commission regulated the stock market. Roosevelt maintained faith in democracy.
But there was a cost. The New Deal also caused suffering. Sharecroppers were often thrown out of work, for example, when the AAA paid landowners not to grow. The New Deal also fostered class consciousness. Roosevelt increasingly blamed the depression on the wealthy—"economic royalists," as he called them. The loss of business confidence in government policies may have deterred new investment, offsetting any economic stimulus of higher public spending. But by 1933 the economy had been so ravaged that only a partial recovery may have been possible until the huge wartime boom.
The depression left an enormous legacy. The New Deal accustomed people to look to government, rather than to private charity, for help. After World War II, governments everywhere strove to prevent a repetition of the Great Depression. Economic policies became more active and, as a practical matter, more inflationary. With the gold standard gone, governments had more freedom to stimulate their economies with an expansion of money and credit. The political inclination was to act sooner, rather than later, to halt a slump. Likewise, the protectionism of the thirties prompted postwar efforts to reduce tariffs and other trade barriers. Finally, the wild swings of exchange rates that occurred after countries went off gold spurred the creation of the Bretton Woods system of fixed exchange rates in 1944. This system (named after a resort in New Hampshire where the agreement was finalized) stipulated that currencies were to maintain fixed exchange rates with the dollar. The system broke down in the early seventies.
It is commonly said that another depression will never occur. This is probably true, as long as "another depression" means a crude repetition of the thirties. However, crises can come in unfamiliar forms. The basic lesson from the Great Depression is that governments cannot permit massive collapses of banks or spending. The deeper lesson is that there are times when the world changes so much and events move so rapidly that even the well-informed do not know how to respond. This is the story of the depression. Now it seems preventable. Then, it was baffling. World War I made restoration of the prewar economic system difficult, maybe impossible. But that is what world leaders attempted because it was all they knew and it had worked. Only its collapse convinced them to try something different. Old ideas were overtaken and overwhelmed. It has happened before𠅊nd could again.
Robert J. Samuelson is a journalist who writes a column on economic affairs for Newsweek, the Washington Post, and other newspapers.
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