Introduction
Industrial policy is among the oldest elements of British economic statecraft. Born in the cradle of empire, and grounded in the commitment to free trade and international capital mobility, British industrial policy has tended to prioritize financial services rather than the civilian manufacturing industries preferred by most other early industrializing countries. Economic weaknesses caused by this finance-centred approach to industrial policy were largely ameliorated in the nineteenth century by the burgeoning British empire, whose imperial markets gave its civilian manufacturers significant competitive advantages. In the twentieth century, however, economic decline and the fall of empire would rob Britain of the economic strength required to reconcile these inherent tensions in its industrial policy.
The British political elite proved remarkably reluctant to adjust to these realities. As well as missing several opportunities to reorientate Britainâs economic model, it has also led to a paradox at the heart of British industrial policy-making. In short, the deleterious consequences for other economic sectors caused by continued efforts to promote the City of London as a global financial centre have forced the British state to enact ever more elaborate schemes to support manufacturing. These policies, however, have never amounted to the consistent strategic intervention necessary to overcome the structural power of financial services within British capitalism. Instead, selective intervention to promote British industry was relegated to piecemeal and reactive measures to combat economic crises that had their source in Britainâs financialized economy.
The decision to leave the European Union affords yet another opportunity to reset British industrial policy in a way that acknowledges its diminished global economic status and deals with its enduring contradictions. This sits uneasily however, with the persistent refrain of British exceptionalism and the vision of a buccaneering âGlobal Britainâ proffered by those presently steering the British ship of state. As such, the Johnson government shows little sign of charting a course that will fundamentally alter Britainâs financial approach to industrial policy.
Industrial policy in the age of empire, 1688â1914
The genesis of Britainâs financial industrial policy can be found in the creation of the Bank of England in 1694, itself part of a wider English financial revolution that stemmed from a series of military defeats against the emerging naval and commercial power of the Netherlands and the 1688 Glorious Revolution. As the issuer of the worldâs first government bonds, the Bank of England was also charged with acting as a financial intermediary between citizens and the state for the purposes of rebuilding English military capacity. In a forerunner of what Edgerton (2006) terms the warfare state, the British government used the innovation of public debt to channel credit into military spending. In turn, public investment into defence manufacturers prompted the technological improvements needed to deliver the battlefield superiority upon which the British empire was constructed.
As the frontiers of the British empire expanded, sterling became the international reserve currency of world markets. British imperialism, rather than entrepreneurial dynamism, was the source of the City of Londonâs competitive advantage that enhanced its importance within the international economic order. The flow of international capital into the City, and the invisible earnings it contributed to the balance of payments, conferred upon financial services significant structural power within British capitalism that has endured into the contemporary era (Strange 1994). The Cityâs ascendence was augmented by further deliberate state agency and the actions of private interests, the most important being the Bank of Englandâs decision to become lender of last resort to financial institutions during economic crises (Capie & Wood 1994: 230â2). Sponsorship by the British state allowed the City of London to develop into the worldâs preeminent financial centre, bankrolling trade and manufacturing throughout the British empire, which also facilitated the growth of ancillary commercial services such as insurance and shipping.
As Lee suggests in this volume, the City of Londonâs ascent was aided by substantial support from an âEnglish developmental stateâ. Consisting of the quadrumvirate of the Bank of England, Treasury, City of London and defence manufacturers, each had their own role to play in the implementation of industrial policy. The Bank kept Britain on the gold standard, which required the unhindered flow of international capital, much of which was handled by the City of London as centre of global finance. The Treasury preserved international credibility and confidence in sterling by keeping the budget balanced and ensuring imports remained free from duties. In exchange, the City was charged with generating economic prosperity, strengthening sterlingâs global role by making overseas investments, and using its position as a global financial centre to fund the public debt (for a fee) that fuelled the British military machine. Finally, the defence manufacturers ensured British armed forces were capable of prosecuting âgunboat diplomacyâ, bringing more countries into the orbit of empire, extending both free trade and sterlingâs global reach (adapted from Tomlinson 1990: 40).
Industrial strategy in an age of economic crisis, 1918â39
Recognizing the United Statesâ threat to its economic preeminence, the instinct of Britainâs policy-makers after the First World War was to re-establish the financial industrial policy (Burk 1979). The Treasury and Bank of England were in agreement that this required Britain to return to the gold standard, a move which reasserted sterlingâs role as an international reserve currency and helped the City of London to face down the emerging commercial challenge posed by New York. In the interwar period the tension, previously contained by Britainâs hegemonic economic position and a limited electoral franchise, between the policies necessary to promote financial services and their negative impact on domestic economic activity, wages and employment were now viciously exposed. The deflationary policies necessary to preserve Britainâs commitment to its fixed exchange under the gold standard inflicted severe damage to the âstapleâ industries of Northern England, Wales, Scotland and Northern Ireland such as coal mining and steel with the resultant job losses meaning poverty and deprivation across many communities (Miller 1976: 455). The concerns of the City of London had again been elevated over those of civilian manufacturing (Pollard 1970).
The economic misery wreaked by the Great Depression combined with the extension of the franchise increased the clamour for the British state to take more account of the domestic (industrial) repercussions of its international (financial) commitments. The interwar period saw the scope of industrial intervention advance in three directions. First the âwinnersâ identified by industrial policy were broadened beyond the traditional beneficiary of financial services. Industries that were assisted through government-funded research and subsidized investment during the First World War, including chemicals, electrics and motor vehicles, continued to receive state support in the interwar period (Pope 1998: 29â33). Parliamentary evidence by Sir John Simon (1939a, 1939b) â Chancellor of the Exchequer from 1937 to 1940 â demonstrates the significant subsidies given by the Treasury to ânewâ industries appearing as a result of the First World War, such as civil aviation, and âstapleâ industries like agriculture. Second, Britain can lay claim to have invented what would later be called regional policy (Pemberton 2017), focused on increasing employment and rebuilding the export capacity of the âSpecial Areasâ. This included government support in the establishment of new businesses in a diverse range of industries from aluminium manufacture to confectionery (Simon 1939b).
Finally, Britainâs industrial strategy took a protectionist turn. Import duties were first introduced in 1915 as a wartime expediency. During the 1920s, however, a series of Acts of Parliament extended the range of protection offered to British industry. Most notably, the 1921 Safeguarding Industries Act initiated a 33.3 per cent duty on 6,500 imported goods thought to be of strategic consequence. Muddled motives lay behind this legislation, which did not constitute a coherent protectionist industrial strategy. This would change with the introduction of the general tariff in April 1932 due to âgrowing support for tariffs in labour, business and financial circlesâ (Garside 1998: 47) and acknowledgement by the ruling Conservative Party and Treasury that a sheltered domestic market might restore industrial efficiency (Garside 1998: 63â5).
These industrial interventions clearly remained subservient to the needs of finance in the eyes of the English developmental state. The Treasury and Bank of England continued to stress throughout the 1930s the need for balanced budgets and the credibility this macroeconomic policy awarded sterling in world markets. This stubborn adherence to the strictures of financial orthodoxy delivered significant benefits to the City of London, but severely blunted the efficacy of industrial policies directed elsewhere ensuring they could never pose a threat to the structural power of financial services within British capitalism. Instead, they proved relatively minor adaptations to the dominant paradigm of financial industrial policy that served to entrench, rather than overcome, the dependency of Britainâs economic growth on finance.
The general tariff illustrates the prevalence of Britainâs financial industrial policy. More than a simple retreat to protectionism, the general tariff dusted down and put into action ideas associated with Joseph Chamberlainâs Tariff Reform League. The 1932 Ottawa Conference established a system of imperial preference, exempting imperial imports into Britain from the general tariff, with subsequent bilateral trade deals guaranteeing British firms all important access to markets in the Commonwealth and colonies. Establishing a concomitant sterling area, consisting of a group of countries which pegged their currencies to the pound, the general tariff ensured access to international financial markets for the City of London and was a vehicle to maintain confidence in sterling (Garside 1998: 65).
Industrial policy in the post-imperial age, 1945â79
Ostensibly the postwar system of âembedded liberalismâ (Ruggie 1982), encompassing strict controls on short-term capital movements, shackled the Cityâs financial markets in a manner that allowed the UK government to appease demands for full employment. Initially the industrial policies of postwar governments diverged sharply from their predecessors. The Labour governments of 1945â51 focused on nationalization of key industries, while the Conservative governments of the 1950s trained their attention on liberalization and competition policy (Tomlinson 1994: 216â45). Combined with the new Keynesian paradigm in macroeconomic policy, and favourable global economic conditions, Britainâs manufacturers rose from their slumbers and for a time it did look like the British economic model might shake its historical addiction to finance.
The renaissance of British manufacturing was short-lived, however, with productivity lagging behind international competitors for much of the 1960s and employment starting to dwindle by 1966 (Kitson & Michie 2014: 10â11). The resurgence of British manufacturing in the postwar era was undercut by the legacies of Britainâs financial industrial policy that still held great sway among the British political elites. The emergence in the City of the Eurodollar markets in the 1950s typified these developments. Far from being an innovation springing solely and spontaneously from the fertile minds of the Cityâs bankers their emergence reflected âa conscious act of policy by the Bank of Englandâ (Moran 1991: 55â6) reflecting a desire by the state to re-establish London as the worldâs preeminent international financial centre (see Burn 1999; Helleiner 1994). In setting the City free once more from its domestic moorings, the state tacked towards higher interest rates and a strong currency which choked the competitiveness of British manufacturing (Booth 1995: 140â3).
The obsession with preserving sterlingâs international role produced an almost pathological resistance by postwar British governments to devaluation of the currency. Consequently, efforts to reflate demand through Keynesian macroeconomic policy were limited by balance of payments constraints as imports flooded into the British economy. The punctuation of the postwar era by repetitive economic crises was the visible representation of a truth that had been evident since the interwar period, but studiously avoided by the British power elite. Britain no longer possessed the economic strength for sterling to play a critical role in international markets while simultaneously enacting projects of domestic economic modernization and industrial renewal.
The dismemberment of the British empire, which had long protected British companies from global competition, was a further blow to British manufacturing (Skidelsky 2013). Even into the 1960s many British firms were still reliant on captive domestic and imperial markets allowing them to postpone the investments needed to modernize production and management techniques. Variously seen as evidence of, or an opportunity to stem, Britainâs economic decline, entry into the European Economic Community (EEC) in 1973 was the next chapter in its financial industrial policy. The EEC offered not only access to new international markets for British exports replacing those lost in the colonies, but also the prospect of an integrated European market for financial services that the City of London was likely to dominate (Thompson 2017: 215).
This re-emergence of statecraft beneficial to financial services coincided with the creeping realization that the British economy was suffering from comparative economic decline with its European neighbours. Alongside a renewal of the stateâs commitment to financial services, the 1960s and 1970s saw a huge expansion of selective forms of industrial intervention. New industrial bodies such as the National Economic Development Council were initiated to bring together management, trade unions and government to address economic decline. The 1972 Industry Act, introduced to improve the competitiveness o...