The City, colonialism and East Asia's industrialization

In the period under consideration there was no international political organization to regulate the diffusion of industrialization, so what necessitated the rest of the world to co-operate with the City? The City offered an institutional mechanism through which all the countries, dominions and colonies of the world were rated in terms of risk premiums and the degree of conformity to the liberal regime of free trade and free movement of capital.

To qualify for such a role, openness and fluidity had to be combined with trustworthy institutions and respectable values. Gentlemanly capitalism was as much a product of this requirement as a force which shaped it. The capitalist world economy needed something like this, to ensure that the process of industrialization - which was dictated by different ecological, cultural and other factor endowments - was diffused smoothly through international competition. It was important that the City, and by implication Britain to some extent, acted as if they were outside this industrial competition. The City was in a position to benefit from the growth of world output and trade no matter who the winners were, so it should have been impartial to the competition. On the one hand, this accounts for the uniqueness and irreproducibility of gentlemanly capitalism. The core attributes of this function cannot and should not be copied, although smaller centres (such as Hong Kong) could and should serve as subcentres of the London-centred international networks. At the same time, this understanding of the role of the City of London explains why a purely national perspective does not work in assessing its strength.

Thus, from the perspective of the City, any action that violated this liberal regime, such as the protection of home industry, was to be effectively resisted, if necessary, with the use of threats or force.

Naturally, some industries felt that they were being victimized, and the victims included British industries, sometimes even important ones such as the Lancashire cotton textile industry. J.A. Hobson's internationalism was consistent with such a view. At the same time, Hobson was also an interventionist, whenever a fair rule or an institutional framework was missing or under threat. This made him not only a leading liberal social reformer at home, but a profound critic of British imperialism abroad. His picture of Western imperialism in Asia highlights the limitations of Western officials' understanding of local languages, cultures and institutions, hence how difficult it is to argue the success of colonial rule in the first place.

By contrast, Cain and Hopkins offer a more rigorous narrative on how strongly the interests of the City were represented in British policy in India and China. That they were more strongly represented than the interests of Lancashire from the very early stages of the nineteenth century, and that this service sector orientation persisted right down to the late 1930s are both important insights. But the authors do not appear to consider the changes in the global effects of this orientation upon the strength of the British empire as fundamental to their study. Once again, they only make links between British colonial policy and the City within the perspective of national and imperial history.

If their argument holds, however, it seems to me that this orientation must have increasingly weakened both British rule in India, and British influence in Asia generally, as a result of global industrialization. During most of the nineteenth century, the complementarity between British policy and Asia's industrialization worked well for Britain and there was little or no contradiction between service sector orientation and colonial rule. However, in 1893 the rupee was linked to gold via sterling, primarily to secure the value of British investment and the personal income of British officials in India.

This artificial raising of the value of the rupee severely damaged India's position in Asian trade and the Asian monetary system which was based on silver. Japan was the chief beneficiary of this, rapidly capturing the vital part of the Chinese cotton yarn market that was previously dominated by Indian yarn. The large amount of British investment worked against colonial development in this respect.¹² During the interwar period Britain continued to discourage India's industrialization by keeping the value of the rupee consistently high. In the 1930s, the drastic devaluation of the yen was a vital element in Japan's industrial recovery,¹³ while Britain retained the policy of protecting investors' interests and allowed Japanese industrial goods to penetrate into imperial markets.¹⁴ In this respect, Japan's industrialization and British service sector orientation in the colonies reinforced each other. Together, they weakened Britain's political and economic grip on the empire, by causing abandonment of the effort to implement an overall developmental strategy. This indirectly helped the nationalist cause in Asia, albeit unintentionally. In the 1930s, faced with the Great Depression and the collapse of world trade, gentlemanly capitalism became increasingly reliant on the protected environment of the British empire. It was precisely at that point that the identification of the interests of the City with the empire had to be seriously qualified,¹⁵ and by the early 1940s it had to be abandoned, partly because of the changes in Asian international politics and partly due to the pressure for decolonization from the United States.¹⁶ While Cain and Hopkins are right in arguing that British hegemony in the international order did not decline as fast as Britain's manufacturing competitiveness, it did decline against the growth of initiatives of industrial economies. Service sector interests came to be exposed to political negotiations with industrial economies, without the backing of the empire.

In fact Cain and Hopkins have also noted that 'the City assisted the growth of manufacturing within and beyond the empire in ways that in the long run contributed to the process of decolonization', and emphasized 'the importance of the 1930s as a turning point in this regard'.¹⁷ They rightly remind us of their contribution to our understanding of these links, especially with regard to the dominions. I am making a further point here that the City's contribution to the growth of manufacturing, when considered from the point of view of the growth of the Asian regional economy, tended to be greater outside the empire than inside it, and that this paradoxical tendency at the regional level made the association of the interests of the City with the protection of the empire much more difficult than otherwise.

On the other hand, Britain succeeded in maintaining her international position, by making sterling the key currency after she abandoned the gold standard in 1931. Admittedly, this was made possible by various imperial devices, such as replacing the gold reserves of colonies and dominions by sterling and keeping them in London. But its effect was worldwide, going well beyond the confines of the formal and informal empire, as sterling became the first currency that was accepted by many independent countries of the world, without the guarantee of it being exchanged for gold. The 'sterling area', by which I mean an area in which the value of the local currency was linked to sterling,¹⁸ extended well beyond the tariff protection set out under the Ottawa agreement of 1932. It was not just Scandinavia and many other smaller countries that linked the value of their currencies to sterling. After 1933, the United States agreed to link the value of the dollar as well, as a result of which the two currencies effectively replaced gold by acting as the standard of value against which the value of a number of other currencies was measured.

East Asia was no exception.

After abandoning the gold standard in 1931 and sharply devaluing the yen, Japan decided to link its currency to sterling in 1932, in the hope of stabilizing its value. Although she continued her effort to expand the 'yen bloc' in the continent, the majority of Japanese trade was conducted with countries outside the bloc. So, the stabilization of the currency was vital to the procurement of raw material and fuel from abroad, needed for rapid industrialization, territorial expansion and the preparation of war. To the extent that the international confidence of the yen now depended on its linkage to sterling, not to gold, the entire yen bloc can be said to have belonged to the 'sterling area'.¹⁹ Thus the more the yen bloc expanded, the greater became the influence of sterling and the sterling-linked international monetary system on East Asia. Meanwhile, the Chinese currency also came to be linked to sterling in 1935, as a result of the currency reform implemented by the nationalist government with the co-operation of Britain. Since the Chinese currency was originally linked to silver and had been heavily devalued against gold before 1931, this linkage also meant that the Chinese government opted for devaluation, to carry out import-substitution industrialization. Thus during the brief period from 1935 to 1938, nearly all of the East Asian economies were linked to sterling at a heavily devalued rate. As a result, the exchange rate between yen and yuan was more or less completely stabilized.

On the one hand, this suited East Asia whose priority was industrialization and the need to restrict imports of industrial goods from the West and export their own to other developing countries. At the same time, it enabled both Japan and China to issue a large amount of yen- or yuan-denominated notes at home and in the colonies, the sphere of influence and disputed areas, not backed by gold or silver but linked to sterling via the central government. This was a much more acceptable solution for Britain than either the French-led gold bloc or the German- led mark bloc, as it helped avoid the worsening of the liquidity trap felt worldwide since 1929, while simultaneously maintaining the trade between East Asia and the rest of the world at a reasonable level.

Devaluation was tolerated, as the Western stake in investment in East Asia was not as important as in their colonies in South and Southeast Asia. In spite of the 'currency war' and the effects of the Sino-Japanese War itself, which began in 1937, the value of the Chinese currency did not collapse before the second quarter of 1938. The final blow to the sterling-linked East Asian monetary regime came when the Second World War began in Europe in 1939 and the value of sterling collapsed, after which the yen bloc was rapidly transformed into a regional autarky, rather similar to the mark bloc in Europe.²⁰

An important result of the region's linkage with sterling for much of the 1930s, was that intra-Asian trade became progressively concentrated on East Asia, while the share of colonies of the Western powers in South and Southeast Asia diminished. Thus, as far as Asia is concerned, the vitality of the City became more and more dependent on the industrialization of East Asia, rather than on the resources of the British empire. Yet by this time Britain's military and political muscle was no longer strong enough to contain Japan. Faced with a fight for survival as the world's major financial centre, that is, the need to find a 'new role' in global development, the City by the late 1930s had no choice but to support the British government's appeasement policy towards Japan, in spite of its moral and political sympathy with China. In British Malaya, overseas Chinese remittances to mainland China, which were sent in order to support national resistance against Japan, were discouraged by the colonial government which disliked the flow of monetary resources from the empire. The British service sector orientation effectively ended up supporting Japanese aggression.²¹ It was surely an act against the principle of Hobson's internationalism.

Looking at the changes in the structure of the capitalist world economy in the interwar period as a whole, however, the presence of an international regime of free trade and capital flows centred around London was crucial in promoting East Asia's industrialization by making the Western technology available to the region. It was the City, not those manufacturers who carried out national industrial advance in the West, that made this technology transfer internationally acceptable and politically possible. It was gentlemanly capitalism, not national economic interests, that helped the global diffusion of industrialization.

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Source: Akita Shigeru. Gentlemanly Capitalism, Imperialism and Global History. Palgrave Macmillan Ltd.,2002. — 279 p.. 2002

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