From Empire to Europe: The Decline and Revival of British Industry Since the Second World War

At the level of individual industries, old and new, the British response to American and German competition between 1870 and 1914 was patchy but by no means disastrous.33 World trade in manufactures had become a three-horse race, and the early leader could hardly have been expected to remain dominant on all fronts. Were there, nevertheless, institutional weaknesses, inherited from the first industrial revolution, which were holding industry in Britain back?

One obvious gap, especially compared with Germany, was in the field of technical education. In 1870 British universities were not well equipped to serve the new, science-based industries. Oxford and Cambridge had played no part in the industrial revolution, and had no interest in the world of industry. Nevertheless, although Britain started late in this field, it recovered well. New universities with a strongly technical bent were established in several provincial cities during the last years of the nineteenth century, and the Imperial College of Science and Technology was founded in London in 1908. There was also an expansion of part-time technical education below the university level. The British approach was more decentralised, less systematic and more market-led than in Germany, but by 1914 the gap between the two countries was narrowing. Sidney Pollard, the economic historian, has suggested that Germany’s investment in technical education and the role of the state in it ‘may not imply German superiority, simply a different tradition and a different place in the sequence of world industrialisation’.34

Some historians believe that the creation of the universal bank gave German entrepreneurs a competitive advantage because it provided access to long-term capital on terms which were not available in Britain.35 British commercial banks, even after the mergers that took place towards the end of the century, generally steered clear of long-term lending to industry, while the merchant banks in the City – Barings, Rothschilds and the rest – were preoccupied with raising capital for foreign borrowers. There were flaws in the financial system during this period, but financial markets were sufficiently well-developed to ensure that few creditworthy entrepreneurs were starved of finance. There is no clear evidence that the outflow of capital to support railway construction and other infrastructure projects overseas diverted funds from investment in domestic industry.36 The German universal bank was a response to a particular set of circumstances – a late-developing country undergoing a very rapid process of industrialisation – that did not exist in Britain.

As for the impact of trade unions on industrial performance, labour relations in Britain went through a stormy period around the turn of the century, and again in the years immediately preceding the First World War. This was due partly to a change in the character of trade-unionism, arising from the emergence of more militant ‘general’ unions which represented semi-skilled and unskilled workers. Labour relations became more adversarial, and in industries such as engineering, where craft unions were strong, the number of disputes over working practices and demarcation increased. But the employers generally came out on the winning side in these disputes, and the labour relations system was probably not a significant brake on efficiency and technical progress in manufacturing before 1914.

The late Victorian and Edwardian entrepreneur has been criticised by some historians for his reluctance to break away from craft control – the practice of delegating to skilled workers part of the responsibility for the organisation of work. The argument is that this practice delayed the introduction of ‘Taylorist’ techniques, which called for tighter supervision of shop floor labour.37 But for most British employers craft control was not a competitive disadvantage in the conditions which they faced before the First World War. In shipbuilding, for example, where craft control was solidly entrenched, productivity in Britain was higher than in the US and Germany, and there was no reason to abandon a well-tried production system which was working satisfactorily. This point is also relevant to Alfred Chandler’s strictures about personal capitalism. The main reason for the creation of giant companies in the US towards the end of the nineteenth century was the nature of the domestic market. Firms which were manufacturing on a large scale needed to take direct control over the procurement of raw materials and the distribution of finished products. In Britain, with a smaller home market and more highly developed networks of merchants and other intermediaries, there was less need for manufacturers to integrate backward into raw material purchasing or forward into marketing and distribution.38 Lancashire cotton was the classic case of a successful industry which was both horizontally and vertically disintegrated, with most firms specialising in one part of the production chain.

The comparison with Germany is less clear-cut. In industries where German companies were bigger than their British counterparts, this, too, was mainly due to the character and timing of German industrialisation. The iron-masters of the Ruhr were building a new industry from scratch in an undeveloped region. They needed to do more things for themselves than was necessary in Britain, and to integrate more operations on the same site. Some German companies, of which Thyssen and Siemens are examples, did adopt organisation methods similar to those of the big American corporations.39 But many of Germany’s industries, such as mechanical engineering, were as fragmented, and as dominated by family-owned concerns, as in Britain.

Britain, Germany and the US in the Inter-war Years

One of the consequences of the First World War was to consolidate the position of the US as the world’s leading industrial power. American manufacturers were well placed to profit from the booming domestic demand of the 1920s and to exploit internationally the managerial advances which they had made before the war. Their most spectacular success was in the mass-production industries; US manufacturers accounted for three-quarters of the world’s car exports in the inter-war years. But there was also a push forward in science-based industries as large American firms began to adopt the German approach to company-financed research. The discovery of nylon by Du Pont in 1930 was the direct result of this company’s decision to build up a team of first-class scientists and engineers and give them the same facilities which they would have enjoyed in an academic environment.40 American Telephone and Telegraph created in Bell Laboratories what was to become America’s foremost industrial research institution.41

The broadening of American industrial capabilities was reinforced by new managerial techniques. Alfred Sloan at General Motors, which overtook Ford as America’s largest car manufacturer during the 1920s, showed how economies of scale in large, multi-product companies could be combined with efficient central coordination. The General Motors multi-divisional structure, which separated the day-to-day management of the car businesses – Chevrolet, Pontiac, Cadillac and so on – from the supervisory role of the head office, was widely imitated in the US and later in Europe. Sloan was an example of the kind of professional manager who filled many of the top executive posts in American industry. The separation of ownership and control, which had been a distinctive feature of American capitalism before the war, was taken further as companies increased in size through mergers and acquisitions.

The rise of American industry provoked a mixture of admiration and fear in Europe. Businessmen made pilgrimages to Detroit and tried to learn how the Americans were able to combine high productivity, high wages and high standards of living.42 Of the leading European countries, Germany was the most influenced by American ideas, but its ability to maintain its pre-war momentum of growth, let alone catch up with the US, was constrained by the legacy of the war. The establishment of the Weimar Republic in 1919, and the integration of the working class into the political and economic system, left unresolved many of the political tensions which had existed under the Kaiser. Employers, especially the coal and steel magnates of the Ruhr, resented the new-found power of organised labour, and sought to roll back the concessions they had been forced to make at the end of the war.

The economy was damaged by the onerous terms of the Versailles peace settlement, compounded by the sluggish growth of world trade. Between 1919 and 1924 industrial production was running at between a half and three-quarters of the 1913 level.43 The situation improved in the second half of the 1920s after inflation had been brought under control and capital began to flow in from the US. But most of these funds were withdrawn when the world depression began to bite. With the banking system in crisis and the political parties unable to reconcile their differences, Germany was plunged into a period of political turbulence which culminated in the appointment of Hitler as Chancellor in 1933. Within the confines of a command economy a partial recovery took place in the second half of the decade, but economic efficiency took second place to the two overriding national objectives: military supremacy and industrial autarky.

The response of German industry to these events was defensive. The first priority after the war was to rebuild the industrial base. In heavy industries rationalisation through merger was seen as a means of cutting costs and reducing competition. Thyssen was the prime mover in the formation, in 1926, of a giant steel-making group, Vereinigte Stahlwerke (Vestag), which accounted for about half the industry’s output. This merger, partly financed by US capital, facilitated plant closures and led to some improvement in productivity, but Vestag was an unwieldy creature and difficult to manage effectively.44 In the chemical industry a process of consolidation, which had started before the war, led in 1925 to the creation of IG Farben, embracing all the leading dyestuffs companies. But rationalisation did little to improve the efficiency of German industry; one historian has described it as ‘simply a vogue-word used to describe the mistaken investments made in the 1920s’.45 It was accompanied by a further proliferation of cartels, some of which, as in steel, were extended internationally.

The stagnation of the inter-war years did not erase what had been achieved in Germany before 1914. Investment in skills through technical schools and universities was maintained, and the apprenticeship system was strengthened by the Nazis, albeit for political rather than economic reasons; factory-based training, part of a programme for building ‘works communities’, was a way of detaching workers from their loyalty to trade unions. While German engineering firms lost ground to the Americans in mass-produced lines – the Solingen cutlery-makers, for example, had nothing with which to counter the Gillette safety razor – they continued to be highly competitive in skill-intensive capital goods such as machine tools. IG Farben was the undisputed leader in the world chemical industry, spending more on research than its American and British competitors. But German manufacturers tended to continue along lines which had been set before the war, rather than develop new activities. There was a particular weakness, partly due to the instability of the economy, in consumer products.46 The electrical industry was slow to invest in the large-scale production of domestic appliances, and the motor industry, most of which was still attached to craft production methods, performed poorly until the second half of the 1930s.

For Britain the inter-war period was not as politically traumatic as in Germany, and the social strains arising from high unemployment were handled more successfully. But the war and its aftermath undermined many of the assumptions which had guided governments and entrepreneurs since the middle of the nineteenth century. The 1920s saw the collapse of the liberal world economic order on which British hegemony had been based. The attempt to restore the old order was responsible for what is often seen as a serious error – the return to the gold standard in 1925 at sterling’s pre-war exchange rate. Although this decision could be defended as a contribution to the revival of international trade, it weakened the competitiveness of British exporters at a time when overseas markets were contracting. Yet, whatever the merits of the return to gold, the British government on its own could have done little to halt the spread of protectionism. The one country which might have done so, the US, maintained its high tariff policy; the Hawley–Smoot Tariff of 1930 has been widely blamed for exacerbating the world depression. Britain’s own attachment to free trade finally gave way with the abandonment of the gold standard in 1931 and the introduction of a general tariff in the following year.

The collapse of world trade had a disastrous effect on Britain’s staple industries which had traditionally exported a large proportion of their production. After the brief post-war boom had faded, the cotton textile industry was faced with a huge surplus of capacity which persisted throughout the inter-war period. Some of its important Asian markets were invaded by Japanese textile exporters, and India was building up its own textile production. Cost reduction was the order of the day, but the one major attempt at reorganisation – the concentration of more than a hundred spinning mills in the Lancashire Cotton Corporation – did little to improve the industry’s competitiveness. The situation in shipbuilding was much the same. A surge in orders after the war, as owners replaced tonnage that had been damaged or destroyed, was followed by a prolonged slump. Some yards were closed in the 1930s as part of a capacity reduction programme co-ordinated by the Bank of England, but the adjustment was far from complete by the time of the Second World War.

The positive feature of the inter-war period was the progress made in newer industries. The four-way merger which created Imperial Chemical Industries (ICI) in 1926 was in part a defensive response to the formation of IG Farben in the previous year, but the new company was strongly committed to research. ICI’s invention of polythene in 1933 was the counterpart to Du Pont’s nylon, showing that in the new technology of polymer chemistry German firms no longer had the field to themselves. There was a partial recovery in electrical engineering and a promising start in the new field of electronics; television and radar were two innovations for which British engineers could claim most of the credit. In the motor industry British manufacturers were no match for Ford and General Motors in exports, but by European standards the two leading firms, Morris and Austin, did well, skilfully adapting Fordist techniques to the conditions of a much smaller home market.

There were improvements, too, in management and organisation. The formation of ICI was one of several large-scale mergers which took place in the inter-war period, and although not all of them were successful, these structural changes had a positive effect on managerial efficiency.47 The merger movement, and the increasing trend for large companies to raise capital on the London Stock Exchange, created opportunities for the merchant banks in the City of London (which were facing a dearth of overseas business) to strengthen their links with domestic industry. As companies got bigger and family control was diluted, more professional managers were appointed to senior executive posts. Some of them came into industry via the accountancy profession; the accountancy firms, in their role as auditors, provided their staff with a training in management which was a partial substitute for a business school education of the American type.48

TABLE 2.2 Manufacturing output per person employed 1899–1935

(Britain = 100)

US/BritainGermany/Britain1899195.494.71913212.9119.01925234.295.21935207.8102.0

Source: S. N. Broadberry, The Productivity Race, Cambridge, 1997. p. 36.

Given the difficult international environment, British industrial performance in the inter-war years was creditable, at least in comparison with other European countries.49 As TABLE 2.2 shows, Germany and Britain were roughly on a par in terms of manufacturing productivity at the end of the 1930s, as they had been just before the First World War, and not far apart in their share of world manufacturing production (TABLE 2.3). The failure, if there was one, was in relation to the US, where productivity was more than double the European level. The American lead was based on a large, tariff-free home market, an abundance of raw materials, and institutions and policies which encouraged entrepreneurship and innovation.

TABLE 2.3 Shares of world manufacturing output, 1913 and 1938

(per centage of total)

1913 1938 US 32.0 31.4 Germany 14.8 12.7 Britain 13.6 10.7 Japan 2.7 5.2 France 6.1 4.4 Italy 2.4 2.8 Others 28.4 32.8

Source: Paul Bairoch, ‘International Industrialisation Levels from 1750 to 1980’, Journal of European Economic History, vol. 11, no. 2, Fall 1982.

Britain’s early start in the industrial revolution had left some lasting legacies, some of which would prove troublesome after the Second World War. One was a large commitment to older industries, such as cotton textiles and shipbuilding, which had been built up during the nineteenth century. Another was a pattern of trade originating from the days when Britain exchanged the products of the first industrial revolution – textiles, coal, iron – for food and raw materials from the primary producing countries. The bias towards non-European markets was reinforced by the protectionism of the inter-war years. The newer industries, in particular, became increasingly dependent on the dominions and colonies; in 1938 three-quarters of Britain’s electrical machinery and car exports went to imperial markets. This was to a large extent the inevitable result of high tariffs in other European countries, but it encouraged the view that overseas trade should be based on complementarity rather than competition. Trade with developing countries, inside and outside the Empire, seemed more natural than trade between industrial countries which had similar industrial structures and produced similar goods.

Britain’s distinctive industrial history had left its mark on the three institutions which were referred to in the first chapter – the financial system, the education system and the labour relations system. But in all three fields a process of evolution had taken place before and after the First World War, and none of them can be seen as a fatal disability which condemned British industry to decline after 1945. The labour relations system, for example, had stabilised after the drama of the 1926 General Strike. If attitudes on the part of unions and employers were adversarial, there was a pragmatic recognition that a modus vivendi had to be worked out, and that orderly procedures for dealing with disputes were in everyone’s interests. It can hardly be said that this was a worse preparation for the post-war period than the bitterness which characterised German labour relations during the 1920s and early 1930s, leading to the extinction of the trade union movement under the Nazis.

A damaging consequence of the inter-war depression was the retreat from liberalism in British economic and industrial policy. The abandonment of free trade in 1932 was accompanied by the spread of price-fixing and market-sharing arrangements, condoned and even encouraged by the government in the hope that they would encourage rationalisation. The lack of internal competition, together with protection against imports, created an environment which was not conducive to industrial efficiency. But these policies were not confined to Britain; the cartel habit was even more deeply entrenched in Germany.

Britain was not the only country with awkward legacies from the past, and British industry was not obviously less well equipped than its European competitors to benefit from the more favourable international environment that prevailed after the Second World War. Explanations for what went wrong after 1945 have to be found in the post-war period itself.

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