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The Challenge of Hegemony

age, the reconstruction of China, and currency reform would bene‹t British industry by improving economic stability in China.33

By 1937, there was declining support among free traders for accommo- dating Germany and Japan.34 For instance, the British Bankers’ Association passed a resolution that no new credits should be granted for ‹nancing Ger- man business that could be ‹nanced by means of a Standstill Agreement (Forbes 1987, 584, 586). After the outbreak of the Sino-Japanese War (1937), Britain’s policy toward Japan became less conciliatory, with com- mercial groups clamoring for economic retaliation (Lee 1971, 156–65; Trot- ter 1977, 44–45; Lowe 1981, 161–62). Stephen Endicott suggests that British loan discussions, support for China’s currency reserves, and aid in the building of strategic railroads might have pushed the Japanese military into action in 1937 (1973–74, 494–95).35 Japan’s actions threatened Britain’s position in Shanghai, its stake in the Maritime Customs, and its shipping and railway interests, while British economic activity throughout north China suffered heavily.36 Japan was also engaged in a major campaign to undermine the Chinese currency in the hope that the leader of the Chi- nese Nationalists, Chiang Kai-shek, would be destroyed and that occupied China would be completely absorbed into a yen bloc. To resist Tokyo’s fur- ther encroachments in China, the City of London, with the support of the Treasury and the Bank of England, extended loans to strengthen China’s Nationalist government (and prevent its collapse), encouraged British ‹rms to negotiate partnerships with Chinese corporations (T. V. Soong’s China Development Finance Corporation), fostered British investment and trade through Hong Kong, and constructed the Burma Road to deliver supplies (completed in 1938).37 In 1938, the cabinet approved a scheme for a British stabilization loan for China’s currency (Lee 1971, 163). In 1939, London announced a loan provided by four banks (two Chinese and two British), with the British contribution guaranteed by the Treasury.

the sterling area: the triumph of orthodoxy

Within the empire, beleaguered invisible exports ensured that orthodoxy triumphed in the Sterling Area, reinforcing ‹scal conservatism (Longstreth 1979, 172; Tomlinson 1990, 102–3, 113–21). Free traders argued that protection would foster inef‹ciency within the trading bloc (Tomlinson 1990, 75). First, in the Ottawa Agreements, London granted generous provision for the empire in British markets, to the detriment of British manufacturing, allowing the Dominions to secure a relatively

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