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Britain’s Grand Strategy of Restrained Punishment

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greater share of the British market than London secured in the empire markets. This was not a sign of British weakness or the power of the empire countries, but re›ected the residual strength of invisible exports (Cain and Hopkins 1993a, 87, 306). Since the empire countries were borrowers and were dependent on Britain’s ‹nancial services and shipping, they had heavy bills to meet for invisible items. Colonial debtors needed preferen- tial treatment to obtain sterling to service their debt to the City.

Second, as in the past, the prerequisite for the Sterling Area was a sta- ble pound (many countries’ exchange rates were pegged to the pound). Free traders still aspired to maintain a high degree of ‹nancial authority within the sterling camp in order to retain the con‹dence of sterling hold- ers. As Cain and Hopkins note, “If, by 1931, they could no longer manage a world economy, the British still aspired to run an empire” (1993a, 73).38 This was the price Britain had to pay for a smoothly functioning sterling bloc. Third, the Bank of England pursued central bank cooperation within the empire. This included the development of central banking in the Dominions, which maintained a close liaison with the Bank of England and facilitated monetary cooperation. With the development of Domin- ion central banks, the responsibility of the Bank of England as the center of the whole system was considerably increased, becoming the central bank of central banks (Stewart 1937, 191–94). Finally, the Treasury extended “Treasury control” or its supervisory role to the colonies. The Treasury placed foreign loans under its strict control, lending capital only to the Sterling Area, especially the Dominions. The purpose was to con- tribute to the stability of exchange rates in the bloc and to help keep non- Dominion currencies linked to the British pound and stable in relation to sterling (185). One unintended consequence of the ability of colonies and dominions to borrow freely on the London market was the strengthening of ties between the City and the empire (Peden 2000, 258).

rearmament

In 1932, the Cabinet revoked the Ten Year Rule, warning that this did not justify immediate increases in defense spending without considering Britain’s economic crisis. The Ten Year Rule assumed “that the British Empire will not be engaged in any great war during the next ten years, and that no Expeditionary Force is required for this purpose” (Gibbs 1976, 3). The combination of the Depression, societal pressures, and Treasury con- trol contributed to the further reduction in military spending. The out- come was that actual military preparedness fell well below the minimum

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