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114

The Challenge of Hegemony

order to strengthen its balance of payments. Rearmament would require an increase in imports and shift production from exporting industries (it was estimated that as much as 25 to 30 percent of the cost of rearmament would come from imported raw materials) (Shay 1983, 92). As such, Britain would have to increase its exports or run a negative balance of pay- ments, drawing down its foreign currency, gold reserves, overseas invest- ments, and ability to raise credit abroad—the main components of its war chest. The Treasury feared that a long-run balance of payments de‹cit would reduce international con‹dence in the stability of the pound, fur- ther undermining Britain’s ‹nancial reserves.46 This would be reinforced by the loss of foreign con‹dence in sterling on the part of holders of short- term capital (Parker 1975, 645; Peden 1984, 17).

Second, export trade opposed massive prewar rearmament because it would cause dislocation of both skilled labor and industry from civil trade. The most troublesome bottleneck from the perspective of the armament industries was associated with the shortage of skilled labor and machine tools. After World War I, Britain experienced a rapid demobilization of its war industry. The movement of skilled labor and the conversion of civil- ian industry to military production would hurt Britain’s export trade and balance of trade by diverting labor and factories from the production of foreign-exchange-earning export goods (Thomas 1983, 563–65). Free traders especially opposed calls for industrial mobilization, compulsion of industry for rearmament, and interference in such matters as the level of pro‹t.47 After 1938, with the weakening of the free-trade coalition, the government asked industry to give priority to rearmament orders.

Third, free traders resisted ‹nancing the DRC’s rearmament program by large increases in government borrowing or taxation (Peden 1979, 1984). Borrowing was opposed by the Treasury because de‹cit spending would cause in›ation and perhaps a ‹nancial crash on the scale of 1931. In›ation would adversely affect trade by increasing the price of Britain’s exports, resulting in a rise in imports and a decline in exports. Alternatively, increased taxation was opposed by the Treasury because it would lower consumer demand (hindering Britain’s economic recovery) and draw down Britain’s ability to mobilize additional resources in the event of pro-

longed war.48

The only choice was ‹nancial stringency.

The Free Traders’ Alternative Rearmament Program The free traders advanced an alternative rearmament program.49

Their

solution to imperial Germany’s military challenge was to build up the RAF

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