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The Challenge of Hegemony

strengthened bargaining position to advance state intervention in the economy, industrial rationalization, and industrial cartels and interna- tional agreements, eroding the principles of free trade.

The City of London, the banks, the Labour Party, the Treasury, and the Bank of England resisted the economic nationalists’ grand strategy of pun- ishment. Outward-oriented free traders feared that another war like the Great War would permanently extinguish gentlemanly ‹nancial capital- ism in Britain (Cain and Hopkins 1993a). They prophesied that strength- ening economic nationalists meant the “establishment of a ‘new economic order’ in which price-‹xing and the control of production and competition would replace the market as the main regulatory mechanism of economic life” (Wurn 1993, 49). Even a massive rearmament program carried such risks, since it would require state intervention in industry and would divert resources and factories from export to rearmament. As the Treasury warned, state intervention in managing the economy was turning Britain into “a different kind of nation” (Peden 1984, 24). For the sake of their coalition’s survival, free traders pressed for a self-reinforcing grand strategy of cooperation. Free traders moderated the economic nationalists’ agenda by (1) restraining Britain’s military buildup and more generally imposing ‹scal orthodoxy and laissez-faire economics, (2) lobbying for economic and territorial concessions, and arms limitation agreements with Ger- many, Italy, and Japan, and (3) pressing for free trade within the Sterling Area (which required ‹scal discipline at home). The outcome of the free traders’ strategy was the delay in Britain’s rearmament program.

The combination of Britain’s delayed rearmament and the challengers’ defecting or not renewing the arms reduction agreements and territorial concessions meant that Great Britain’s military capability was insuf‹cient to defend its global commitments (as discussed in chap. 6). Limits on Britain’s industrial capacity also restricted the scale of Britain’s rearma- ment program. As one author concedes, “more ambitious plans without strict Treasury control of priorities would not necessarily have resulted in better-equipped forces by the late 1930s” (Bond 1980, 192). Once rearma- ment began in 1935, bottlenecks, industrial dislocation, shortages of engi- neers, supplies, and machine tools to manufacture the equipment, and competition among the services for scarce industrial resources restricted Britain’s rearmament program.1 The solution, rejected by the free-trade coalition until the war, was government compulsion of manpower and industry.2

This chapter examines Britain’s international environment to explain

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