How Austerity Destroyed the British Empire
by Benjamin Studebaker
It’s rarely talked about during Britain’s contemporary debate over austerity, but British austerity has a major 19th century precedent, one that ultimately culminated in the decline and fall of the British Empire.
Many may not know that the amount of debt Britain accumulated after the Napoleonic Wars was greater as a share of the British economy than the debt accumulated post-2008 or even during the World Wars:
Indeed, for much of the last three centuries, Britain’s debt burden has far exceeded its contemporary size. As you can see, the British government reduced its debt burden much faster after the world wars than it did after the Napoleonic Wars. In the 20th century, Britain’s debt burden was under 50% of GDP by the 1970’s, just three decades after the war. In the 19th century, Britain’s debt burden did not drop under 50% until around 1890, more than seven decades after the war. This means that Britain reduced its debt about twice as quickly as in the 20th century as it did in the 19th.
It might be natural to assume that this is because in the 20th century Britain was much more fiscally responsible. But nothing of the sort is true–following demobilization in the 1940’s, British government spending never fell to pre-war levels and increased consistently throughout the 50’s, 60’s, and 70’s, not just in absolute terms but also as a share of GDP:
The fuel was provided by the creation and expansion of the British welfare state beginning under Clement Attlee. By contrast, in the 19th century, the British government committed itself to a severe austerity plan that lasted decades. As economist Thomas Piketty describes in Capital in the Twenty-First Century:
The most interesting example of a prolonged austerity cure can be found in nineteenth-century Britain. As noted in Chapter 3, it would have taken a century of primary surpluses (of 2-3 points of GDP from 1815 to 1914) to rid the country of the enormous public debt left over from the Napoleonic wars. Over the course of this period, British taxpayers spent more on interest on the debt than on education. The choice to do so was no doubt in the interest of government bondholders but unlikely to have been in the general interest of the British people. It may be that the setback to British education was responsible for the country’s decline in the decades that followed.
Education has lagged effects on the economy–a reduction in education spending takes a couple decades to fully show up in an economy’s long-term output. This is because when a change in policy happens, the majority of people have either partially or fully completed their educations. It will take about two decades for a cohort to emerge that was not in any way influenced by previous education policy, and it will take longer still for those individuals to dominate the society’s workforce. Other European countries did not initiate massive education funding programs immediately at the end of the Napoleonic Wars–the gap in education funding grew gradually over time. There are also other areas where the British economy could have been slowed by austerity (e.g. infrastructure, healthcare, welfare spending, etc.).
But in any case, what we see in the historical record is that Britain’s relative share of global wealth peaks a couple decades after the end of the Napoleonic Wars, in the 1840’s, holding even until the 1860’s, and the dropping at an increasingly rapid pace until World War I, when Britain finally stopped the austerity. It slides further during the 1920’s when Britain tried to reimpose austerity between the wars, before stabilizing again once Britain abandons the gold standard in the 1930’s. John Mearsheimer’s figures from The Tragedy of Great Power Politics tell the story of Britain’s decline:
Britain’s huge advantage should have given it the power to suppress the industrial growth of Germany and inhibit the growth of the United States, or at least compete with it by more rapidly developing Canada and Australia. But the British state was committed to austerity and could not make the necessary investments. Even in the 1840’s at the height of British imperial power, the United States was able to threaten Britain with war, forcing it to cede the Oregon territory, which included all of Oregon, Washington, and Idaho, as well as parts of Wyoming and Montana. Because Britain was committed to austerity, it was unwilling to pony up the funds necessary to defend its interests. The British Empire needed to invest in its own economic development and it needed to protect its territorial claims and industrial advantages from foreign competitors. Austerity left it powerless to do both. Eventually the result was the rise of German imperialism, two world wars, and millions of deaths. A strong British Empire could and should have prevented all of it.
What could Britain have done differently in the 19th century? It could have followed the path it followed after the Second World War. In the decades following World War II, Britain did two key things that enabled it to shrink its public debt quickly and easily without compromising public investment:
- It allowed inflation to eat away at the debt.
- It continued to invest in itself, encouraging a higher growth rate.
In the 19th century Britain stuck to the gold standard, resulting in deflation. £1 in 1815 was equivalent to £0.62 in 1900, a cumulative deflation of 38%. By contrast £1 in 1945 was equivalent to £2.70 in 1970, a cumulative inflation of 170%. This means that in the 19th century, Britain’s debt burden grew larger in real terms as time passed, causing the government to actively save large sums of money to ensure the debt and the interest were repaid. In the 20th, the debt burden grew smaller in real terms as time passed, so all the British government had to do was ensure that it did not add more to the debt than could be accounted for by inflation and economic growth.
Speaking of growth, it was much higher in Britain during the decades following World War II. In the 19th century, the Bank of England indicates that British GDP grew by around 2.07% in the 19th century. From 1948 to 1970, Britain grew by an average of 2.7%. This 0.63% may not sound like much, but over time it adds up quite a bit. If Britain had grown by 2.7% between 1830 and 1900 instead of 2.07%, Britain’s GDP in 1900 would have been about 53% higher. To give you a sense of the scale, if Britain’s per capita GDP were 53% higher than it is today, it would be almost £43,000 instead of around £28,000. That would make Britain significantly wealthier than the United States.
But alas for the empire, by the 1940’s most of the decline had already transpired, and even sound economic policy would not enable it to catch up to the US or USSR much less hold onto its remaining territories around the world. At the most critical moment, the British Empire chose to stick with austerity and the gold standard. So instead of remaining the wealthiest and most powerful nation on earth, Britain was reduced to a second rate power. Instead of investing in Britain’s future, Britain prioritized feathering the pockets of wealthy bondholders. Contemporary governments in Britain and throughout the rest of Europe have too often followed similar policies, and though we may be heartened by the possibility that modern European countries will not engage in austerity for a whole century the way that the British Empire did, even a few years of destructive policy remains destructive.
So the next time you encounter a British conservative who pines for the glory of the empire, you might remind them that it was conservative economic policy that dashed the imperial dream.
Great piece, Ben. Jeremy Corbyn should sign you up immediately. You make the complex understandable and re-educate the electorate to what really goes on. Dave.
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The problem after the Napoleonic Wars was that Britain was getting to the point it would need to take out debt to finance debt—which is probably the single most dangerous thing that can happen in an economy.
Britain was able to keep interest rates low, even following the Napoleonic Wars, by hemorrhaging silver and issuing debt. This is basically what Keynes recommended in crisis, but he cautioned that was not sustainable. Following the Napoleonic Wars, Britain found its debt service at about 10% of GDP. For reference, Greece peaked at around 7 and a half percent and then only briefly.
The counterfactual you put forward has Britain taking out debt to cover debt. This leads to a pair of feedback loops. First, it causes inflation. This is not a problem in-and-of-itself—the market will adjust pretty quickly and the negative effects will be a (consequential) blip. But that means that the amount of money that the government must borrow to cover its new and old debt increases. That pushes inflation up again. The growth of the money base is modeled as an exponent of an exponent. Hyper-inflationary fears in the core countries today are silly, but the UK was looking at a real problem by the 1830s!
I find it hard to believe that hyperinflation would have been less destructive than the effects on education. The downside to “inflating away debt” is that you destroy the private investment base for a generation. I am at something of a disadvantage here because I do not know exactly how Piketty figured the advantages of education or his take on hyperinflation, but if he thinks that debt service is something a government can trifle with, he does not understand the history of public finance on the continent.
The post-war inflation, by the way, represents a curious time in economic history. Returning soldiers and demobilization provided /real/ increases to productivity that drove /real/ scarcity. The inflation of the post-war era was driven by production, not monetary policy. (The slowdown of the 70s and 80s was a monetary problem, driving by oil shocks abroad.) Britain did not enjoy the same demobilization bump following the Napoleonic Wars.
By the 1870s, the Brits had stabilized debt service at levels more in line with today. This did not leave them room to borrow wildly, though a cursory reading of the data makes me think that they may have been too conservative. This is the danger of both debt and austerity. For four decades—six if you count the time spent depleting silver reserves—Britain was so saddled by debt they had cut off their options. But keeping austerity too long probably contributed to some of their loss of power at the end of the 19th century. I’m not so sure they could have spent their way back to hegemony, but they might have pushed the inevitable off a few more years.
If you’re concerned about hyperinflation, Britain could have hit its wealthy with a one-time tax on assets of around 20%. In the 19th century, assets were typically 600% of GDP, and that would have brought the debt to GDP ratio down far enough for Britain to handle the rest with moderate inflation, avoiding any risk of hyperinflation. Even without an asset tax, I think the risk of hyperinflation is overstated–British inflation rates immediately post-war don’t look especially different from later in the century. Indeed, Britain was actually deflating:
Not sure I’m following your argument concerning demobilization–generally demobilization induces a post-war recession (which is what Britain saw in the mid-40’s). The 50’s and 60’s were good decades for growth for nearly all the affluent states under Bretton Woods, irrespective of the level of involvement in WWII.
Productivity growth is in part influenced by policy–a lack of investment in things like education, infrastructure, etc. will hinder productivity growth. Massive government investment during WWII led to swift technological development in the decades that followed further facilitated by strong public investment in education, infrastructure, and welfare states. The level of industrialization in the early 1800’s was not nearly as great, but a comparable set of policies by the government at that time would likely have yielded substantial benefits. We should not abstract the economic performance in the 50’s and 60’s from the political institutions and policies that brought it about. We cannot have one without the other.
If I lived a thousand years, I would never understand how our leaders still, willfully, ignore the historical record. Thank you Mr. Studebaker for your concise and attainable explanation of what our leaders should have taken into consideration following the events of 2008.
[…] How Austerity Destroyed the British Empire […]
Interesting post, but I think you are underestimating the deleterious effects on Britain’s economy of Britain’s dogmatic adherence to free trade in the face of mercantilist policies by Germany and the U.S, among others, similar to the U.S. and China, Japan, et al. today. Have you read this book? http://press.princeton.edu/titles/9312.html
It is amazing how the debates about the industrial decline of the country, especially relative economic decline (relative to Germany and the USA, both of which erected protective tariffs against British exports, while Britain adhered dogmatically to free trade), is hauntingly familiar to the USA today, faced with unfair competition from Japan, South Korea and China primarily. Joseph Chamberlain was the tariff reform champion. Even brilliant and mainstay figures as Lord Salisbury and Arthur Balfour questioned free trade: “In spite of any formula, in spite of any cry of Free Trade, if I saw by raising the duties on luxuries, or threatening to raise it, I could exercise pressure on a foreign power, inducing it to lower rates and give relief, I should pitch orthodoxy and formulae to the winds and exercise pressure.” –Salisbury. The book sets forth the positions of Chamberlain, the free traders who wanted orthodoxy – status-quo, and Arthur Balfour, the Prime Minister in 1903, who wrote a masterful analysis of the situation in a memorandum entitled “Economic Notes on Insular Free Trade,” which I downloaded and have begun reading. Keynes wrote of the memo: “The Economic Notes on Insular Free Trade is one of the most remarkable scientific deliverances ever made by a Prime Minister in office. It wears well and bears re-reading. I think that economists today would treat Balfour’s doubts, hesitations, vague sensing of trouble to come, polite wonder whether unqualified laissez-faire is quite certainly always for the best, with more respect, even if not with more sympathy, than they did then.”
Chamberlain himself argued things that are so eerily similar to the situation we face today in the USA that it gave me goose bumps reading it, e.g., “whereas at one time England was the greatest manufacturing country, now its people are more and more employed in finance, in distribution, in domestic service… I think it is worthwhile to consider – whatever its immediate effects may be-whether that state of things will not be the destruction ultimately of all that is best in England, all that has made us what we are, all that has given us prestige and power in the world.” He went on to tell London’s bankers that in the short run, the net effect of the changes would be to leave Britain more divided between rich and poor and less self-sufficient, “richer and weaker.” Over the long run the country could not survive as merely a “hoarder of invested securities” if it was not also the “creator of new wealth.” He went on: “…are you entirely beyond anxiety as to the permanence of your great position?… Banking is not the creator of our prosperity, but is the creation of it. It is not the cause of our wealth, but it is the consequence of our wealth; and if the industrial energy and development which has been going on for so many years in this country were to be hindered or relaxed, then finance, and all that finance means, will follow trade to the countries which are more successful than ourselves.”
Ultimately, I think Balfour’s position of raising retaliatory tariffs on protectionist countries in order to negotiate a reduction of theirs for ours to create a fairer playing field was more workable than Chamberlain’s cry for Imperial Preference, since walling off Britain and her colonies from competition, even legitimate competition, could exacerbate a lack of innovation and upgrading of plant and equipment, technique, etc. and lead to possibly even more decay, not to mention the problematic politics involved. Essentially, Chamberlain’s position, while I agree with all of his arguments on the problems with free-trade while others practices mercantilism, would amount today to what might seem a general, across the board raising of tariffs in the USA against all other countries, while Balfour’s position would amount to strategic raising of duties or retaliation in some measure against currency manipulation by China and others and other stealth protectionist practices which give them an unfair advantage at the expense of our manufacturing base, perhaps by taxing their purchase of our treasuries in proportion to the degree of currency manipulation or something like that, i.e., counter-intervention in the currency markets. That Balfour identified the problems, saw the future and prescribed what would seem to the best solution over 100 years ago without any historical precedent (as Britain was THE first industrial power and the first to face these issues), which nowadays we have plenty of, is astounding to me and merely highlights his unmitigated brilliance as a thinker with a genius analytical mind.
Nothing happened though because of the lack of political will to do anything, the opposition of vested multinational business and financial interests and fear of political fallout splitting parliamentarian parties. Indeed, the whole tariff debate split the conservatives and brought in the staunchly free-trade liberals, collapsing Balfour’s government. Again, this is incredibly, eerily familiar today, down to the Democratic Party splitting into pro-TPP and anti-TPP camps. History really repeats itself.
Indeed . Betrayal of British Interests by Tory Regime Austerity just like Now