Modern history


A Tale of Two Economies

‘Germany is a land teeming with children. It is a terrifying thought that, in
long range terms, the Germans may have won the war after all’.
Saul Padover, 1945

‘Of course, if we succeeded in losing two world wars, wrote off all our
debts—instead of having nearly £30 million in debts—got rid of all our
foreign obligations, and kept no force overseas, then we might be as rich as
the Germans’.
Harold Macmillan

‘The prosperity and strength of the British economy which [UK
Chancellor of the Exchequer R.A.] Butler celebrated in several speeches in
1953 and 1954 was but the last wash of prosperity breaking on British
shores from the wake of the German economy as it surged ahead, pulling
its attendant European flotilla with it. In retrospect, 1954 looks like the last
grand summer of illusion for the United Kingdom’.
Alan Milward

A striking feature of the history of post-war western Europe was the contrast between the economic performance of West Germany and Great Britain. For the second time in one generation, Germany was the defeated power—its cities shattered, its currency destroyed, its male workforce dead or in prison camps, its transportation and service infrastructure pulverized. Britain was the only European state to emerge unambiguously victorious from World War Two. Bomb damage and human losses aside, the fabric of the country—roads, railways, shipyards, factories and mines—had survived the war intact. Yet by the early 1960s, the Federal Republic was the booming, prosperous powerhouse of Europe, while Great Britain was an under-performing laggard, its growth rate far behind that of the rest of Western Europe.136 Already by 1958 the West German economy was larger than that of Britain. In the eyes of many observers the UK was well on its way to becoming the sick man of Europe.

The sources of this ironic reversal of fate are instructive. The background to the German economic ‘miracle’ of the fifties was the recovery of the thirties. The investments of the Nazis—in communications, armaments and vehicle manufacture, optics, chemical and light engineering industries and non-ferrous metals—were undertaken for an economy geared to war; but their pay-off came twenty years later. The social market economy of Ludwig Erhard had its roots in the policies of Albert Speer—indeed, many of the young managers and planners who went on to high position in post-war West German business and government got their start under Hitler; they brought to the committees, planning authorities and firms of the Federal Republic policies and practices favored by Nazi bureaucrats.

The essential infrastructure of German business survived the war undamaged. Manufacturing firms, banks, insurance companies, distributors were all back in business by the early ’50s, supplying a voracious foreign market with their products and services. Even the increasingly high-valued Deutschmark did not impede German progress. It made imported raw materials cheap, without restricting foreign demand for German products—these were typically high-value and technically advanced, and they sold on quality, not price. In any case, during the first post-war decades there was little competition: if Swedish or French or Dutch firms wanted a certain sort of engineering product or tool, they had little option but to buy it from Germany, and at the asking price.

German business costs were kept down by sustained investment in new and efficient production methods—and by a compliant workforce. The Federal Republic benefited from a virtually inexhaustible supply of cheap labor—skilled young engineers fleeing East Germany, semi-skilled machine minders and assembly workers from the Balkans, unskilled laborers from Turkey, Italy and elsewhere. All of these were grateful for stable hard-currency wages in return for steady employment, and—like an un-protesting older generation of German workers inherited from the Thirties—they were not disposed to make trouble.

The results can be illustrated with reference to a single industry. By the 1960s German car manufacturers had successfully established a reputation for engineering quality and manufacturing reliability, such that companies like Mercedes-Benz in Stuttgart and BMW in Munich could sell increasingly expensive cars to a near-captive market, first at home and increasingly overseas. The Bonn government unashamedly supported such ‘national champions’, just as the Nazis had done before it, nurturing them in early years with favorable loans and encouraging the banking-business nexus that provided German companies with ready cash for investment.

In the case of Volkswagen, the groundwork had already been laid by 1945. Like so much of post-war West German industry, Volkswagen benefited from all the advantages of a free-market economy—notably growing demand for its products—without suffering any of the drawbacks of competition or the costs of research, development and tooling. The company had been given inexhaustible resources before 1939. Nazism, war and military occupation had all done well by it—the Allied Military Government looked kindly on Volkswagen precisely because its productive capacity had been built up before the war and could be put to work without further ado. There was no serious domestic competition for the VW Beetle when demand for mass-produced small family cars took off, and even at a fixed and low price the cars turned a profit—thanks to the Nazis, the company had no old debt to pay off.

In Britain, too, there was a ‘national champion’—the British Motor Corporation (BMC), a conglomerate of various formerly independent car manufacturers like Morris or Austin, and itself later merged with Leyland Motors to produce British Leyland (BL). As late as 1980, BL was selling its products as emblematically British: ‘Drive the flag—buy an Austin Morris’. And like the German manufacturers, British carmakers laid increasing emphasis on the overseas market. But there the similarities ended.

After the war, successive British governments urged BMC especially (they had less influence over US-owned Ford, or General Motors’ subsidiaries in the UK) to sell every car they could overseas—as part of the desperate search for foreign currency earnings to offset the country’s huge war debts (the official government export target at the end of the 1940s was 75 percent of all UK car production). The company duly and deliberately neglected quality control in favor of rapid output. The resulting shoddy quality of British cars mattered little at first. British firms had a captive market: demand both at home and in Europe exceeded available supply. And continental European manufacturers could not compete on volume: in 1949 the UK produced more passenger cars than the rest of Europe combined. But once the reputation for low quality and poor service was established, it proved impossible to shake. European buyers abandoned British cars in droves as soon as better home-produced alternatives became available

When they did decide to update their fleets and modernize their production lines, British car firms had no affiliated banks to turn to for investment cash and loans, in the German manner. Nor (unlike FIAT in Italy or Renault in France) could they count on the state to make up the shortfall. Yet under heavy political pressure from London, they built plants and distribution centers in uneconomic parts of the country—to conform to official regional policies and to appease local politicians and unions. Even after this economically irrational strategy was abandoned and some consolidization undertaken, British automobile firms remained hopelessly atomized: in 1968 British Leyland consisted of sixty different plants.

Governments actively encouraged the inefficiency of British producers. After the war, the authorities distributed scarce supplies of steel to manufacturers on the basis of their pre-war market share, thus freezing a major sector of the economy in the mould of the past and decisively penalizing new, and potentially more efficient producers. The guarantee of supplies, the artificially high demand for anything they could make, and political pressure to behave in economically inefficient ways all combined to lead British firms down into bankruptcy. By 1970 European and Japanese producers were taking over their markets and beating them on quality and price. The oil crisis of the early 1970s, entry into the EEC and the end of the UK’s last protected markets in the dominions and colonies finally destroyed the independent British car industry. In 1975 British Leyland, the country’s only independent mass automobile maker, collapsed and had to be bailed out via nationalization. A few years later its profitable parts would be bought up for a song . . . by BMW.

The decline and eventual disappearance of an autonomous British automobile sector can stand for British economic experience at large. The British economy did not initially do so very badly: in 1951 Britain was still the major manufacturing center of Europe, producing twice as much as France and Germany combined. It provided full employment and it did grow, albeit more slowly than everywhere else. It suffered, however, from two crippling disadvantages, one a product of historical misfortune, the other self-imposed.

The UK’s endemic balance of payments crisis was in large measure a result of the debts racked up to pay for the six-year war against Germany and Japan, to which should be added the enormous costs of supporting an effective post-war defense establishment (8.2 percent of the national income in 1955, against a German outlay of less than half that figure). The pound—still a major unit of international transactions in the 1950s—was overvalued, which made it hard for Britain to sell enough abroad to compensate for sterling’s chronic deficit against the dollar. An island country, utterly dependent on imports of food and vital raw materials, Britain had historically compensated for this structural vulnerability by its privileged access to protected markets in the Empire and Commonwealth.

But this dependence on far-flung markets and resources, an advantage in the initial post-war years as the rest of Europe struggled to recover, became a serious liability once Europe—and especially the EEC zone—took off. The British could not compete with the US, and later Germany, in any unprotected overseas market, while British exports to Europe itself lagged ever further behind those of other European producers. British manufactured exports represented 25 percent by value of the world’s total in 1950; twenty years later they constituted just 10.8 percent. The British had lost their share of the world market, and their traditional suppliers—in Australia, New Zealand, Canada and the African colonies—were now turning to other markets as well.

In some measure the relative economic decline of Britain was thus inevitable. But Britain’s own contribution should not be underestimated. Even before World War Two, Britain’s manufacturing industry had gained a well-deserved reputation for inefficiency, for coasting on past success. It was not that the British were overpriced. Quite the contrary. As Maynard Keynes pointed out in a sardonic commentary on Britain’s post-war economic prospects: ‘The hourly wage in this country is (broadly) 2/- per hour; in the US it is 5/- per hour . . . Even the celebrated inefficiency of British manufacturers can scarcely (one hopes) be capable of offsetting over wide ranges of industry the whole of this initial cost-difference in their favour, though admittedly they have managed it in some important cases . . . The available statistics suggest that, provided we have never made the product before, we have the whole world licked on cost’.137

One problem was the workforce. Britain’s factories were staffed by men (and some women) who were traditionally organized into—literally—hundreds of long-established craft unions: British Leyland’s car factories in 1968 counted 246 different trade unions with whom management had separately to negotiate every detail of work rates and wages. This was an era of full employment. Indeed, the maintenance of full employment was the cardinal social objective of every British government in these years. The determination to avoid a return to the horrors of the thirties, when men and machines decayed in idleness, thus trumped any consideration of growth, productivity or efficiency. Trade unions—and especially their local representatives, the factory shop stewards—were more powerful than ever before or since. Strikes—a symptom of labour militancy and incompetent management alike—were endemic to post-war British industrial life.

Even if Britain’s trade union leadership had followed the German example and offered amicable shop-floor relations and wage restraint in return for investment, security and growth, it is unlikely that most of their employers would have taken the bait. Back in the 1930s the future Labour Prime Minister Clement Attlee had accurately identified the British economic malaise as a problem of underinvestment, lack of innovation, labour immobility and managerial mediocrity. But, once in office, there seemed little that he or his successors could do to stop the rot. Whereas German industry inherited all the advantages of the changes wrought by Nazism and war, Britain’s old-established, uncompetitive industries inherited stagnation and a deep fear of change.

Textiles, mines, shipbuilding, steel and light engineering plants would all need restructuring and retooling in the post-war decades; but just as they chose to accommodate trade unions rather than attack inefficient labour practices, so British factory managers preferred to operate in a cycle of under-investment, limited research and development, low wages and a shrinking pool of clients, rather than risk a fresh start with new products in new markets. The solution was not obvious. Keynes, once again: ‘If by some sad geographical slip the American Air Force (it is too late now to hope for much from the enemy) were to destroy every factory on the North East coast and in Lancashire (at an hour when the Directors were sitting there and no-one else) we should have nothing to fear. How else are we to regain the exuberant inexperience which is necessary, it seems, for success, I cannot surmise.’

In France, a similar heritage of managerial incompetence and inertia was overcomeby public investment and aggressive indicative planning. British governments, however, confined themselves to collective bargaining, demand management and exhortation. For a state that had nationalized such sweeping tracts of the economy after 1945, and that was by 1970 responsible for spending 47 percent of the country’s GNP, this caution seems a curious paradox. But the British state, although it owned or operated most of the transport, medical, educational and communications sectors, never boasted any overall national strategic ambition; and the economy was for practical purposes left to its own devices. It fell to a later generation of free-market reformers—and a radically state-averse Conservative prime minister—to apply the full force of central government to the problem of Britain’s economic stagnation. But by then some of the strictures levelled at Britain’s mal-adapted ‘old’ economy were being levelled, for different reasons, at the faltering German economy too.

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