Chapter CXLIII: The Consequence of Conference
Chapter CXLIII: The Consequence of Conference.
Imperial Conferences spawned committees, councils and bureaus in much the same way the Stuarts spawned illegitimate children; frequently, vigorously and with precious little thought as to the consequences. There were some slight hopes that the London Economic Conference would break this trend, an Australian proposal to establish an Empire Agricultural Council was rejected when it was noted there was already an Agriculture sub-committee on the Imperial Economic Council as well as an Imperial Agricultural Bureaux. Sadly the ambitions of bureaucracy, and the enduring political value in being seen to 'do something' (even if nothing was ever actually done), were not so easily denied and the London Economic Conference would gift the Empire several new organisations before it finally concluded. In addition to the Imperial Trade Council discussed in the previous chapter there were new groups doing worthy work in quiet (such as the Brown Goods sub-committee, which would belatedly start work standardising plugs and such like across the Empire) and others that made a great show of achieving very little (the Fuel Board on the Imperial Shipping Committee mostly provided a new place for the Coal Lobby to complain about the continued existence of fuel oil). Our attention in this chapter is directed to the Capital Finance and Investment sub-committee of the Imperial Economic Council which, despite it's less than enthralling name and relatively short life, would produce some long lasting and unexpected results.
As with many things at the Conference the starting point had been a Dominion complaint about British policy, in this case it was their objections to the British government's Export Credit Guarantee Department's remit only covering projects that were, in fact, exports (i.e. outside the Empire). This was presented as a grave threat to Imperial unity, the spectacle of British guarantees and capital being poured into foreign projects, such as the Turkish Iron & Steel Works discussed previously, when schemes in the Dominions were crying out for funding would undermine the entire economic basis of the Empire. Moreover these funding problems were impacting the facilities being built for the Wellington Project, so this would have serious defence implications unless immediately rectified. The politicians recognised a difficult looking problem when they saw it and hurriedly kicked it down to the new sub-committee, at which point the British representatives got to work determining what the issue actually was as opposed to what was being complained about. It soon emerged that the large scale works for the Wellington Project were actually mostly proceeding on schedule and, being relatively 'safe' government projects, had secured commercial funding at reasonably low rates, certainly far below the rates that the ECGD charged for its projects. Further down the supply chain however things were not so rosy and it was the myriad of smaller suppliers who were struggling to establish themselves and obtain reasonable funding. The Dominions were also concerned that if these problems were occurring on such a high priority project then similar, or worse, issue were probably afflicting lower profile schemes.
The crankshaft being lowered into the crankcase during construction of a Merlin engine. While the Australian government had grandly declared they wished to build the 'whole engine', as opposed to assembling kits of imported parts, the reality was proving far more challenging than they had imagined. Taking the parts in this picture, the Merlin crankshaft was made of a nickel-chrome-molybdenum steel alloy, which was shaped in a high capacity drop forge, perfectly balanced and then nitrogen hardened, while the crankcase itself was precision cast from high quality aero-grade aluminium. At this time there was no steel mill in Australia capable of producing the correct grade of steel and no aluminium refineries in the country at all (or indeed in the entire Southern Hemisphere). There were also no drop forges with the necessary capacity or any facilities for hardening the steel to the required strength. It was slowly dawning on Canberra that there was far, far more to this endeavour than just building a couple of modern factories and that London's preference for a more gradual approach might not have just been about trying to keep the work in Britain. It was quietly being discussed if allowing a small number of imported parts would be an acceptable compromise of Australia's grand aero-engineering industrialisation plans.
The Dominions depended upon foreign capital for most of their industrialisation, being too small (Australia) or still scarred by the Depression (Canada) to generate large amounts of investable funds themselves. In practice this meant British capital as the other options that would have been acceptable had no funds and those offering funds were politically unacceptable. While the British economy was recovering well there was a certain amount of capital available and the various City institutions were very good at herding it together and then sending it out into the wider world to earn a good return. These skills were in fact a large part of the problem, while a great deal of British capital was being invested in Australia, Canada and the wider Empire (formal and informal) it was going to the 'wrong' schemes. That is to say projects that would make the best returns for the investors and not those schemes that accorded with the plans of the various governments. As an example gold mining was a popular choice for the Empire focused investor, very large scale investment was ongoing throughout the 1930s in new and expanded mines in Western Australia, Northern Ontario, the Canadian North West Territories and much of East Africa. With so much of the world economy remaining on the gold standard, and with the 'Gold Fix' conveniently priced in Sterling in London, these investments were proving far lucrative than expected, even after the costs of the additional infrastructure required to access the new mines. The delight amongst the investors at this was almost perfectly mirrored by the frustrations of the Dominion governments, who had wished to move their economies away from resource extraction and into more industrial endeavours.
The specific problem had a simple enough solution, the extension of assured contracts and guarantees to the Wellington Project supply chain would make those firm's investments very low risk, and so more attractive, and this was duly done. The wider problem would remain, how to 'encourage' Imperial investment into the right areas and this was the meat of the committees work. It soon became apparent that it was not strictly speaking an Empire problem, there were more than enough existing links and Empire-wide banking institutions to move the money about, it was a British problem. Specifically it was another manifestation of the Macmillan Gap, the tendency of British banks to not properly support small and medium sized industries, for an admittedly very unclear definition of 'properly support' but which was generally taken to mean not offering enough long term loans to fund expansion and 'working capital'. The exact reasons and history as to why this was the case is long, contested and to a large extent irrelevant for our purposes, it is enough to say that the "gap", having been identified by the Macmillan Committee in the early 1930s (hence the name), was the subject of a number of schemes initiated by the Bank of England and Treasury in a effort to "close" it and improve the flow of funding to smaller firms. However those efforts were fairly narrowly focused on the British domestic market, had more than half an eye on minimising 'disruption' to the existing systems and, far more seriously, were not actually working. Frustration had been building within the rest of the government at this lack of progress not least within the Board of Trade (who had long pushed for a more ambitious approach) and from the more small business friendly wing of the wider Conservative party (who didn't particularly care how it got solved, just that it was sorted). With the issues raised by the committee at the conference adding Imperial and Defence implications, the problem escalated up the government's rather full priority list.
The Captain Flats mine in New South Wales, less than 40 miles south east of Canberra, after almost £1.5 million of investment the mine went into full production just as the Conference was opening. It was not just gold mining that brought the miners to Australia, Captain Flats was a lead-zinc pyrite mine which admittedly did produce a small amount of gold as by-product, in any event this was not the sort of diversification away from gold mining that the Australian government had been hoping for. While the mine brought with it a large investment in the Port Kembla docks, the local railways and the electrical power network, it was still a long way from the sort of industrial manufacturing development Canberra wanted to see. The issue was that Captain Flats would be a profitable mine and repay it's investors handsomely, while the 'strategic' industries the government wanted to see built had far less enticing economic prospects.
It was the Canadian representatives on the committee who provided the answer, being less attached to the existing configuration of the British financial system they pointed out the obvious solution - stop trying to get the clearing banks to do something they didn't want to and just get someone else to do it. This was very much in line with Canada's own interventionist approach to financing, one of the first acts of the Mackenzie King government had been the Dominion Housing Act which had used generous federal co-funding to get life insurance companies involved in mortgage lending when the traditional 'trust and loan' organisations would not. To an extent this had been happening in Britain as well (though without the central government funding or direction) as so called 'extra-bank' lending had been increasing steadily for years; insurance companies and building societies dominating the mortgage market, merchant banks expanding their offerings and any number of institutions providing Hire/Purchase and leaseback financing. However this competition and 'cutting in' to the clearing banks business (as the banks saw it) had not extend to the type of loans and financing identified in the Macmillan Gap. This was, depending upon ones view, indicative that the market was either dominated by an oligarchy that squeezed out competition or was just not a particularly profitable endeavour and therefore not worth new entrants competing in. Either way change would be required and there were precious few options left; 'influence' (the Bank of England and Treasury asking the Clearing Banks to sort the matter out) had clearly failed, as had the Bank of England's efforts to improve the existing system. The stick' (making other investment opportunities less attractive through tax or regulations) was discarded due to concerns it would have undesirable side effects elsewhere, so this left only the 'carrot', making long term industrial loans a more attractive proposition. As the rates could not be raised (making the loans more expensive would defeat the object of the exercise) that meant they had to be made less risky. If the loans were safer then their low interest rate and the required long term commitment would be more acceptable and more investments would be made. However the only body in the financial system that would take the risk of default, without requiring some form of compensation, was the Bank of England and thus ultimately the Treasury.
This was, to put it mildly, not an attractive option to the Directors of the Bank of England, yet they can be considered wildly enthusiastic as compared to the reaction from the Clearing Banks themselves. It was therefore unfortunate for both groups that there was a self-styled 'economic heretic' in No.11, Leo Amery has very little problem with enraging bankers if it would meet his goals of Imperial Unity and strengthening British industry. In a clash of wills between Governor of the Bank and the Chancellor it is the Treasury that tends to get its way, particularly if there was wider support in the government and country, which as we have seen there was. Thus was the British Investment Finance and Industrial Development corporation (BIFID) formed and operational by early the next year, that bifid also meant something split in two was undoubtedly deliberate, as even at birth the corporation would be torn between two almost incompatible objectives. The Bank of England was determined it would not disrupt the existing banking system too seriously, whereas for the government a major disruption was the entire point; if there wasn't a major step change in industrial financing and a closing of the Macmillan Gap there was no point in forming BIFID. The Governor achieved some small victories, BIFID would remain under the aegis of the Bank of England and not the Treasury for instance, but his desire to see the existing clearing banks involved was rejected, the government making it clear they very much saw those banks as part of the problem. The initial funding would instead be from the Bank of England itself and from the various non-bank financial entities who were interested in safe long term assets, pension and assurance funds chief amongst them. The exact extent of the guarantee was somewhat nebulous, the Bank of England investment would take the first loss (should any occur) while any profit not re-invested would be split equally, but beyond that it was more implication that firm commitment; the Bank was not legally obliged to cover losses, but the expectation in the City was that it would ultimately cover them to avoid the reputational damage. Ultimately this proved enough to get the corporation going and, while not every BIFID investment would be a success, the overall portfolio made a healthy return so the implied guarantee was never tested.
Naturally BIFID included investments by British firms within the Empire in its remit, while carefully excluding notionally 'British' firms that merely had a London office and where entirely Empire based. Realising this loophole had been closed, the Canadian government would follow it's own advice and began work on the Industrial Development Bank (IDB), which would be operational in Canada before the end of the decade and, like it's British counter-part, it would be an arm of the Bank of Canada. Australia would in fact never quite get round to starting their own industrial bank, the BIFID remit would prove to be more than sufficient in encouraging British industry to setup subsidiaries in Australia, which was the main objective. By the time Australia had ambitions, and sufficient domestic capital, to go beyond that point industrial development banks had somewhat fallen out of fashion, not least due to the various problems that would engulf BIFID and IDB in their later years as their 'innovations' in securitisation and financial engineering did not develop as they had hoped. Such matters are beyond the timeframe of our work however, it is enough to say that while BIFID would face a considerable challenge from the incumbent clearing banks it would ultimately achieve it's objective and more funding would flow to British industrialists. What should also be noted that the Bank of England directors would feel they 'owed' the clearing banks something for their failure to maintain the status quo and that this marker would be called in sooner than anyone had expected with quite unexpected consequences.
--
Notes:
Some people would have to tempt fate and say industrial finance seemed very interesting and that it would not scare anyone off. Let us see if they are still so confident of those opinions now.
Imperial Conferences really where that bad at breeding new talking shops. So of course the Australian idea about a new agricultural council, when the Empire already had at least one, is OTL from the actual 1937 Imperial Conference. Not mentioned, because it is irrelevant yet amusing, was that the Empire somehow ended up with an Imperial Forestry Institute and an Imperial Forestry Bureau, both based in Oxford with a shared library, seconded staff, shared buildings and so on, but absolutely different things. Let us be clear on that, definitely different things. (Also the Imperial Bureau of Agricultural Parasitology was both a real thing and slightly disturbing sounding).
The Macmillan Gap was indeed a thing, you can find a number of explanations ranging from "Evil bankers oligarchy" through to "It's Lloyd Georges fault". Naturally I prefer that explanation, which is obviously correct.
Australia has bitten off more than it can chew by building an 'entire' Merlin and is slowly realising this, OTL it was in 1938 the Australian tariff board said it would be 'unwise' to try to build an entire car in Australia and aero-engines are much more complicated. Australia (and the southern hemisphere) didn't get an Aluminium smelter until the mid 1950s in OTL and they are not quick or easy things to build. However BIFID will help with the supply chain and Australian aero policy was always madly ambitious so they will go a long way towards their goal before quietly compromising on the really difficult bits. Gold Booms are OTL, it was a busy decade for gold.
Canada did have some interesting ideas on what a bank should do, the IDB is an OTL (if 1944) organisation and the Bank of Canada was in part setup to help funnel money to farmers and industry after the existing Canadian banking system failed to do so in the Depression. Being so dependent on the US Canada had a bad depression in OTL and it's only marginally better here, yes Imperial trade is doing much better, but the US is doing worse and the re-balancing is taking time (and being resisted by Mackenzie King to some extent). Australia never bothered with any sort of local development bank, rhetoric aside Australia has always been happy enough to ride various natural resource crazes which keeps under-cutting any industrial plans.
BIFID is an invention, but one based on a few OTL organisations, mainly IDB and Industrial and Commercial Finance Corporation (ICFC) the British version which had been in planning since 1942 (because the pre-war efforts like Credit for Industry just hadn't worked). ICFC was in many ways a 'modern' venture capitalist, it took equity stakes and provided advice as well as loans. That seemed a bit much for 1930s Britain, but the ideas where there so a toned down version like BIFID seemed reasonable, particularly with someone like Amery as Chancellor. It will not solve every problem of British industry, but it will remove one of the excuses. BIFID will probably get involved in some massive secondary banking scandal/cockup involving securitisation sometime in the 60s, because that is the way of such things, but that is for Pip Generation 6 to worry about. If the last line seems in some way ominous, it is supposed to.
Last edited:
- 5
- 1
- 1
