The Butterfly Effect: A British AAR

Chapter LXII: The Politics of Defence.​

The Parliamentary recess often gives the impression that the British government takes much of the summer off on holiday, that no governing is done between parliament rising in late July and returning for the state opening in October. This is a distinctly false impression for while there are certainly no laws being debated or passing through committee, the work of government continued behind the scenes. Thus it was that in the summer of 1936 the offices of Whitehall were working hard, quite aside from the show piece of political theatre that was the King's Speech to parliament there was the little matter of the Autumn budget to prepare. For our purposes the King's Speech is not especially relevant, thus the doubtlessly fascinating intricacies of the such vital legislation as the Exportation of Horses Act need not detain us and we will proceed to focus on the two main areas of interest; The Chamberlain Report and the Autumn Budget.

The Chamberlain Report started life as a political gesture, an attempt by the new Prime Minister Austen Chamberlain to placate those worried about the costs of the war, rearmament and the general economic strategy being pursued. The fiscally conservative group on the right of the party was just one of the many that Churchill had so studiously ignored, offended or both while in office and thus had to be kept happy, or at the very least quiet. The natural choice for the report therefore was Neville Chamberlain, not because he was Austen's half-brother but because he had retained a significant power base in the very wing of the party the report was aimed at. Though originally given the role of Lord President of the Council as a step towards rehabilitation the office gave Neville access to the very heart of government without the onerous official duties that normally accompanied that privilege. This access, combined with his background as Chancellor, gave an ideal base on which to build a intimate and detailed document from the best information the government had. While the final report would not emerge until the new year, the draft copy circulated in early October would have a significant impact on both the Autumn budget and Conservative economic policy for years to come.


The report mixed credit claiming for past policies, the 'Shadow Factory' scheme for instance had proven itself highly valuable, with acceptance of mistakes, particularly over the role of government intervention during the Depression. While not accepting full blown Keynesian economics, that would remain a step too far for many, the report did mark the grudging acceptance by the Tory right that there was a role for increased state spending. However the report was just as quick to rule out vast swathes of the economy as being 'unsuitable' for such government intervention, N. Chamberlain being particularly concerned that spraying government money around the economy would both ruin the nations finances and stunt the private sector recovery. The report therefore called for spending to be concentrated in sectors where there was no existing market to distort. This idea was leapt on by the service ministries who were quick to point out that defence spending was perfect for the kind of intervention outlined in the report, a conclusion the report's authors were, by their own logic, forced to agree with.

The remainder of the report concerned itself with an industry by industry breakdown of the effects of the war, much of it obvious (heavy industrial firms had done very well) some less so (the 'knock on' benefit of so many workers being hired to fill orders had boosted consumer spending far more than anyone, save perhaps the team around Keynes, had expected) and some surprising (the rail industry had, despite the vast increase in rail freight, made slightly less profit than during peace time). These observations, together with the ideas from the first section of the report, formed the basis of a set of recommendations for on-going economic policy; most significantly for our purposes was continued higher defence spending until the recovery was 'firmly established' and a major re-think of transport policy. The former will be discussed in later chapters, while the latter was focused on preserving a strong and viable rail network without resorting to government subsidies or intervention. The solution, as implemented, saw the repeal of the 'Common Carrier' requirements on the Big Four railway groups in areas where road freight was established and a commitment to maintain 'strategic' rail capacity between the main military bases of the country and the industrial heartlands. The lifting of these restriction would not reverse the inexorable rise of road haulage, indeed their share of freight haulage would grow as the railways axed 'light' freight capacity across the South East, Midlands and North East. It did however save the Big Four millions of pounds almost instantly as they no longer had to maintain a vast freight infrastructure that was only used for the unprofitable runs the road hauliers didn't want. Released from their shackles the railways would finally be able to turn a healthy profit and enter a new golden age, the faster and higher capacity network that would emerge would prove a boon to the country and be of immense strategic value scant years later.


Turning to the second major political event, the budget, the first surprise, not least for the government, was that the financial position was far stronger than had been expected in the immediate aftermath of the war. While this can partly be attributed to the stronger consumer spending noted in the Chamberlain Report the importance of the considerable upswing in exports, particularly by the arms industry, should not be under-estimated. Quite aside from the high profile strategic deals, such as the Handley Page Hampden sales to Sweden, there had been a mass of less publicised, but nevertheless valuable deals done; ranging from the construction of a flotilla of modified G-class destroyers for Greece through to the selling on of dozens of Hawker and Gloster biplanes that Minister for Air Churchill was forcing out of RAF service. The rising tensions in Europe and subsequent acceleration of re-armament programmes across the continent left British manufacturers in a strong position to sell 'war proven' designs to countless smaller nations across the continent, even if the product in question had spent the conflict lying in a storage depot miles from the enemy.

There was, however, one deal that was resolutely un-publicised and was the cause of much anxiety in many quarters - the truly immense arms sales to Monarchist Spain. Ignoring the growing concerns over British involvement in Spain in the first place, the Spanish were paying in their only hard currency, the vast gold reserves of Spain, hence forcing the British government to get involved in the deal. After being transferred from Madrid to Gibraltar, it was the Royal Navy that moved the gold back to the vaults of the Bank of England and the Treasury that then paid the manufacturers in sterling. As a further twist the Treasury was valuing the gold at the government official price of £4.25 an ounce, far below the London market rate of over £7 a ounce. Before the end of the year over 500 tonnes of gold, almost three quarters of the total reserves of Spain, would have been transferred from Madrid to London, amounting to almost £70 million at official rates, or over £110 million at market rates. For comparison the total cost of HMS Ark Royal, from design to final commissioning and including all aircraft, was less than £7 million. It is clear, therefore, that the British government was making a very large, if unofficial, profit from the deal, and that is before considering the incalculable economic benefits of so many large contracts going to the likes of Vickers-Armstrong, Hawker and BSA. In the end it was this immense financial boon that over-rode the concerns over British involvement and drove through the official recognition of Monarchist Spain, so as to put the deal on a (slightly) firmer legal footing.

The upshot of all this was that the government had both the motivation and the finances to continue re-armament and keep defence spending at a far higher level than had seemed possible scant months earlier. While spending did indeed fall considerably from the wartime peak, primarily driven by the massive drop in fuel and supply use, it remained higher in both real and absolute terms than any settlement since the Geedes Axe. The problem therefore was not the availability of funding, but what to spend it on. Attempts to solve this problem would evolve into a vast multi sided squabble between the Treasury, the service ministries, the Ministry for Defence Co-ordination and the Board of Trade. As an added spice many in the armed forces had not finished learning the lessons of the conflict, indeed as we shall see many had learnt entirely the 'wrong' lesson from their wartime experiences.