From Empire to Europe: The Decline and Revival of British Industry Since the Second World War

Technical progress was helped by close co-operation with the metallurgy department of Sheffield University, one of the new civic universities which were set up in the closing decades of the nineteenth century to serve the needs of local industry.

The German and American steel industries were younger and growing faster, and more of their investment took place on ‘greenfield’ sites, whereas expansion in Britain usually took the form of piecemeal additions to existing plants. They were also more likely to integrate the three main manufacturing operations – iron-making, steel-making and steel-rolling – on the same site. Partly for this reason, the leading companies such as Krupp and Thyssen in Germany and Carnegie in the US were bigger than their British counterparts. In the US, though not in Germany, competition law had the paradoxical effect of encouraging the creation of larger companies. The Sherman Antitrust Act of 1890, by making cartels illegal, stimulated a wave of mergers which transformed the structure of several major industries. In steel Carnegie and several other companies came together in 1901 to form United States Steel Corporation, accounting for two-thirds of the industry’s capacity. Most British steel-makers during this period were small and family-owned, and the few mergers which took place generally left the founding families in control. But, as the Sheffield example shows, small size and family ownership did not imply technical or managerial backwardness. Moreover, the nature of the British market, with its requirement for a variety of different sizes and shapes of steel, did not lend itself to giant plants and companies on the US model.

Another aspect of management which some historians see as a source of weakness was the way in which production was organised within the works. Like the textile manufacturers and the shipbuilders, the early British ironmasters delegated to experienced workers responsibility for part of the production process in return for a lump sum based on output. The contractors were the first to organise a strong trade union – the Ironworkers Union, formed in 1868.

The contract system was dying out by the end of the nineteenth century, partly because of opposition from a rival union, the Smelters, which represented the underhands (the two unions came together in 1917 to form the Iron and Steel Trades Confederation). But the management of production through self-supervising teams remained a characteristic feature of British steel-making. A two-tier wage structure was negotiated, consisting of a basic wage, linked by a sliding scale to average steel prices, and a tonnage bonus related to the output of individual plants. The bonus enabled the production workers to benefit directly from improvements in productivity, and they became one of the highest paid groups in the country.

These arrangements did not include craftsmen engaged on maintenance duties, or unskilled workers, who were paid a fixed daily wage.

Employers liked the sliding scale because it enabled them to reduce wages during business downturns, while the tonnage bonus varied according to each company’s ability to pay. The outcome was a stable relationship which helped to make steel an unusually strike-free industry; both sides had a strong interest in maintaining continuity of production. On the other hand, the tonnage bonus, which varied according to the efficiency of each plant, may have made it easier for high-cost producers to survive; if the union had pressed for the equalisation of wages across the industry, obsolete plant might have been closed down more quickly.

A more important consequence in the long run was the weak control which employers exercised over the deployment of labour. The seniority system for the process workers was administered by the trade unions, and when new equipment was introduced it was customary to seek the union’s prior agreement to manning levels and pay rates.

These practices may have been storing up trouble for the future, but they were not unreformable, and the labour relations system which took shape in iron and steel between 1850 and 1914 was not a block on technical progress. A German historian has concluded that if British steel-makers are to be criticised during this period, it is not for managerial shortcomings, but for their failure to press the government for a firmer response to the protectionist policies of their competitors.

The Inter-war Years

In the years leading up to the First World War the British steel industry was exporting some 40 per cent of its production, and its prosperity was linked to the continued expansion of world trade. In the aftermath of the war prospects for demand at home and abroad looked good, and competition from the Continent seemed likely be less severe than before the war. The return of Lorraine to France under the terms of the Versailles treaty deprived the German steel industry of most of its ore mines and part of its steel-making capacity; it would take several years before production and exports got back to pre-war levels. But the brief post-war boom collapsed in 1921, and the British steel industry was plunged into one of the worst recessions it had ever experienced. Moreover, at a time when protectionist pressures were spreading around the world, Britain was still a free-trading country, and a natural outlet for steel which Continental and American producers could not sell at home.

By the mid-1920s it was clear that steel-making capacity in Britain was far in excess of likely demand. Rationalisation, involving the closure of smaller works and the concentration of production in more modern facilities, was widely agreed to be necessary. A few amalgamations had already taken place – the most important was the creation of United Steel Companies in 1920, bringing together a group of firms based in Sheffield, Lincolnshire and Workington – and merger activity quickened in the late 1920s as the outlook for demand worsened. As in the case of cotton textiles, Montagu Norman, governor of the Bank of England, took an active interest in the reorganisation of the steel industry, partly because he was anxious to avoid direct intervention by the government.

In 1927 the Bank helped to set up English Steel Corporation, which pooled the steel-making interests of the three major armaments manufacturers, Vickers, Armstrong-Whitworth and Cammell Laird. Several more ambitious proposals were canvassed, but the companies concerned were reluctant to give up their independence. In the north-east, for example, the logic of combining Dorman Long with its near neighbour on the River Tees, South Durham, was accepted by both sides, but the financial complexity of the proposed merger, together with the difficulty of reconciling a large number of sectional interests, proved an insuperable obstacle.

The issue of rationalisation was closely bound up with protection. The steel-makers argued that there was no incentive to modernise and re-equip as long as other countries were free to dump their surplus steel in Britain. This case was considered in 1929 by a government committee chaired by Lord Sankey. The committee agreed that rationalisation was needed, but rejected protection on the grounds that it would keep inefficient producers alive; the pressure on firms to participate in mergers would be reduced if a tariff was introduced.

However, by the time the committee reported, the world depression was deepening and demands for protection were becoming irresistible. A general tariff of 10 per cent was introduced in 1932, but steel was deemed to be a special case, justifying a higher duty of 33⅓ per cent.

The government hoped that the introduction of the tariff would produce a more stable environment in which industries which were suffering from excess capacity could reorganise themselves. A committee of civil servants, the Import Duties Advisory Committee (IDAC), was set up to supervise the industries concerned and to ensure that rationalisation took place. This was a new departure in government policy, a shift from Victorian laissez-faire to regulated competition based on a partnership between the state and industry. To make the partnership work, stronger trade associations were needed to exert tighter control over individual firms and to act as interlocutors with the government. The British Iron and Steel Federation was formed in 1934 to take over some of the authority previously exercised by regional trade associations. One of its tasks was to operate a price maintenance scheme under the supervision of IDAC. In 1935 the government encouraged the Federation to join the International Steel Cartel, which had been formed by the leading Continental steel-makers two years earlier.

Part of the purpose of these arrangements was to facilitate rationalisation, but neither the Federation nor IDAC had the power to enforce mergers, and only limited progress was made. In Scotland Colvilles acquired several smaller firms and by the end of the 1930s this company controlled about 80 per cent of the region’s steel-making capacity.

There was also some consolidation in the South Wales tinplate trade under the leadership of William Firth, chairman of the largest producer, Richard Thomas. But these moves fell short of the sweeping reorganisation which many observers felt was necessary, and by the time of the Second World War the industry was only slightly less fragmented than it had been twenty years earlier. The three largest firms – United Steel, Colvilles and Dorman Long – each accounted for 12–13 per cent of the industry’s production.

The slow pace of rationalisation appeared to confirm the views of those who had warned that the reduction of competition, through tariffs and cartels, would preserve the status quo. But the steel-makers were not necessarily wrong to take a cautious view of what mergers could achieve. To have embarked on large-scale amalgamations in the depths of the Depression would have been extremely risky; it was impossible to predict the revival of demand that occurred, mainly because of rearmament, in the second half of the 1930s.

Moreover, the industry’s inter-war performance cannot be judged simply on the basis of how many mergers took place. The most encouraging development was the willingness of several firms to launch ambitious investment projects. Stewarts & Lloyds, the steel tube manufacturers, built a large integrated works at Corby in Northamptonshire to exploit the East Midlands ore fields. Richard Thomas installed Britain’s first continuous wide strip mill at Ebbw Vale in South Wales. This was a new process which had been developed in the US to produce sheet steel on a large scale, principally for cars, domestic appliances and the canning industry. The British motor industry grew rapidly during the 1920s, partially offsetting the decline in traditional steel-using industries such as shipbuilding, and William Firth believed there was sufficient demand to support at least one wide strip mill; his persistence eventually overcame the opposition of other steel-makers to the project.

Work on a second strip mill, at John Summers’ Shotton works in North Wales, began in 1939.

These projects contributed to a partial modernisation of the industry. There was modernisation, too, in management and organisation. Although many of the leading firms continued to be controlled by the owning families, professional managers were playing a larger role. For example, Robert Hilton, appointed managing director of United Steel in 1928, was a capable engineer who reorganised what had previously been a loosely run group, and under his direction United Steel became the best-managed firm in the industry; Hilton had previously been in charge of Metropolitan Vickers, one of the leading electrical equipment manufacturers. Another outstanding manager was Allan Macdiarmid, who joined Stewarts & Lloyds as a chartered accountant in 1909, was appointed company secretary, and worked his way up to become chairman. He steered Stewarts & Lloyds into a dominant position in the steel tube trade, supported by low-cost steel-making at Corby.

Macdiarmid was one of several ex-accountants who rose to senior positions in industry during this period.

Meanwhile the German steel industry, which had been a formidable rival in export markets before the war, faced great difficulties in the inter-war years. To make up for the loss of Lorraine, a large capital spending programme was set in train in the Ruhr, but the expansion went too far, and by the mid-1920s action was needed to reduce surplus capacity. In 1926 twelve firms came together to form a giant steel trust, Vereinigte Stahlwerke (Vestag), controlling about half the industry’s production. Thyssen was the prime mover behind this enterprise, which was modelled on United States Steel Corporation and partly financed by American capital.

The aim was to cut out duplication and close down obsolete plant. But, although some rationalisation was carried out after the merger, the concentration of the industry did little to improve its competitiveness. With fewer firms to keep in line, cartels were easier to enforce. The absence of price competition, together with continuing protection against imports, weakened the incentive for firms to specialise in the products where they had the lowest costs. When demand recovered in the second half of the 1930s, the priority was to maximise production from existing plant. Of the 418 rolling mills which were operating in Germany at the end of the decade, 300 had been built before the First World War; only one wide strip mill was built, at Dinslaken in the Ruhr.

TABLE 6.2 Steel production 1913–39

The inter-war period checked the advance of the German steel industry and allowed British steel-makers to recover some of the ground they had lost before 1914. Although the average size of German plants was slightly larger than in Britain, there was no great difference between the two industries in terms of overall productivity.

The productivity leader, by a wide margin, was the US. Not only was the US the largest steel-making nation (TABLE 6.2), with opportunities for economies of scale which were not available in Europe, but American steel-makers also benefited from the presence of a dynamic, technically demanding and fast-growing customer, the motor industry. By the end of the 1930s there were twenty-eight continuous wide strip mills in operation in the US.

To get closer to the American level of efficiency, European steel-makers needed a market as large and competitive as that of the US. As it was, the proliferation of cartels and tariffs limited the scope for intra-European trade in steel, and made the larger European industries more dependent on their domestic markets. In the British case, thanks to the system of imperial preference introduced after the Ottawa conference in 1932, the steel-makers had access to partially protected Empire and Commonwealth markets; this provided a useful addition to demand, although exports amounted to only 12 per cent of production during the 1930s. The British steel industry was largely insulated from international competition, but this was also true of Germany, where there was a much longer tradition of tariffs and cartels.

Steel is not an industry where the legacy of the past imposed a uniquely heavy burden on British manufacturers. All the European steel-making countries would have an equal opportunity to narrow the productivity gap with the US when the external environment became more favourable. How quickly they did so would depend, not on history, but on the policies adopted by companies and governments after 1945.

1945–60: The Post-war Boom

For the first fifteen years after the Second World War European steel-makers enjoyed a period of unprecedented prosperity in which demand for steel persistently outran supply. The priorities were to tackle the backlog of underinvestment which had been left by the war, and to raise productivity closer to the US level. With the rapid growth in demand for cars, there was greater scope for introducing the wide strip mills which had been pioneered in the US. An additional stimulus to investment in the second half of the 1950s was the invention of a new steel-making process, the basic oxygen furnace, which used less fuel, less capital and less labour than the older steel-making techniques. Basic oxygen steel-making was well suited for large-scale production, and its introduction hastened the closure of smaller plants.

Of the leading European steel-making nations, Britain seemed at the end of the war best placed to exploit these opportunities. The industry had suffered little damage from bombing; the new plants built in the 1930s were in good working order; and detailed planning for the post-war development of the industry was under way. In Germany the revival of steel production was delayed by political and economic uncertainty; it was not until the early 1950s that the structure and ownership of the steel industry in what had become West Germany were settled. The French steel-makers were quicker to get back into full production, but France had been a laggard in this field before the war; a notoriously conservative industry had to be shaken out of its old ways.

When Winston Churchill’s coalition government began examining the future of the steel industry in 1943, a central issue was whether the regulatory arrangements which had been put in place in the 1930s should be retained. Some economists in Whitehall argued that cartels and protection were a recipe for inefficiency, and that competition should be given freer rein. But this was a minority view. The advantages of co-operation between industry and government had been reinforced by the war. Central planning worked well, and the British Iron and Steel Federation acquired more authority over member firms. The main debate was between those, including the leaders of the Federation, who favoured self-regulation under government supervision, and those who wanted a stronger role for the government.

The Labour Party’s position – and that of the principal trade union, the Iron and Steel Trades Confederation – was that the industry should be brought into public ownership. A joint study carried out by the Board of Trade and the Ministry of Supply at the end of 1944 accepted the Federation’s view that the industry should be protected against imports for at least the first five years after the war and that price controls should be retained. In reaching this conclusion the civil servants were impressed by the apparent eagerness of the industry’s leaders to press ahead quickly with modernisation. The Federation was then asked to prepare a development plan, which was presented to the newly elected Labour government at the end of 1945 and approved a few months later.

The plan called for an expenditure of £168m over a seven-year period to renew some 40 per cent of the industry’s capacity.

A third strip mill, in addition to the existing mills at Ebbw Vale and Shotton, was to be built at Port Talbot in South Wales by the newly formed Steel Company of Wales, in which Richard Thomas & Baldwins

and several other sheet and tinplate producers were shareholders. Two other integrated works were proposed for the East Midlands and Scotland, and several of the rationalisation schemes which had been left outstanding from the 1930s were revived. The plan was put together by the Federation out of projects submitted by its member companies. However, the companies were not necessarily committed to the projects contained in the plan. Some of the rationalisation proposals involved difficult negotiations between long-standing local rivals. Moreover, steel was in short supply, and the quickest way to raise output was to patch and mend existing plant.

The Federation had no powers of compulsion, and it could not prevent investment from being spread over a larger number of sites than had been envisaged in the plan.

Meanwhile the industry was engaged in a political battle over public ownership. Because of the complexity of steel nationalisation, the government excluded it from the first wave of nationalisation measures which covered coal, gas, electricity and the railways. As an interim measure an Iron and Steel Board was set up in 1946 to advise the government on the progress of the development plan, working closely with the Federation. Early in 1947, when the nationalisation bill was about to be put before Parliament, the Federation suggested a compromise, whereby the Board would be strengthened and given the power to acquire shares in individual steel companies. Some senior members of the Cabinet had been uneasy about steel nationalisation from the start, and they welcomed the Federation’s proposal as a way of ensuring effective state control without the cost of a full-scale take-over. However, pressure from the left of the party, which regarded steel nationalisation as a test of the government’s commitment to socialism, proved too strong for any halfway house to be acceptable.

The nationalisation bill, after lengthy delays in the House of Lords, was enacted in 1949. Implementation was delayed until after the 1950 election, which Labour won with a much reduced majority, and the Iron and Steel Corporation of Great Britain began operations early in 1951. The chairman, Steven Hardie (former chairman of the British Oxygen Company), intended to reorganise the industry into seven regional groups, but the life of the Corporation was too short for any such plan to be put into effect.

Within less than a year another election was held, which the Conservatives won, and they promptly set about denationalising the industry.

The political battle over nationalisation was fought with much passion, but there were fewer differences between the parties than the rhetoric suggested. Both sides accepted the steel-makers’ argument that steel was not a normal industry; with its large, capital-intensive plants, and its vulnerability to ruinous price competition when demand was weak, some form of regulation was thought to be unavoidable. The issue was whether regulation would be more effective under public or private ownership. Thus in 1950, when Britain was invited to join the European Coal and Steel Community (ECSC), the idea of exposing steel to competition in a wider European market held no appeal for the government.

The steel-makers had no interest in Ruhr coking coal or Lorraine iron ore, and most of their export trade was with the Commonwealth; closer links with Europe were at best irrelevant and at worst disruptive. When another opportunity for closer association with the ECSC came up in 1954, the Conservative government’s position was much the same as that of its Labour predecessor.

The return of the steel companies to private ownership began in 1953 and was largely complete by 1957.

The only major producer left in the public sector was Richard Thomas & Baldwins; this firm was planning a large new steelworks and its shares were not easily saleable. Denationalisation did not involve any significant changes in the structure of the industry, although two small plants were bought by a newcomer to steel-making – Tube Investments, an engineering group – and the Steel Company of Wales was detached from its original shareholders as an independent quoted company. The Conservatives set up a new Iron and Steel Board to control prices and monitor the capital spending programme. The Board set maximum prices on a selected range of products, mainly semi-finished steel; price-fixing agreements ensured that these were normally the prices charged. On capital investment, the Board’s prior approval was required for schemes costing more than £100,000, but it could not force companies to do things which they did not want to do.

This controlled environment, together with the seller’s market for steel which prevailed for most of the 1950s, did nothing to encourage radical change in the way the industry was run. The focus was on increasing production rather than reducing costs. The patch-and-mend policy which had been adopted by several firms in the early post-war years meant that a number of older, poorly located plants had been expanded, and less rationalisation took place than had been envisaged in the Federation’s 1946 development plan. Everyone was aware that productivity in British steel-making fell far short of the US level, and this was confirmed in 1952 when a team of managers and employees visited American steel companies under the auspices of the Anglo-American Council on Productivity.

Their report showed that output per man was between two and three times higher than in Britain, mainly because the average size of plant was larger. While recognising that the smaller domestic market imposed limits on how far British steel-makers could go in the American direction, the team set down minimum sizes for blast furnaces and steel-making equipment to guide future investment decisions. But to put these recommendations into practice would require the closure of smaller plants, many of which had been partially modernised since 1945 and were making money for their owners. There was no incentive for these firms to abide by the productivity team’s guidelines.

The American advantage derived not just from larger plants, but also from lower manning levels. When Steel Company of Wales managers visited Inland Steel in Chicago in 1955, they saw ‘many instances of one man doing what our trade unions would require three to do, and each craftsman assigned to departmental maintenance was able to turn his hands to fitting work, electrical repairs, welding and so on as required’.

But the chairman of the company declined to act on their report for fear of opposition from the trade unions. This was not because the steel unions were especially militant. On the contrary, the stability which had characterised the industry’s labour relations since the nineteenth century continued throughout the Second World War and into the 1950s. But it was a stability based on a privileged position for the production workers’ union, the Iron and Steel Trades Confederation. Other unions, representing craftsmen, blastfurnacemen and unskilled workers, resented the ISTC’s high wages, and the employers had no wish to exacerbate these tensions. As long as they could sell all the steel they could make, it was better to leave the status quo on the shop floor undisturbed. Booming demand and persistent labour shortages put the unions in a strong bargaining position, and the employers were willing to make concessions on pay and manning levels in order to keep production going. The Port Talbot strip mill, in particular, which began full production in 1951, was notoriously overmanned; it was regarded by the unions as ‘a treasure island with a permanently filled pot of gold’.

The political climate of the 1950s did not favour confrontation with the unions. The Conservative governments which held office from 1951 to 1964 attached a high priority to full employment and social peace. Ministers were particularly concerned with the so-called depressed areas, which had suffered badly from high unemployment in the inter-war years. When plans for a fourth strip mill were being considered in 1957, a choice had to be made between two rival schemes, one from Colvilles in Scotland and the other from Richard Thomas & Baldwins in South Wales. The government was directly involved, partly because of regional policy considerations, partly because it was being asked to provide part of the finance. Richard Thomas was still state-owned, and the project was too big for Colvilles to finance entirely out of its own resources. The outcome was a Solomon-like judgement by Harold Macmillan, the Prime Minister, to split the project between Ravenscraig, adjacent to Colvilles’ existing works, and a coastal site at Llanwern, near Newport, in South Wales. The Ravenscraig mill was linked to the planned development of steel-using industries in Scotland, including a car assembly plant.