1b: Responding to economic challenges: Post-war boom, crisis and recovery, 1918-39



  • Britain was economically damaged at the end of WW1 due to several factors:
  • Gov hadn't expected the war to last so long & command so many resources
  • America's banks on Wall Street had loaned Britain large sums of money for the war
  • Industries had been forced to switch to war production instead of supplying export markets
  • By 1918 Britain had lost over 750,000 men, many of whom were essential to its economic output.
  • Total financial cost of the war was £3.25bn
  • Britain continued to import the same pre-war level of goods from abroad, but the decline in exports meant the country experienced a negative balance of payments throughout the 1920s.
  • In 1920, Britain's total debt = £8bn.
  • Standard rate of income tax ↑ from 5% in 1908 to 25% in 1924 - necessary to repay debts.
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Post-war boom, 1918-20

  • Throughout 1919 consumers & businesses spent their savings on luxury items that had been rationed during the war e.g. coffee, soap, clothes, cigarettes.
  • There was a huge speculative boom as businesses issued new shares for traders, investors & other businesses to buy & more money poured into the London stock market than ever before in British history - total amount of new shares ↑ from £65m in 1918 to £384m in 1920.
  • Investors were keen to buy British shipyards, cotton mills & coal mines, but these industries had become outdated & had received little investment throughout the war, making them uncompetitive - they also had new competitors in USA, Japan & South America.
  • In 1919 there was a global surplus of ships.
  • British wartime industries still in the process of returning to civilian usage couldn't keep up w/ the level of demand  goods in short supply became excessively expensive & as a result demand declined & the boom ended

Speculative boom - boom in investment in the hope that the economy will grow but not based on actual evidence.

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Recession, 1920-21

  • By 1921 2m workers were unemployed & cost of living had  by 25% between 1918-20.
  • Deflation - Gov cut spending by 75% between 1918-20 & Bank of England raised its interest rate to 7%, meaning it was expensive to borrow money - drained available money for spending from the economy. Bank & gov took these measures to try to repay Britain's wartime debts but by the end of the decade, debt had risen from 120% of GDP to 160%.
  • Loss of export trade - Global economy no longer dominated by Britain after the war - several new foreign manufacturing & financial competitors had taken advantage of the disruption to British trade during the war e.g. Japan began to supply India & South East Asia w/ cotton & silk during WW1 → textile industry in northwest declined.
  • Underinvestment - Output from the steel industry in the interwar years was lower than that of British rivals - by 1920 a growing no. of British manufacturers were importing American steel because of its superior quality & price & by 1937 British steel foundries were producing 83,000 tonnes per year, but America was producing 210,000 tonnes.
  • Industrial relations - to prevent a general strike in 1919 David Lloyd George had bought off British workers in the main industries (coal, rail, docks) with generous pay & working hours. These workers (many former soldiers) were unwilling to lose these conditions when times became tough & the creation of an 8-hour working day → 13% decrease in working hours but no increase in productivity. Wage rates also stayed high, meaning products remained overpriced & uncompetitive.
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Attempts to solve economic problems, 1921-24

  • Lloyd George was anxious to appease MC voters who were experiencing financial hardship & wanted to see tax cuts & less gov spending → he adopted a policy of spending cuts known as retrenchment.
  • 1921 - Sir Eric Geddes appointed to implement greater cuts in public expenditure as high taxes were blamed on high spending so Lloyd George hoped tax cuts would stimulate the economy. Geddes recommended £87m of cuts in the 1922-23 budget - most of these came from the military budget but the health, welfare & housing budgets were reduced (£205.8m in 1920-21 → £182.1m in 1922-23).
  • Many MPs began to consider introducing tariffs to protect British industry & prevent futher increases in unemployment however Lloyd George had always believed in free trade & had opposed tariffs - when he left office in 1922 some Conservative MPs sought an election victory that would give them a mandate to impose tariffs on imports & protect industry, which divided the party & led to the establishment of the first Labour gov.
  • When MacDonald became PM he was unable to make any real improvement to Britain's economic fortunes - he lacked a parliamentary majority so was unable to increase spending & taxation to help revive the economy or create jobs, but he was also unwilling to do this as he wanted to present Labour as a moderate party, not a party of radical socialist ideas.
  • Between 1921-24 unemployment had declined from 12% to 6.5% but started to climb again throughout MacDonald's year in office - however inflation fell from 15% in 1920 to <1% in 1924 because spending had collapsed due to unemployment.
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Gold Standard

  • The war had led to the suspension of the Gold Standard but Churchill reintroduced it in his 1925 budget because the £ was decreasing in value, which was bad for British prestige, & he believed that a competitive economy could not be built by the gov.
  • Exchange rate in 1925 was £1 to $4.85 - interest rates had to be kept high to make the £ attractive to foreign investors, however this made borrowing expensive so businesses found it more difficult to expand and take on new workers.
  • Many businesses wanted to come off the Gold Standard to make exports cheaper so they could compete w/ the cheaper imports coming into the country - the higher costs of British exports were offset by employers through reducing wages or moving workers on to short-hour contracts, meaning many people in paid employment had almost as much financial hardship as the unemployed.
  • Sept 1931 - Bank of England forced to concede that it could no longer keep the £ in the Gold Standard as interest rates were at 8% & would have to dramatically increase in order to prop up the value of the £ - that month the £ was withdrawn from the Gold Standard & devalue → enabled the economy to recover more quickly from the depression than many other countries.
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Depression, 1929-34

  • Oct 1929 - stock market crash on Wall Street in USA sent shock waves through the US economy, resulting in economic depression - the USA had replaced Britain as the world's largest importer of overseas goods & the financial crisis had consequences for nearly every other country in the world - global trade contracted by 66% over the next 5 years & Britain's exports declined by 50%.
  • Exports were worth 1/3 of Britain's GNP & the collapse in trade was catastrophic for several key industries e.g. coal; dock work; cotton; iron & steel; ship building.
  • Shops & markets where miners, dock & mill workers spent their wages were also seriously affected & unemployment leapt to 2.5m in 1930 (as opposed to 1m in 1929) - this put additional pressures on the gov as tax revenue declined but the no. of people applying for financial assistance increased rapidly.
  • 1931 - British economy shrank by nearly 5% but the gov's main priority was keeping the £ in the Gold Standard system & supporting its value through spending cuts & high interest rates.
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Labour government's response to depression

  • Britain's huge debts & rising unemployment led to a debate within the new Labour gov - Philip Snowden believed unemployment relief should come from taxing the wealthy and from corporate profits however as these profits slumped & private, wealthy individuals w/ money were anxious to protect/conceal it, the cost of providing for the unemployed became unsustainable.
  • John Maynard Keynes suggested gov spending on public works (e.g. new roads) but Snowden refused as he knew that bankers in NY & London had little patience for further spending as the value of British gov bonds they had purchased during the war would decrease.
  • Only part of the economy the gov invested & created new jobs in during the depression was the defence industry.
  • Summer of 1931 - rumours that the forthcoming budgets would be unbalanced → banks in America engaged in panic selling of the £, which slumped in value.
  • Gov proposed spending cuts to reassure financiers their investments were safe - main measure being the introduction of a 10% cut in employment assistance, which would keep the value of the £ stable but caused hardship for many of Britain's poorest.
  • Threat of this cut split the Labour party & the gov resigned on 24 August 1931.
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National Government's response to depression

  • NG cut public sector workers' pay by 10% & introduced the means test for unemployment assistance.
  • 1934 Special Areas Act - identified Tyneside, South Wales, West Cumberland & Scotland as regions in need of direct gov assistance, but only a little investment came to them.
  • A new steel works in Ebbw Vale brought some jobs to the depressed South Wales valleys however it was not enough - King Edward VIII visited Dowlais in Wales in 1936 & said that "something must be done".
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Hunger marches

  • 1921 - Communist Party of Great Britain formed National Unemployed Workers' Movement - organisation was boycotted by Labour because of their links with communists & organised series of marches throughout the 1930s to protest the means test.
  • Protestors were unemployed men from depressed regions of Britain who walked to London - most famous was the Jarrow Crusade from Tyneside in 1936.
  • The northeast felt particularly forgotten & ignored by the wealthier southeast & London, & the marchers sought to bring the attention of the gov to the scale of the deprivation & poverty of the region.
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Recovery, 1934-39

  • Depression did not last as long in Britain as in other countries - on average between 1932-37:
  • Real incomes rose by 19%
  • Industrial production rose by 46%
  • GNP rose by 23%
  • Exports increased by 28%
  • Unemployment fell from 17% to 8.5%
  • Economic growth averaged 4% a year between 1934-37 as the removal of Britain from the Gold Standard enabled the following economic measures:
  • Cut in interest rates - borrowing became cheaper which enabled more spending & job creation, as well as making it less attractive to save money so people investing their wealth bought property instead, fuelling a housing boom. Total value of mortgages taken out in    1930 = £316m, 1937 = £636m.
  • Gov able to allow a degree of inflation by end of the decade - instead of trying to completely prevent inflation, the NG stimulated spending which let prices rise slightly e.g. spent money on road building which in turn stimulated the car industry.
  • Devaluation of the £ - made exports cheaper & more competitive.
  • Banks became more willing to spend again.
  • NG stimulated economic growth by restructuring British war debts, ensuring they cost the country 25% of its tax revenue as opposed to 40%.
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