Causes of the Depression in Britain

  • Created by: Pip Dan
  • Created on: 20-09-17 15:14

The UK economy in the 1920s

In the 1920s, the UK economy struggled with low growth, high unemployment and deflation. This was due to factors such as:

  • A decision to return to the gold standard in 1925, at a rate which many believe was 10-14% overvalued. This overvaluation of Sterling reduced demand for exports, leading to lower economic growth. Many heavy industries, such as steel and coal become less competitive in this period.
  • Deflation. The overvaluation of Sterling and relatively high real interest rates contributed to periods of falling prices. This deflation increased the burden of debt and reduced spending.
  • Tight fiscal policy. In the aftermath of the First World War, UK debt reached up to 180% of GDP. To reduce debt to GDP in a period of deflation was difficult and required high primary budget surpluses. This required strict budgets, but also because of deflation and low GDP growth, it proved very difficult to reduce debt to GDP ratios.

The Causes of Depression in Britain

  • Problems with traditional industry - Before the Great War, Britain’s prosperity had depended on the sale of heavy industrial goods such as coal and steel. However, at the end of the war, these older traditional industries entered a period of decline. Rising costs in production, obsolete methods and a failure to invest in new technology and machinery contributed to the decline in these traditional industries. There was a fall in demand for British goods and increased competition from abroad particularly from the USA and Germany. The more expensive British goods could not compete with cheaper imports. To make matters worse, Britain’s traditional pre-war export markets (countries that represented the core of the economic strength of the Empire such as Australia, Canada and New Zealand) were no longer prepared to buy British. They bought US steel, German coal and Indian cotton instead. This brought to an end the so-called ‘golden age’ of Welsh and British heavy industry. When the worldwide economic Depression arrived in the early 1930s, Britain’s old


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