A Changing Economic Landscape 1918/45 - A Changing Political and Economic Environment 1918 - 79

The 20s

What was the economic legacy of the First World War?

—  Loss of trade –During WW1 British ships were occupied shipping essential war supplies -with 20% being sunk in the process - and could not be used for exports. Economic rivals ( US and Japan) filled the gap left by a decline in British exports, took over British markets. Britain was also unable to trade with countries she was at war with - many of these countries became more self-sufficient, producing goods within the country that they had previously imported from Britain, and continued this practice one war had ended.

—  Value of the pound fell. Britain had been forced to abandon the gold standard in 1914, in order to be able to print enough money to cover the immense costs of the war. This decision resulted in a rise in inflation and a drop in the value of the pound (£1 was valued at $3.19 in 1919),

—  Inflation rose to 25% in 1918 which impacted upon prices.

—  Technological development accelerated in the war – particularly in medicine and transport, radio. Use of machine tools and assembly-line techniques encouraged employment of semi-skilled labour, taking jobs away from skilled workers. Britain fell behind in technological development - Countries like France and Germany saw many of their factories destroyed, were forced to purchase new, more modern machinery, giving them an edge over their British counterparts. Foreign industries to overtake British ones after WW1- by 1918 Germany was producing twice as much steel as Britain

—  Nearly 900,000 men were killed in the First World War – many who made up the British workforce.

What was the pattern of Britain’s economic story during the 1920s?

—  1919-20 saw a short post war boom fuelled by an increase demand for scarce goods caused by the First World War.

—  1920-21 saw a severe recession as unemployment rose to 12% of the working population. The heavy industries, particularly coaling mining, was hit the hardest as prices rose by 25% and wages had failed to keep up with these increases.

—  The main causes of the recession were loss in trade, underinvestment in traditional industries (shipping, mining, steel, iron and textiles) and declining industrial relations.

—  Spending cuts helped to usher in a period of limited recession from 1922 although unemployment remained high averaging at 10%.

—  The Great Depression from 1929 hit Britain hard as trade collapsed and unemployment soared.

Ineffective solutions to economic problems

Interest rates and value of the pound	–         Government set high interest rates to curb inflation and raise value of the pound against other currencies –         However high interest rates curbed economic growth - more expensive for businesses to borrow and invest, people more likely to save then spend –         Britain returned to the gold standard in 1925 –         Key post-war policy decision, taken following the report of the Cunliffe Committee in 1919, restored the pound to its pre-war value of $4.86 in 1925. –         Decision proved to be disastrous for traditional industries. The high exchange rates made British exports more expensive and less competitive, industries such as coal, steel, shipping and textiles had an even harder time selling abroad. –         In contrast the US dollar had become increasingly attractive - Keynes famously argued Sterling was overvalued by 10% compared to the dollar –this, coupled with America’s low interest rates made American exports far more advantageous than British ones, further damaging Britain’s export market.
Tax, spending and balancing the budget	–         To reduce inflation and repay war debts as quickly as possible taxes were raise each year after 1918 from  £18 per capita in 1919 to  £24 per capita in 1922 –         Lloyd George appointed a Commission of National Expenditure under Sir Eric Geddes to find out where savings could be made –         1922 Geddes Axe led to £24 million of cuts in spending on education, pensions, unemployment benefit, housing and health –         Defence cut from  £190 million to  £111 million –         Spending cuts contributed to growing unemployment - unemployment never fell below 1 million during the war years
Protectionism	–         Government policies of ‘protectionism’ introduced duties and limited tariffs on foreign goods in order to protect Britain’s traditional industries, which struggled after WWI. –          These policies may have helped in the short term but in the long term they created a lack of incentive to modernise in order to compete with new foreign traders –         Industries avoided introducing the changes needed to become competitive in the long term, and so failed –         Protectionist policies and tariffs also incited other countries to elect their own ‘tariff walls’ which further limited international trade. –          After WW1 Britain struggled to reclaim dominance of the market -  the volume of British exports in the mid-1920s was only about 75% of its 1913 level - industries which relied on exports suffered –          By 1933 unemployment had reached 60% in shipbuilding areas, and 49% in iron and steel industries – demonstrating how a failure to modernise created the decline in traditional industry. –         Newer industries, such as chemicals and cars, were neglected.

Other things that impacted the economy:

Rise of Trade Unions

o   War had caused a huge growth it trade union membership – between 1915 and 1918 membership rose from 4.3 to 8.3 million –trade unions had far greater power and influence.

o   During the harsh 20’s employers in traditional industries were forced to cut costs – yet attempts at introducing pay cuts or longer working hours were met with harsh resistance from the trade unions

o    In 1926 – the year of the General Strike, there were 323 strikes launched, which led to a total of 162.23 million working days being lost.

o   Trade unions led to a lack of wage flexibility which resulted in employers firing workers in a bid to keep costs down

o    As a result unemployment never fell below 1 million between the two world wars.

o   TUS halted the progress of certain industries, particularly as their foreign competitors had much greater access to cheap manual labour (the US’s influx of immigrants gave it a huge advantage for economic growth). 

The 30s

Remember - Wall St Crash in 1929 impacts much of the 30s

Why are the 1930s referred to as ‘the hungry thirties’?

—  The term ‘the hungry thirties’ refers to the 1930s being a period of depression and high unemployment. This was partly a political term begun by left wing historians in the 1940s wanting to darken the name of the Conservative Party, who they blamed for devastating economic slump of the early 1930s.

—  Modern historians have countered this view arguing that it is too simplistic. They argue that there was no single trend that identified that most people suffered a decline in living standards in this period.

—  A commonly held view now is that the impact of the depression on Britain was uneven

—  The areas that were hit the hardest were those that centred on the staple industries, such as coal in the north and in south Wales, textiles in Yorkshire and shipbuilding in Scotland and the Tyne – in the town of Jarrow in the north-east of England every man was made redundant after the coal mine, steel works and Palmer’s shipyard closed - Jarrow March in 1936

—  Unemployment rose to 2.5 million (25% of the workforce) in 1933, but it was higher in the north of Britain

—  The depression also lowered productivity for the whole country, and so demand for products such as coal and steel fell – with coal use in the UK dropping from 180 million tonnes in 1929 to 155 million tonnes in 1935

—  However, while these areas suffered from high unemployment, areas such as London and the south east remained prosperous as consumer industries enjoyed boomed.

—  This encouraged the two nations view of poor and rich and north and south.

What was the pound devalued in 1931?

—  The Great Depression led to a fall in exports by 50% and unemployment rising to 2.5 million in 1933.

—  The government cut spending and maintained high interest rates to preserve the value of the pound, which was still attached to the Gold Standard.

—  This policy divided the Labour government (Labour were particularly against the 10% cuts in unemployment benefit) , who resigned which led to the formation of the National Government in 1931.

—  12 000 Soldiers mutiny in Scotland 1931 in opposition to pay cuts - leads to change in policy

—  The National Government removed the pound from the Gold Standard and devalued the pound; the pound depreciated from $4.80 to $3.40

What was the impact of the pound being removed from the Gold Standard in 1931?

—  The removal of the pound from the Gold Standard allowed for a quicker recovery from the depression compared with other countries.

—  The key features of this recovery are –

—  Unemployment fell from 17% to 8.5% between 1932 and 1937.

—  Interest rates were cut from 6% to 2% leading to greater borrowing. This policy was called ‘Cheap Money’.

—  Rate of long term government borrowing cut but 1.5% slashing the cost of government debt repayment

—  Greater borrowing triggered a boom in mortgages and house building.

—  Exports were cheaper as prices of British goods fell by 45% and sales went up by 28%.

—  Industrial production rose by 46%.

The 40s

What was the impact of the Second World War on the direction of economic policy?

—  Churchill expanded the government’s role in managing the war economy and created a series of ministries which had a specific role in economic management

—  These ministries had extensive powers of economic management.

—  The government also controlled prices through controlling production levels.

—  The National Government transformed Britain into a managed economy; rationing and conscription introduced immediately, Registration for employment made compulsory in 1941; 8.5 million work orders issued,  By 1945 1/3 of citizens involved in war work

—  The growth of state intervention led to a huge increase in war production and military spending. Between 1941 and 1945, over half the government spending was on military.

—  Even after the war, military spending continued to be a priority for the government (who wanted Britain to be in possession of her own atomic bomb) By 1951 over 10% of GDP was spent on defence- 30% of total Government spending

How important was economic aid to the British economy during the 1940s?

—  By December 1940, Britain’s cash reserves were spent.

—  Churchill was able to secure the Lend-Lease Agreement with the USA. This allowed the USA to supply Britain with what it needed and the debt would be paid after the war.

—  This was supported by supplies from America being brought to Britain by ‘Liberty Ships’.

—  Immediately after the war, John Maynard Keynes negotiated a £2.2 billion loan from the US and Canada - this was nowhere near enough

—  Britain was also a recipient of £6 billion of Marshall Aid from 1948.

What was the impact of austerity economic measures in the 1940s?

—  In 1945, Britain had accumulated £4 billion worth of debt to the USA and with an additional loan in 1945, it would cost Britain £70 million a day just to finance the debt.

—  There was a £700 million deficit

—  The Attlee Government embarked upon a series of austerity measures – which was a programme of cuts in government spending, controlling private spending and rationing of goods.

—  This was unpopular with the British public – the most outraged were the trade unions, who were requested to accept a wage freeze or face legal pay restraints.

—  However, austerity measures did not work alone. With the harsh winter of 1947 led to an economic crisis which hit industrial production and Britain having to pay for goods in dollars and not pounds, making imports more expensive, Attlee was forced to devalue to pound in 1949.

What was the impact of nationalisation of key industries in the 1940s?

—  The nationalisation of key industries was a centrepiece of Attlee’s economic policy.

—  The aim of nationalisation was to create full employment and to ensure the effective management of the key industries, which had been for too long inefficient.

—  By 1950 10% of the work force were employed in nationalised industries

—  The nationalisation of coal, the Bank of England, transport infrastructure, electricity, gas, iron and steel cost the government over £2 billion in buying out the previous owners of the key industries.

—  This meant that the government had little money left over to invest in the key industries in modernising them. Eventually, this left them lagging behind international competitors.