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Great Depression in the United Kingdom

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The United Kingdom economy had been severely damaged by World War 1 by serious human losses, to which were added the losses of many of its overseas markets and many of its overseas assets. Recovery was interrupted by a severe post-war depression and - after rejoining the gold standard in 1925 at its pe-war parity with the dollar - by an overvalued currency and a struggle to resist massive gold outflows to the United States. The economy suffered a sharp "slump" (the term used in Britain to denote its share of the great depression) between 1929 and 1931, and the government was then forced by further gold outflows, to leave the gold standard - after which the economy showed a steady recovery.

Post-war recovery, 1919-24

Economic policy in the aftermath of the war was directed mainly at the restoration of a balanced budget and a return to the pre-war gold standard. There had been large deficits during the war with less than half of 1918 spending paid for from tax receipts. In the two following years spending fell as a result of cuts in defence budgets, but tax rates were not reduced. There was thus an abrupt change from a strongly expansionary fiscal stance in 1918, to a strongly deflationary stance in the following two years, and sharp rises in the Bank of England's discount rate added to the downward pressure on economic activity. That downward pressure was at first offset by a surge in consumer expenditure, but in 1920 and 1921 the economy fell into a deep recession. National output fell by 6 per cent in 1920 and a further 9 per cent in 1921. Prices fell by 10 per cent and unemployment rose to 11 percent [1].

The recession was followed by a partial recovery. Deflationary monetary and fiscal policies had been adopted and were maintained to raise the exchange rate in preparation for a return to the gold standard [2]. There followed a six-year period of economic growth that was not strong enough to bring about a major reduction in unemployment.

Return to the gold standard 1925

In his 1925 budget speech, Winston Churchill announced the country's return to the pre-war gold standard. He forecast that the consequence would be a great revival in international trade as nations united by the gold standard would 'vary together, like ships in harbour whose gangways are joined and who rise and fall together with the tide'. It would do so, moreover at the pre-war exchange rate of $4.87 to the £ - about a 10 per cent increase on the market rate. The move was met with general approval at the time. It was strongly supported by Montagu Norman, the Governor of the Bank of England, and by Benjamin Strong, the Governor of the New York Federal Reserve Bank who had written early in the year that "Mr Norman's feelings, which are shared by me, indicated that the alternative - a failure to resume gold payments...would be followed by a long period of unsettled conditions, too serious really to contemplate... - and incentives to governments undertake various types of paper money experiments and inflation" [3].

Among the few who disapproved was John Maynard Keynes, who had previously argued against a return to the gold standard on the grounds that price stability should take priority over exchange stability [4] and had recommended a devaluation [5]. He pointed out in 1925 that the 10 per cent increase in the exchange rate would mean accepting 10 per cent less revenue from exports [6], that in practice would require policies that would raise unemployment).

In 1975, the move was described by John Kenneth Galbraith as "perhaps the most decisively damaging action involving money in modern time" [7] - and that judgment roughly represents the current consensus among economists. The immediate effect of adopting what turned out to be a seriously overvalued exchange rate was a damaging reduction in the competitiveness of Britain' exports. One of the resulting problems was brought home in the following year, when Britain's miners were told that they would have to take a wage cut to make coal mining an economic activity. The miners subsequently went on a strike that led to the general strike of 1926. The persistent balance of payments deficits that followed led to outflows of gold from the Bank of England's reserves, at times threatening their exhaustion. By 1927 Montague Norman sought the help of Governor Benjamin Strong, in response to which the Governor acted to reduce the dollar's market price by a reduction in the discount rates of the Federal Reserve banks [8].

Impact of the Great Depression, 1929-30

The weakness of Britain's balance of payments resulting from the overvalued exchange rate made the Bank of England's reserves very vulnerable to an outflow of capital, and when the United States Federal Reserve raised interest rates in 1928, the Bank was bound to follow suit. One of the effects of the United States depression that followed was a further reduction in Britain's exports, and those two factors have been taken to be the main reasons for the sharp fall in industrial production and the steep rise in unemployment that occurred between between 1929 and 1931 [9][2]. The minority Labour Government led by Ramsay MacDonald that started work in May 1929 had few ideas for dealing with unemployment apart from Ernest Bevin, who favoured devaluation and Oswald Moseley, who proposed credit expansion and government direction of industry. Both ideas were rejected by the Cabinet, and Moseley resigned. The new Chancellor, Phillip Snowden was mainly concerned to eliminate the budgetary deficit inherited from his predecessor. In his first budget in early 1930 increased income tax and introduced a tax on land values (that was never implemented). Increasing unemployment was reducing revenues and increasing expenditure, however, threatening a further increase in the deficit [10].

Crisis 1931

In February 1931, the Chancellor appointed a Committee on National Expenditure under the chairmanship of Sir George May, and in July the May committee published a report that has been referred to by the historian A J P Taylor as "compounded of prejudice, ignorance and panic" and by Keynes as " the most foolish document I ever had the misfortune to read" [10]. The report forecast a major increase in the budget deficit and proposed spending cuts that included a 20 per cent reduction in unemployment compensation.

It is hard to say whether it was the May report that triggered the speculative attack on the pound that followed, and it is likely in any case that there were other influences. Another committee had drawn attention to the large volume of London's short-term overseas liabilities, and the failure of Austria's Kreditanstalt bank had created a banking panic on the continent of Europe that was preventing the repayment of many of the British banks' European loans. The findings of some studies suggest that the attack on the pound was prompted by market expectations of a devaluation [11] and others that it was a response to the dramatic rise in unemployment [12].

On August the 11th, Ramsay MacDonald returned from his holiday in response to an urgent appeal for a meeting with a group of bankers [13] at which he was told that

(1) that we were on the edge of the precipice and, unless the situation changed radically, we should be over it directly,
(2) that the cause of the trouble was not financial but political, and lay in the complete want of confidence in H.M.G. existing among foreigners,
(3) that the remedy was in the hands of the Government alone. [14].

Ramsay MacDonald and Phillip Snowden accepted the bankers' contention that the solution lay in the restoration of confidence by policy action to reduce the budget deficit - mainly, they suggested, by further cuts in Government spending on unemployment compensation. There followed a series of Cabinet meetings at which Snowden and MacDonald tried without success to persuade their colleagues of the need for economies including a cut in unemployment compensation payments. It eventually became clear that the Government could not continue, and on 24th August the Prime Minister announced to the Cabinet that:

... as a result of the failure to reach agreement on the previous day, the financial position had greatly deteriorated, and the situation was now one of the gravest possible character. As had then been arranged, His Majesty had received Mr. Baldwin, Sir Herbert Samuel and himself in audience that morning, and it was quite clear that no useful purpose would be served by consideration of any question other than that of saving the country from financial collapse. The proposal was that His Majesty would invite certain individuals, as individuals, to take upon their shoulders the burden of carrying on the Government, and Mr. Baldwin and Sir Herbert Samuel had stated that they were prepared to act accordingly. The Prime Minister then stated that he proposed to tender to His Majesty the resignation of the Government.[15]

- and later that day he announced the formation of the "National Government" as a temporary arrangement for the specific purpose of dealing with the "national emergency". The new cabinet was led by Ramsay Macdonald, and Phillip Snowden retained the post of Chancellor of the Exchequer, in addition to which there were two other Labour members, four Conservatives and two Liberals.

On September 8th, parliament passed Snowden's emergency budget designed to remove the budget deficit by raising the income tax rate to 25%, reducing contributions to the "sinking fund" (of provision for debt repayments) and cutting the salaries of civil servants, police and teachers. The Bank of England's reserves were replenished by the provision of credits by banks in the United States and France and there seemed for a time to be a restoration of confidence. But, on September 15th it was learned that news of pay cuts had prompted strikes on naval ships that the press reported as the "Invergordon mutiny" . That was among the factors behind a further crisis reported to the Cabinet on September 17th [16]. British Government stocks were heavily sold, over £30 million of the Bank of England's gold was lost in three days and on 19th September the Bank informed the Government that the recently acquired credits had been exhausted. On 20th September, the Cabinet decided to abandon membership of the gold standard [17]

Recovery 1932-37

There followed five years of financial calm during which almost total policy inaction was accompanied by steadily increasing economic activity [9]. Freed of the external restraint imposed by gold standard policy, the Bank of England reduced the bank rate from 6 per cent to 2 per cent, where it remained for the rest of the period, and at the beginning of the period there was a rapid expansion in the money supply [18]. Fiscal policy continued to be preoccupied exclusively with the maintenance of a budgetary balance. But despite the absence of policy action to promote recovery, there was a 55 per cent increase in industrial production, a 23 per cent increase in GDP; and unemployment fell back to its 1929 level. (An exception to the general policy inaction was the setting up of the Exchange Equalisation Account [19] and its use to discourage speculative attacks on sterling [20].)


  1. Christopher Dow:, Major Recessions: Britain and the World, 1920-1995, Chapter 5, Oxford University Press, 1998
  2. 2.0 2.1 Barry Eichengreen: The British Economy Between the Wars April 2002
  3. Strong memorandum Jan 11 1925, Peter Temin: Lessons from the Great Depression, page 14, MIT Press, 1989
  4. John Maynard Keynes: A Tract on Monetary Reform, Macmillan, 1924.
  5. Susan Howson and Donald Winch: The Economic Advisory Council 1930-39, Cambridge University Press, 1977
  6. John Maynard Keynes: "The Economic Consequences of Mr Churchill" (1925) reprinted in Essays in Persuasion, Harcourt Brace 1932
  7. John Kenneth Galbraith: Money: Whence it Came, Where it Went pages 124-178 1975
  8. Priscilla Roberts: Benjamin Strong, the Federal Reserve, and the limits to interwar American nationalism: Part II: Strong and the Federal Reserve System in the 1920s, Economic Quarterly - Federal Reserve Bank of Richmond , Spring 2000
  9. 9.0 9.1 See the economic statistics on the tutorials subpage
  10. 10.0 10.1 A J P Taylor "Unexpected Crisis 1929-31", Chapter 8 of English History 1914-16, Oxford University Press 1965
  11. Paul Hallwood and Ian Marsh: Exchange Market Pressure on the Pound-Dollar Exchange Rate: 1925-1931, Economics Working Papers, University of Connecticut 2003
  12. Barry Eichengreen and Olivier Jeanne: Currency Crisis and Unemployment: Sterling in 1931,NBER Working Paper 6563, National Bureau of Economic Research, 1998
  13. including Sir Ernest Harvey, Deputy Governor of the Bank of England and Edward Peacock,who was a partner in a merchant bank and a director of the Bank of England, (it seems that the shadow chancellor, Neville Chamberlain, was also present)
  14. Letter from Neville Chamberlain to Cunliffe Lister, reproduced in Keith Feiling: The Life of Neville Chamberlain, page 191, Macmillan, 1946
  15. Cabinet Minutes August 1931, catalogue no :CAB/23/67, British National Archives
  16. Minutes of Cabinet meeting of Septembert 17th 1931, cab-23-68, British National Archives
  17. Minutes of Cabinet meeting og 20th September 1931, catalogue no CAB23/68 British National Archives
  18. Ben Bernanke: Essays on the Great Depression, pages 146-8, Princeton University Press 2004
  19. The Exchange Equalisation Account is used to stabilise the exchange rate by buying (or selling) foreign currencies or gold and selling (or buying ) sterling.
  20. A. J. Youngson: The British Economy, 1920-1957,Chapter 3, Harvard University Press 1960
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