Great Depression in the United Kingdom

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Overview

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 hampered 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. (It was in an attempt to stem those outflows that the Bank of England persuaded the Federal Reserve Bank to engineer a monetary expansion in 1927.) 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 ouflows, to leave the gold standard - after which the economy showed a steady export-led recovery. There was considerable labour unrest but no banking crisis.


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, in order 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 ...to 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 in order to make coal mining an economic activity - and 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].

Great Depression impact 1929-30

The weakness of the balance of Britain's balance of payments situation 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 reduction in Britain's exports. Those two factors have been taken to account for the sharp fall in industrial production between 1929 and 1930

Crisis 1931

By 1929 the unemployment rate was still about 8 per cent, but it rose to about 12 per cent in 1930 and 16 per cent in 1931. [9].

The findings of some studies suggest that the speculative attack on the pound was due to market expectations of a devaluation [10] and others that the true cause was the dramatic rise in unemployment [11].

[2]

[12].

[13]

Recovery 1932-39

References

  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. ↑ Higher figures (of 10,15 and 20%) published at the time were of numbers unemployed as a percentage of insured employees. These are estimates of numbers unemployed as a percentage of the all employees. They may be an underestimate (see British Unemployment 1919-1939 by W. R. Garside Cambridge University Press, 2002)
  10. ↑ Paul Hallwood and Ian Marsh: Exchange Market Pressure on the Pound-Dollar Exchange Rate: 1925-1931, Economics Working Papers, University of Connecticut 2003
  11. ↑ Barry Eichengreen and Olivier Jeanne: Currency Crisis and Unemployment: Sterling in 1931,NBER Working Paper 6563, National Bureau of Economic Research, 1998
  12. ↑ A. J. Youngson: The British Economy, 1920-1957,Chapter 3, Harvard University Press 1960
  13. ↑ A J P Taylor "Unexpected Crisis 1929-31", Chapter 8 of English History 1914-16, Oford University Press 1965
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