Economic policy of the IWYs 1918-1939 Flashcards
when and why did Britain come off the gold std?
came off the gold std in 1919 due to financial cost of the Great War (gold
reserves had been used to finance war loans) but promised to return to it.
Who supported the return to the gold standard and what or who influenced politicians over it?
-BoE and the Treasury. -believed there was a sense of prestige being on the gold std and orthodoxy ideas abt econ & role of govt were dominant in IWYs.
-they believed the gold std made economic policy ‘knave-proof’ – an external and independent measure of fixed currency would discipline industry, workers, consumers and govts who could otherwise ‘foolishly’ succumb to pressures for reforms that could not be sustained economically.
-City of London favoured the return to gold since high I.Rs brought capital & profits to financial institutions -foreign investors would save money in British banks.
-their ultimate aim was to drive wages and prices to US levels to make Britain more competitive.
-BUT it failed, cost millions of jobs and gravely damaged industrial output and British exports.
when did they return to it?
what was the E.R?
1925-under Baldwins cons govt.
-high E.R £1:$4.86
consequences on X due to gold std
-strength of £ damaged an already weak industrial X econ & increased unemployment.
-X more expensive at a time when competitors had devalued/ weakened their own currencies making their X cheaper. -difficult to compete.
-staple industries struggled.
consequences on I.Rs due to gold std.
-set high I.Rs which made borrowing more expensive, so discouraged capital investment in industry, which meant there was a reduction in modernisation & productivity. -damaged industry-unemployment.
-trade unions and TUC complained.
-already low govt spending was inevitably reduced further – the cost of borrowing for public spending went up.
how had Britain mainly funded the war and what was the problem now with higher I.Rs?
-had financed it through loans achieved through bonds.
-BUT higher I.Rs made govt debt to British bond holders more expensive.
what could have the cons govt done instead of pursing a deflationary policy?
-pursued an inflationary policy (like Europeans) as it would’ve reduced the cost of the war debts.
BUT Cons were worried about the effect of inflation since it would devalue the wealth of the m/c & debts owed to bond-holders.
-govt policy valued the bond-holder, m/c & City of London over industry & w/c. -attacked TUs & Keynes for placing the interests of finance over industry.
when were they forced off the gold std?
-1931 and rate of sterling fell from $4.86 to $3.40, making X cheaper.
impact of WW1 on the econ of 1920s
-position in 1914?
-reason for loss of strong global position after WW1?
-war forced GB to retreat from international markets but demand for M in those markets continued and were filled by other countries not involved. e.g US X to latin america increased by 75% in 1916 & Japanese textile X filled the void.
-‘beachhead effect’ – after the war British exporters discovered foreign competitors had established a strong position in markets British firms had previously dominated.
- in 1914 GB - world’s leading trading and lending nation – her trade was 1/3 larger than Germany’s and larger than the USA & her overseas investments stood at £4bn.
Britain’s financial position after the war
(assets, war office, protectionism)
Private British foreign assets were requisitioned by govt & up to 10% sold to partly finance trade. -led to a 10% decline in invisible profits requiring a corresponding improvement in the BoT to compensate. But given increased foreign competition in trade this proved difficult to achieve.
-end of WW1 war office controlled 90% of British M and marketed 80% of the food consumed (both were returned to private control between 1918-22 by de-control measures)
-protectionism was introed by McKenna duties of 1915 (e.g on cars).
-it was continued in the Key Industries Duties Act 1921 (and in 1930s).
workers during the war
(new techniques, increase in TUs, changes in attitudes)
-During war, modern management techniques and American machine tools were used to increase efficiency and ‘dilution’ of skills and automation amounted to the first steps towards the mass production approach of the USA.
-Workers encouraged to join TUs (who agreed to no-strike and dilution agreements). Union membership doubled, 4-8m from 1913-19 and a 1/3 to 1/2 of all workers were covered by collective bargaining.
-By 1918 organised labour was bigger, more organised & assertive and, given the sacrifices of the war, unwilling to lose these structural advantages in the labour market.
what was the govt debt from war?
-had increased twelve-fold & stood at £7bn (costing 40% of the state budget to service)
What was recommended by the Geddes committee?
Consequences for govt spending due to war debt & committee?
In 1920, following recommendations of Geddes Committee, already low govt spending was cut by £52m (‘the Geddes Axe’). -(it initially recommended £86.8m worth of cuts).
-in total the coalition cut 25% of public expenditure- Most borne by armed forces & civil service but it curtailed education reform and govt spending didn’t recover until 1931.
what was the speculative boom in the staples?
- British investors/ owners unwisely believed peace would return the growth of trade experienced before 1914 so there was, an expansion in the cotton & shipping industries.
But by 1920 the boom was ended by a recession worsened by speculation – productive capacity had been increased unrealistically (e.g shipping by 40%) but there was no demand for it and the chronic excessive overcapacity produced= lay-offs to meet sustainable levels/cover costs.
If the recession was caused by a lack of global D then econ should have bounced back when D returned (boom in USA - ‘roaring twenties’ prior to 1929) but it is estimated that British GNP rose by 22% less between 1920-7 than predicted for a country in its position.
what was the unemployment figure by 1921?
-unions despite being strong -unable to stop unemployment rising to 2m+ by 1921
Why did GB in the 1920s lag behind other countries, all of which experienced the same global conditions?
- gold std
- econs dependence on the staples and unwillingness to adjust to new demands, D for the staples was low & they demonstrated excessive overcapacity.
-slump in global trade and B Xs declined as a proportion of N.I from 33% in 1907 to 15% in 1938.
-Exports of cotton declined by 71% between 1913 and 1937 -due to old production techniques only 5% of looms were automatic.
-In 1913 X of shipping accounted for £11m, by 1932 to £3.9m.
-by 1937 coal output was 40m tons down on 1913.
-led to structural LT unemployment.
unemployment figures overall in IWYs
-never fell below 1m & in 1st half of 1930’s never fell below 2m
-1932- estimated 3.4m
new industries (add to)
-experience of misery & unemployment not universal across Britain
-new industries- employment in chemicals, electrical engineering, vehicles, electricity, silk and, rayon expanded by 25% between 1920-29 when industry and mining was falling by 9%.
-new industries share of employment rose from 11% to 15% between 1920-29, the share of employment by staples declined from 30% to 25%.
-less than 1 in 10 of all new jobs was in an export-linked sector that had previously employed millions.
-new ind. were unable to replace the strength of the old industries in X e.g British car exports exceeded European competitors but the market was dominated by the USA.
-cotton & shipbuilding substantially declined.
BUT it wasn’t all bad
-but wool exports made up 60% of combined wool X of France, us & Germany.
-Manufacturing’s share of N.I increased from 21% in 1913 to 35% in 1937.
-paper, timber and construction materials industries-more demand due to housing boom.
-1921 Key Industries Duties gave limited tariff protection to staples, encouraged producers to continue rather than exiting the market.
problems of the British econ-productivity
-productivity in America was 125% higher than Britains in the IWYs.
-it allowed relative productivity to decline, under-invested in new machinery, failed to modernise management, under-equipped its labour force with skills and tolerated numerous restrictive practises which, stopped it from realising its potential.
physical capital
human capital
-skills need to be strengthened so they can meet demands of a changing econ
-lack of education & skills for new industries-under resourced.
-Less than 1/4 of the pop received secondary or vocational education
-Most young people were educated in work- apprenticeships. GB was outperformed here by Germany, which had a much larger stock of skilled workers.
-Unemployment further reduced the reservoir of skilled labour.
R & D
time effort & expertise creating new products
-spending on R&D tripled in IWYs but was less than 1/2 of USA.
govt policies to help the econ
cheap money
cheap money-abandonment of gold std in 1931 led to low I.Rs -2% -meant businesses benefitted as they could take out loans/borrow & invest with lower rates of return-modernisation.
-increased consumption of new cons durables by new industries.
-cheap mortgages -housing boom -house building accounted for 17% of the increase in GNP 1932-4 and 50% of it came from cheap money.
-devalued £ to $3.40 -made X cheaper & more competitive
BUT -not a positive policy as the govt was FORCED off the gold std.
tariffs
-In 1915 the Chancellor McKenna set duties of 33% on a range of manufactured goods
(e.g, on foreign cars).
-But by 1931 over 80% of M were still tariff-free.
-National Government introduced more protectionism - 1932 a general tariff of 10% was added to M apart from the colonies.
- Abnormal M Act 1935 and the M Duties Act 1935 followed, the latter imposed duties of 10% (later increased to 20%) on manufactured M and increased the preferential treatment for M from the
empire.
But the colonies themselves did not co-
operate as Chamberlain presumed and a free trade empire failed to arise. The
Dominions (Canada, Australia etc.) refused to abandon their own protectionism or
economic interests and the British had to negotiate separate agreements with each one in the Ottawa Agreements.
A new sterling area was set up involving all countries who traded in sterling.
what was protectionism motivated by?
effects of the tariffs?
-by domestic, not global concerns. e.g excessive overcapacity, unemployment & the need to protect industries facing foreign competition.
-protectionist policies of Baldwin - uneven
impact – tariffs benefited the British car industry but had little effect on econ recovery. -Farming - not producing food that even competed with foreign M – too late to reverse the decline of cereal production.
-tariffs raised output by 3% and only reduced unemployment by 1.5%.
-implemented for political purposes- atmosphere of shelter.
-Employment in the staples continued to fall tariffs just reduced the speed of decline.
-real cost of protectionism-inefficient-focused on industries that didn’t have a LT future -inhibited the allocation of econ resources to dynamic industries.
cartelisation
depressed areas & transference
rearmament
-defence spending rose from 2.7% to 7.7% from 1935-9.
-Nearly 500,000 new jobs were created by rearmament by 1935 alone, absorbing 15% of the unemployed.
-By 1938 nearly a million jobs were created mainly in steel, coal and engineering.
-treasury moved away from orthodoxy & realised the need for large scale borrowing to prepare for war.
