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
-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
-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?
-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 it?
-1931 and rate of sterling fell from $4.86 to $3.40, making X cheaper.
impact of WW1 on the econ of 1920s
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
Private British foreign assets were requisitioned by the government and up to 10% sold to partly finance trade. This amounted to a 10% decline in invisible profits requiring a corresponding improvement in the balance of trade 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 and 1922 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
-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 from 4 to 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 and more assertive and, given the sacrifices of the war, unwilling to lose these structural advantages in the labour market.
govt debt from war
-had increased twelve-fold & stood at £7bn (costing 40% of the state budget to service)
consequences for govt spending
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.
speculative boom in the staples
British investors/ owners unwisely believed peace would return the growth of trade experienced before 1914 and there was, an explosion in expansion in the cotton and 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 meant lay-offs to meet sustainable levels.
Some historians have argued the strength of the unions’ successes in reducing the working week contributed to a fall in productivity but such strength was unable to stop unemployment rising to 2m+ by 1921 it and remained high throughout the IWYs (worsened later by the Great Depression).
If the recession was caused by a lack of global demand then the economy should have bounced back when demand returned (the USA experienced a boom, the ‘roaring twenties’ prior to 1929) but it is estimated that British GNP rose by 22% less between 1920 and 1927 than predicted for a country in its position.
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- 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.
