Theme 1 - Responding to economic challenges Flashcards
what were the factors for Britain’s economic damage after WW1?
- the government didn’t expect the war to last so long or demand so much of the nation’s resources
- Britain had been cut off from many valuable export markets (1914: exports accounted for 1/3 of Britain’s wealth, and dropped to 1/5 in 1918)
- Britain’s industries had to witch to war production rather than supplying export markets
- financial cost of the war was £3.25 billion
what was the economic state of Britain after WW1?
short-lived economic boom as more money poured into the London stock market
however, wartime industries couldn’t keep up with the level of demand and goods in short supply became increasingly expensive
boom followed by recession in 1920
recession of 1920-21
unemployment rose to 12%.
1921: 2 mill workers unemployed
areas such as South Wales became depressed due to collapse of old industries
cost of living increased by 25% between 1918 and 1920 and wages stagnated
deflation in 1920 recession
1918-20: government cut spending by 75%
Bank of England raised interest rate to 7% to return value of the pound to pre-war levels, which made it expensive to borrow money
government and the Bank made efforts to repay debt, but debt had risen from 120% of GDP to 160%
loss of export trade in 1920 recession
global economy was transformed by the war and Britain was no longer dominant
other new foreign manufacturing and financial competitors took advantage of the disruption to British trade during the war
underinvestment during the 1920 recession
caused problems for the steel industry as output during interwar period was lower than competitors
more British manufacturers were importing American steel because of better quality and price
industrial relations during 1920 recession
1919: DLG had bought off workers with generous pay and working hours to prevent general strike
- many workers were unwilling to lose these conditions when times became tough
what attempts were made to solve economic problems (1921-24)?
1921: Sir Eric Geddes implemented greater cuts in public expenditure, recommending £87 mill of cuts in the 22/23 budget (most came from military budget, but health, welfare and housing budgets were also reduced)
DLG opposed proposals to impose tariffs, which contributed to the division of the party
MacDonald didn’t win a majority so couldn’t carry out major economic measures to deal with unemployment - it increased from 6.5% (1924) to 8% (1925)
what was the impact of Churchill reintroducing Britain to the Gold Standard (1925)?
meant that the prices of British exports stayed high
problems for manufacturers - businesses struggled to sell their products across the world and compete with imports
1931: Bank of England admitted it could no longer keep the pound in the Gold Standard
was was the result of the Depression (1929-34)?
Britain’s exports declined by 50% which was catastrophic for any industries (e.g coal, dock work, cotton, iron and steel, and ship building)
unemployment increased from 1 mill (1929) to 2.5 mill (1930)
how did the Labour government respond to the Depression?
Chancellor of the exchequer believed in taxing the wealthy for unemployment relief, but wealthy people were anxious to protect their money
Keynes suggested government spending on public works to create jobs, but the government only invested in the defence industry
1931: rumours of unbalanced budget resulted in the pound slumping in value, and caused hardship for many of Britain’s poorest
how did the National Government respond to the Depression?
implemented spending cuts - but public sector workers’ pay by 10%
The Special Areas Act (1934)
- Identified areas that needed direct assistance (e.g South Wales, Scotland, Tyneside, etc)
- however, only a trickle of investment came to them
economic recovery (1934-39)
1932-37:
- industrial production rose by 46%
- exports increased by 28%
- unemployment fell from 17% to 8.5%
1934-37: economic growth averages at 4% per year
how did Churchill’s government control the economy?
developed specific ministries for controlling the wartime economy
- Ministries of Aircraft Production, War Production, Food, etc
wartime economy - production levels were decided by the government
military expenditure during WW2
1940: Britain appeared to be losing, so state intervention resulted in huge increase in war production and military expenditure
- aircraft production increased from 15,000 (1940) to 47,000 (1944)
- produced 6,000-8,000 tanks per year
economic aid during WW2
1939 American Neutrality Act
- allowed British to buy supplied with cash only, but cash and gold reserved were spent by 1940
Lend-Lease Agreement
- arranged by Churchill
- America supplied Britain with the resources it needed and the bill would be paid after the War
American ‘Liberty Ships’
- cargo vessels full of essential materials for the war effort
post-war austerity
£4 bill debt with US
trade was disrupted by the war
American wartime aid helped US manufacturers dominate post-war markets
1945: Keynes visited Washington to negotiate an emergency loan
1947: winter of discontent saw rationing reintroduced and food shortages in some areas
Britain’s expensive world role post-WW2
one of the biggest recipients of the Marshall Aid from the US in 1948
- used this to pay for general expenses rather than investing in industry or infrastructure (investment in infrastructure was 9% of GDP compared to Germany’s 20%)
end of the war didn’t fully end Britain’s international commitments
- involved in other conflicts (e.g Korea in the 50s)
what did Labour hope to achieve with Nationalisation in the post-war period?
aimed to create full employment as nationalised industries financed by the government wouldn’t have to shed jobs during economic downturns
main priority of Labour and later Conservative government was to not return to the mass unemployment of the interwar period
Nationalisation acts under the post-war Labour government
The Coal Industry Nationalisation Act 1946
The Bank of England Act 1946
The Transport Act 1947
The Electricity Act 1947
The Gas Act 1948
The Iron and Steel Act 1949
what was the consequence of the cost of nationalisation?
shareholders of industries taken into public ownership were compensated by the government
the total bill for nationalisation exceeded £2 billion
left little money for modernisation and stored up economic problems for the future
absolute progress, relative decline (1951-79)
despite the consumer boom, Britain experienced relative decline
Britain spent more than it earned, resulting in economic issues (e.g balance of payments issues, devaluation, inflation, unemployment)
Conservative’s approach to the post-war economy (1951-64)
opposed further nationalisation and wanted to end wartime rationing
- 1954: rationing was over and economic boom on the way
consensus led Conservatives to prioritise commitment to full employment and a mixed economy
stop-go economics
government allowed the consumer economy to grow but excessive spending caused inflation and balance of payments problem
slowed the economy by increasing interest rates and taxes
controlling inflation and unemployment at the same time proved impossible
increased taxes and interest rates to slow economy when it grew too quickly, then reduces taxes and increase rates after slowdown to facilitate acceleration
evidence of Britain’s relative decline
West Germany and Japan recovered from the war and their economies grew dramatically
Japan experienced growth of 12% in 1960 while Britain managed just over 4%
NEDDY (1962)
The National Development Council and Office
management unions could discuss the development of the economy and co-operate
unable to enforce any legal control over either industry or unions
NICKY (1962)
the National Incomes Commission
An advisory council for employers and unions on what the government considered ‘reasonable’ pay increases
unions mostly ignored NICKY’s called for wage restraint
why did Macmillan create NEDDY and NICKY (1962)?
believed that uniting labour, management, and government could allow for economic goals to be planned and achieved
economic problems by 1964
1963: unemployment grew to 878,000 - highest since the end of the war
balance of payments problems threatened the value of the pound
Prices and Incomes Act (1966/7)
Wilson’s government experienced balance of payment deficits, increasing inflation, and failure of voluntary wage restraint
1966 Act forces wage freeze for 6 months to curb inflation
1967 Act allowed wage increases in companies that could prove they were increasing productivity and output
what was the Ministry of Technology (1964)
aimed to guide and stimulate major national effort to bring advanced technology and new processes into industry
became one of the largest bodies in government
main achievement was the creation of the supersonic passenger plane Concorde
The IRC
Industrial Reorganisation Corporation
government intervention for efficiency - promoted efficient practices in industry
offered loans to companies that wanted to implement new efficiency measures
promoted merges between businesses to produce more economic efficiency, but many of these merges ended in failure
Devaluation of the pound (1967)
Wilson devalued the pound, admitting it would help to ease deep-seated problems in the economy
decrease of 14% from $2.80 to $2.40
led Callaghan to resign
what changes did Heath make to the economy (1970-74)?
rejected corporatism and embraced free market ideas
axed the IRC
cut state spending:
- subsidies to council houses
- cuts to free school milk for children
- raised charges on prescriptions
believed cuts in spending would stimulate economic growth
what economic problems did Heath face (1970-74)?
inflation - grew to 15% after 18 months of his leadership
unemployment rose from 2% (end of 50s) to 6% (early 70s)
1972: Barber, chancellor of the exchequer attempted a ‘dash for growth’ through massive tax cuts and low borrowing
- resulted in huge spike in inflation
- tried to cool the economy with public sector pay cuts, but this led to union unrest
what new economic thinking emerged in the 70s?
the biggest issue for the Labour government (1974-79) was inflation
- 1975: reached 30%
Labour Chancellor, Healey, challenged commitment to full employment
Callaghan supported Healey, which indicated Labour had moved away from the post-war Keynesianism to embrace monetarist thinking
IMF loan
1976: value of the pound slumped and Britain was forced to accept a loan from the IMF
just under £4 billion, but came with conditions
- Britain had to prove capability of repaying debt
- Britain forces to agree to £3 billion of spending cuts
Alternatively, Tony Benn, on the left of the party, suggested a ‘siege economy’ (trade barriers to keep out foreign imports, withdrawal from the EEC, etc) but was dismissed
