Changes in Economic Landscape

Inter War Years Summary

1920 - boom with inflation, speculation + full employment

1921 - bust with 2 million unemployed, Britains share of world exports fell from 18% to 11%, 2.8% growth per annum; 3.8% productivity per annum (small balance of payments surplus)

1929 - onset of great depression + value of Britains exports halved

1930-31 - 400,000 houses built in Britain, balance of payments deficit

1932 - trough of Great Depression - 3 million unemployed

1935 - recovery due to upturn of trade cycle, housing boom, growth of new industries + increased consumer spending with Britain producing 11% of world exports

1936 - rearmament creates 1 million jobs

1939 - 1.5 million unemployed

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20's - WW1 Economic Legacy

Loss of trade - British ships had to ship essential war supplies + 20% were sunk in the process with USA + Japan taking over markets left by gap + axis countries became self sufficient so didn't trade with Britain

Debt - the war cost Britain £3.25 billion with debts of £8 billion by 1920 - mainly to US banks so wartime debts rose to 160% of income by 1924

Value of the pound - fell as Britain had been forced to abandon the gold standard in 1914 in order to be able to print enough money to cover the high costs of war which resulted in inflation rise + drop in value of pound (£1 valued at $3.19 in 1919)

Inflation - rose to 25% in 1918 which impacted upon prices

Technological developments - accelerated in war particularly in medicine, transport + radio so machinery meant semi-skilled workers could be employed instead of skilled workers, other countries also had to build new factories after bombings so Britains became left behind

Decline of workforce - nearly 900,000 men killed in WW1

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20's Economic Timeline

1919-20 - a short post war boom fuelled by an increase demand for scarce goods caused by WW1

1920-21:

  • severe recession as unemployment rose to 12% of working population with heavy industries such as coal mining hit hardest
  • prices rose by 25% + wages failing to keep up with these increases
  • recession caused by loss in trade, underinvestment in traditional industries (shipping, mining, steel, iron + textiles) + declining industrial relations

1922 - spending cuts helped start period of limited recession from 1922 although unemployment remained high at around 10%

1929 - great depression hit Britain hard as trade collapsed + unemployment soared

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20's - Ineffective Solutions to Economic Problems

Interest rates + value of pound:

  • goverment set high interest rates to curb inflation + raise value of pound but this curbed economic growth so more expensive to borrow + invest - people more likely to save than spend
  • Britain returned to gold standard + pound at pre-war value which was poor decision as British exports more expensive so traditional industries struggled compared to attractive US dollar with low interest rates

Tax, spending + balancing budget - taxes raised each year from 1918 (£18 per capita in 1919 to £24 in 1922) + Commission of National Expenditure under Sir Eric Geddes led to £24 milliion cuts in spending on education, pensions, unemployment benefits, housing, defence + health which contributed to growing unemployment

Protectionism:

  • government introduced duties + limited tariffs on foreign goods to protect traditional industries which helped in short term but left a lack of incentive to modernise + compete with foreign traders so failed in long term
  • these policies also caused other contries to create their own 'tariff walls' which further limited trade
  • after WW1 Britain struggled to reclaim market (exports only 75% of 1913 levels in mid-20's) which effected traditional industries with newer industries such as chemicals + cars neglected
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20's - Rise in Trade Unions

War caused huge growth in TU membership - between 1915 + 1918 membership rose from 4.3 million to 8.3 million so had far greater power + influence

During harsh 20's employers in traditional industries forced to cut costs yet TU replied with harsh resistance to attempts to introduce pay cuts or longer working hours

1926 - 323 strikes launched which led to total of 162 million working days lost

TU's led to lack of wage flexibility + caused employers to fire workers to keep costs down so unemployment never fell below 1 million during interwar period

TU's halted progress of certain industries as foreign competitiors had much greater access to cheap manual labour (influx of immigrants in USA)

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30's - Why 'Hungry Thirties'

Period of depression + high unemployment originally blamed on Conservatives i n 40's but later agreed no single trend contributed to this

Areas centered around staple industries hit hardest e.g. coal in North + in South Wales, textiles in Yorkshire + shipbuilding in Scotland e.g. in Jarrow in north-east England every man made redundant after coal mine, steel works + shipyard closed (1936)

Unemployment rose to 2.5 million (25% of workforce) in 1933

Productivity fell so demand for products such as coal + steel fell (UK coal use fell from 180 million tonnes in 1929 to 155 million in 1935)

Despite this, South East remained prosperous as consumer industries boomed

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30's - Value of Pound

The Great Depression caused a fall in exports by 50% + unemployment rising to 2.5 million in 1933

Government cut spending + maintained high intrest rates to preserve value of pound which was still attached to Gold Standard which divided Labour

1931 - 12,000 soldiers mutiny in Scotland to oppose pay cuts

National Government removed pound from Gold Standard + devalued pound from $4.80 to $3.40

How pound being removed from Gold Standard allowed quicker recovery:

  • unemployment fell from 17% to 8.5% between 1932 + 1937
  • intrest rates cut from 6% to 2% which led to greater borrowing so boom in mortages + house building
  • rate of long term government borrowing cut by 1.5% which reduced cost of government debt repayment
  • exports cheaper as prices of British goods fell by 45% + sales went up 28%
  • industrial production rose by 46%
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40's - Impact of WW2 on Economy

Churchill expanded government's role in managing war economy + created a series of ministries who had extensive powers of economic management + controlled prices through controlling production levels

The National Governement made Britain a manged economy through rationing + conscription implemented + employment registration made compulsory in 1941, by 1945 1/3 of citizens involved in war work

Increasing state intervention increased war production + military spending (half of government spending between 1941-45) which continued to some extent after war (30% in 1951)

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40's - Importance of Economic Aid

By December 1940 Britain had spent all cash reserves

Churchill secured Lend-Lease agreement with USA that allowed USA to supply Britain with money it needed and debt paid after war

Supported with supplies from USA brought on 'Liberty Ships'

Immediately after war, John Maynard Keynes negotiated a £2.2 billion loan from USA + Canada but this was not enough

Britain recieved £6 billion of Marshall Aid from 1948

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40's - Impact of Austerity + Nationalisation

Impact of Austerity Economic measures in 40's:

  • in 1945 Britain accumulated £4 billion debt to USA and would cost £70 million a day to finance
  • Atlee Government implemented a series of Austerity measures which cut spending + continued rationing which was unpopular with public + particularly TU's who were requested to accept wage freezes
  • these didn't work alone + harsh winter of 1947 led to economic crisis making imports more expensive + Atlee forced to devalue pound in 1949

Impact of nationalisation of key industries in 1940's:

  • Atlee aimed to create full employment + make industries more efficient
  • by 1950 10% of work force employed in nationalised industries
  • the cost of nationalising coal, tthe Bank of England, transport infrastructure, electricity, gas, iron + steel cost over £2 billion which meant government lacked money to invest in modernising so were left behind by international competitors 
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50's + 60's - Affluence + Stop-Go

Illusion of affluence:

  • Harold MacMillan - 'you've never had it so good'
  • 50's seen as period of affluence with consumer spending rising by 45%
  • this was from the ability to borrow money to spend which caused growth in inflation (4%) and an increase in imports caused an imbalance in payments

Stop-go economics:

  • Government encouraged this growth in consumer spending by relaxing laws on borrowing + credit through low interest rates + taxes
  • when the problems of inflation + import prices became serious, taxes + interest rates raise whilst wages lowered
  • this was therefore known as 'stop-go economics' + demonstrated controlling unemployment + inflation was impossible
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50's + 60's - Corporatism + 'Dash for Growth'

Corporatism:

  • in the 1950's Britain was behind competitors in economic growth (2.3% a year compared to 5.6% in Italy + 5.1% in Germany) so MacMillans 1957-63 Government followed corporatism - a managed economy that unites labour, management + government through corporations
  • did this by setting up NEDDY (National Development Council + Office) which aimed to produce reports for future of economy, recommending pay freezes + tax increase + NICKY (National Incomes Commission) which advised unions + management on wages
  • both were unpopular + met with heavy opposition from TU's, Tories, Treasury + media which caused quick u-turn although corporatism continued through Department of Economic Affairs

Dash for Growth:

  • launched in 1963 after Coservatives abandon corporatism + based on idea that injecting high demand in economy would stimulate investment + raise productivity
  • policy was failure as higher demand just caused more imports so imbalance of payments
  • Tories didn't have to deal with consequences of policy as lost election
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50's + 60's - Stagflation + Wilson's Policies

Causes of 1964 stagflation (high inflation with low growth + unemployment):

  • increased consumer spending led to more imports so balance of paymetns deficit
  • increased borrowing from IMF
  • rising unemployment

Wilson:

  • attempted to invest in technology but failed due to stagflation
  • DEA created plan to stimulate growth but bad relations with treasury meant couldn't implement
  • Labour nstead continued to use failing stop-go policies
  • Wilson wanted to avoid devaluation of pound but in 1967 had to cut pound of value from $2.80 to $2.40
  • attempted to reassure Public through 'pound in your pocket' speech, but suffered huge credibility loss
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1970's

Heath attepted to tackle economy with reduced state intervention, cutting state spending + tax in 1971 budget + attempts to control TU's (1971 industrial relations act)

Why did Heath's policy fail:

  • 1973 oil crisis - price of oil suddenly rose by 70% which caused inflation to rise by 20%
  • rising unemployment - reached 1 million by 1972
  • these resulted in Heath taking u-turn + pumping £2.5 billion into UK economy

1973 oil crisis caused rapid inflation + pound falling in value until Britain almost bankrupt therefore negotiated £3 billion loan from IMF if made major public spending cuts so resulted in abadonment of consensus + paved way for Thatcher

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