Depression - Government Intervention

  • Created by: Pip Dan
  • Created on: 20-09-17 15:27

Historian's views

Traditional historians were very critical of government action against the Depression. The idea is still popular and argues that had the National Government undertaken an ambitious programme of public investment then British recovery from  the Depression would have started sooner. This approach was associated with the followers of the economist John Maynard Keynes (Keynesianism). Some people at this time support this more radical approach like David Lloyd George and Oswald Mosley; however, the policy makers at the time favoured Treasury Orthodoxy. It aimed to:

  • Create and keep a balanced budget, which was believed to be vital to the maintenance of confidence in trade and industry
  • To avoid too much government expenditure, this limited the scope of state intervention

Revisionist historians have often been more supportive or sympathetic to the economic policy of National Government. Since the 1970s there has been a greater awareness of the limitations of the 'Keynesian' approach to public finance particularly in how it can cause inflation through government spending. Furthermore, it has also be argued by historians like Ross McKibbin that the government simply was not able to carry out large-scale state intervention and that most political opinion at the time would have not supported this anyway.

Leaving the Gold Standard

By September 1931, Britain had left the gold standard and devalued the Pound. Leaving the gold standard enabled the government to pursue more expansionary monetary policy. The Treasury were able to:

  • Cut interest rates which caused 'cheap money' and stimulated consumer spending
  • The cut in interest rates and higher inflation, enabled a rapid drop in real interest rates. Short term real interest rates fell from 9% in 1931 to 0.6% in 1933. This helped boost business confidence, which was key as the National Government believed that it was the private sector which would push Britain out of depression
  • The pound was devalued. Against the dollar, the Pound was devalued 28% between 1930 and 1932. This devaluation helped UK exports and boost domestic demand, providing an economic stimulus

Cheap Money Policy

Leaving the Gold Standard allowed the government to pursue a 'cheap money' policy. By keeping interest rates at 2%, the government stimulated consumer spending and investment. This was the aim of the policy; however, the most important consequence of it was how the policy benefited the private housing market by encouraging it. During the inter-war period, 2.5 million of the new houses were built privately. This meant that by 1939 one family in three lived in an interwar house. Building houses was particularly successful in causing economic growth because the housing market has the multiplier effect - it involves many people from different industries. In 1932, 17% of the total economic growth was because of the housing market which itself accounted for over 30 per cent of the increase in employment by 1939.Whilst this was notably beneficial to the economic recovery it was not directly intended by the government and so their praise for it must be limited.

Unemployment Assistance Boards

In an…


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