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The Transformation Of Economic Policy Between The Wars Notes
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The Transformation of Economic Policy Between the Wars The Historical Background Pre 1914 state intervention in the economy is limited although there is some regulation of monopolies including gas and water railways as well as some rudimentary company law. Trade and financial policy was governed by free trade, the Gold Standard and low balanced budgets. Effects of WWI The state's role wasn't rethought and the aim was to restore to pre-war normality. But this was broadly achieved because of;
• A weaker Gold Standard
• Modified free trade - some luxuries and essential industries e.g. motor vehicles now have to pay duties
• The restoration of the balanced budget rule
• And higher spending and tax (24% of GDP compared to 12-13% pre-war) on national debt. PUBLIC SPENDING Social spending increased (e.g. on unemployment benefits), defence spending decreased BUT the cost of servicing the national debt rose sharply in the 1920s interest charges on this are the biggest item on expenditure. POLICY PROBLEMS Apparent in the 1920s as attempts to return to pre-war normality didn't bring expected prosperity. But policy changes weren't effective. Unemployment remained high, fear that extreme policy shifts would make things worse and people hoped recovery was round the corner. Slump 1929-32 Before 1929 attempts to change policy is half-hearted but the slump changes things. £
Floats and interest rates are cut. Protectionism is introduced in 1932 but there are still arguments for free trade;
• Working class fear higher food prices and
• Industries such as cotton sell most of their produce abroad so fear further retaliation from markets and
• Theory of Comparative Advantage works best without barriers to trade. Slump strengthens case for protectionism as its more important now for people to be employed than an increase in the cost of living. Concern over Balance of Payments causes the City to reduce support for free trade. Besides the argument in favour is increasingly weakened as more and more countries increase their tariffs - fears GB will become a dumping ground. Arguments in favour of protection;
• Unemployment has worsened,
• Tariffs are a source of revenue to help the budget TRADE AGREEMENTS Tariffs don't help exports (esp. for industries such as cotton) when most custom is abroad. So, government promise to use tariffs only as a bargaining tool and to try to keep open export markets 1932-39. Worked best with (empire) countries that are complementary; countries with export/import patterns opposite to GB. Led to several preferential agreements being signed e.g. 1932 Ottawa on mutual tariff preferences. Economic Recovery in the 1930s Cheap money important for recovery and protection probably helps domestic demand as the economy was working below capacity.
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