Britain After The First World War Notes

British Economic History

THE IMPACT OF THE FIRST WORLD WAR

Why did Britain emerge relatively unscathed compared to continental Europe after World War I, and what were the economic consequences of this?

Introduction

Relative to whom – Germany/France/US and Unscathed in what way?

Return to Gold

Inflation

Physical destruction

Trade and foreign investments

Conclusion

Lectures: J. Fenske

- The Gold Standard and the First World War:

- Before the First World War, Britain chose a fixed exchange rate and international capital market integration, and did not attempt stabilization policy¹.

- Governments were committed to the convertibility of currency into gold, and co-operated in order to keep the system stable. However, any fear of an end to convertibility cause a gold drain which the central bank may have insufficient resources to counter; in this case international co-operation became vital.

- Gold was a preferred international standard because it was less bulky than silver and less prone to depreciation as a result of rising production. The move away from silver or bimetallic standards was hastened by globalisation and the desire to operate one standard.

- Counties that failed to abide by the rules of the standard or defaulted faced exclusion and later re-admission at a reduced parity. Spain, Portugal, and Argentina all faced this as a result of intermittent crises.

- The First World War led to the suspension of gold convertibility in order to prevent capital flight. Britain’s withdrawal from South American and Asian trade saw its position usurped by US and Japanese firms, a trend that proved difficult to reverse after the war’s end.

- There was a belief that pre-war parity would be restored.

- British industry changed post-war. Over 2million men had been killed or injured; modern mass-production techniques were more quickly adopted to ameliorate the impact of this loss of skilled labour. Union membership rose from 4million in 1913 to 8million in 1919.

- Britain’s foreign assets were depleted, its government had significant debt, trade was suffering, and the labour market was less flexible than pre-war.

- Inflation: Germay’s monetary base rose 3.5 times over the course of the war; Britain’s less than doubled. Moreover, Germany’s loss meant that its debt was trading at a significant discount to par, and there was no appetite for new debt; the nation’s tax base collapsed.

Golden Fetters - The Gold Standard and the Great Depression, 1919-1939: B. Eichengreen

- The Gold Standard was a threat to economic and financial stability between the wars, contrary to contemporary belief. It failed to operate in the same manner as its pre-war predecessor².

- Britain and the Bank of England were unable to provide stability to the Gold Standard post-war in the same manner they had pre-war. The credibility and co-operation that was fundamental to the success of the Standard was seriously undermined post-war. Internally, governments were prioritising wages and employment over currency stability. Inflation ensued in countries where monetary policy became politicised; to counteract this trend efforts were made to ensure the independence of central banks, but this included limitations on their ability to lend to offer nations, undermining one of the pillars of the Standard.

- The currency depreciation that occurred upon the unwinding of the Standard was fundamental in ameliorating the impact of the Depression.

- The Standard had preserved price stability in Britain and the US, and these nations did not suffer the fate of France or Germany.

- There is evidence that the adoption of proportional representation systems of election by European nations created pressure for inflationary policies³.

- The Standard depended as much upon international co-operation and commitment as it did national.

- Eichengreen identifies four sets of wartime changes that impacted the world economy: domestic finance, international finance, commerce, and politics.

- Nations maintained the appearance of the Standard whilst suspending the reality⁴.

- The US went from being a debtor to a surplus nation and the strong dollar post-war became a significant challenge for policy makers.

- The belief that the war would be short and relatively cheap meant that governments had delayed raising taxes, making finance problems later more acute. The belief that victors would be able to pay off their war debt with reparations was a serious miscalculation.

- Germany had funded only 8% of its wartime expenditure through taxation. The US funded one-third of its expenditure through taxation and the rest via debt. Britain already had an income tax in place and was better positioned to increase tax receipts; the revenue raised from this tax alone quadrupled over the course of the war.

- In Britain, after the war there were calls from the middle- and upper-classes for taxation levels to return to pre-war levels; the working-classes had been promised a ‘land fit for heroes’, with all the social provisions and cost that entailed.

- Post-war debt to GNP was 164% in France and 126% in Britain; it was only 27% in the US.

- France – between 1914 and 1918 the number of francs in circulation quadrupled.

- World trade was permanently reoriented by the war. American meat exports rose tenfold between 1913 and 1918; wheat and flour exports tripled over the same period.

- Proportional representation in European nations represented a substantial barrier to implementing tax rises and spending cuts that would be necessary for a return to stable currency policy.

- Postwar instability:

- A 1920 Act of Parliament prohibited the export of gold from Britain, and the nation’s currency became non-convertible; continued trade imbalances meant that sterling depreciated significantly as a result.

- Though the Cunliffe Committee had recommended an early return to gold, the need for flexible exchange rates delayed this move. Rapid changes in price levels across former Standard nations...

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