Inter War Economic Performance Notes

British Economic History

INTER-WAR ECONOMIC PERFORMANCE

What caused the high rates of unemployment that Britain experienced in the 1920s?

Introduction – relatively high?

Decline in old industries/slow take up of new

Gold standard – high interest rates/fiscal conservatism

Deflation – high wages/falling hours/lack of demand for labour

Weak trade – expensive pound and poor exports

Industrial performance

Unemployment benefits – overly generous

Conclusion

The Cambridge Economic History of Modern Britain, 1860-1939: Floud & Johnson

- The Bank of England raised interest rates from 5% to 6% in November 1919, and then again to 7% in April the following year; Glyn and Booth have argued that this rise in rates burst an unsustainable speculative bubble, precipitating the 1920-21 recession¹.

- In the labour market, unionised workers succeeding in obtaining a reduction in the average working week from 54 to 47 hours; wages were not cut in tandem and there was no immediate increase in productivity. Therefore, employers reduced headcount to cut overheads.

- In pursuit of pre-war dollar parity, the government and Bank of England pursued policies necessary to maintain sterling at $4.86. High interest rates and taxes stifled consumption and investment, and an overvalued pound harmed competitiveness.

- Britain’s post-war prices were 5-10% higher than her main trading partners². Moreover, Britain’s competitors had established footholds in Asia and Latin America during the war, and proved difficult to dislodge after it.

- Britain had specialised in ‘old’ industries which experienced oversupply and weak demand in the post-war period, namely: coal, iron and steel, textiles, and shipbuilding. ‘New’ industry did grow slowly, and its share of total employment grew from 11-15% between 1920 and 1929.

- Established industries not only represented substantial investments in capital stock, they were also home to vested interests resistant to change and lobbying for government subsidies and support; the 1921 Key Industries Duties are emblematic of this support.

- High real wages in the 1920s failed to adjust to falling prices and the strong pound, pricing British workers out of employment. Prices fell by almost 2% per year between 1922-29, but stubborn wages strangled the labour market³.

- Britain’s unemployment benefits were generous during the inter-war years, and in the 1920s were around 50% of average weekly wages; workers in lower paid industries had even greater disincentives to find employment.

- The post-1929 slump was global in nature, and Britain was not responsible for the worst financial excesses. British interest rates were below the international average during the 1920s and were reduced to 2% during the early 1930s.

- Unlike France, Britain had no agricultural sector for the unemployed to retreat to.

- Adoption of the 1932 General Tariff, a 10% tax applied to all imports, excepting raw materials.

- Between 1870 and 1913 UK unemployment averaged 5.8%; it averaged 10.9% during the interwar period and was far more volatile⁴. More specifically, unemployment in mining and metal trades reached average rates of over 20% during the 1920s, reflective of permanent decline in these industries.

- Unemployment insurance was introduced in 1911 and then expanded in 1920. Benjamin and Kochin have argued that abnormally high unemployment in the 1920s was the result of overly generous levels of benefit and the liberal way in which benefits were administered⁵. Benefit could be claimed for periods as short as a day and continue almost indefinitely; by 1937, 15% of men and 18% of women received benefits higher than 80% of their previous wage.

Real Wages, Productivity, and Unemployment in Britain and Germany during the 1920s: Broadberry & Ritschl

- Real wage growth outstripped growth in labour productivity in both Britain and Germany, leading to a rise in the rate of unemployment and a fall in investment. Investment funds were reduced by a fall in profitability, which also dis-incentivised the practice.

- Broadberry sees a reduction in working hours as a supply-side shock.

- Because Britain sought a return to the Gold Standard, monetary expansion to reduce real-wages was not possible.

- Wage bargaining between increasingly unionised workers and their employers kept real wages high for the employed at the expense of the unemployed, by setting them above the full employment level⁶.

- Germany’s large agricultural sector, and greater incidence of family business and self-employment, shielded it the levels of unemployment witnessed in Britain.

- By 1929, US GDP per employee was 1.54 times that of British and indicates a dramatic decrease in relative productivity since 1913 when it was 1.28 times greater; this was the continuation of a longer-term trend which had been apparent since c1890⁷. In manufacturing Britain was even less competitive, and could only have closed the gap with the US through massive investment; due to high wages, taxation, and interest rates, investment in the 1920s was below Britain’s long-run average.

- The profitability of British firms fell from 11.8% in 1913 to 8.7% in 1924.

Fiscal Policy and Employment in Interwar Britain: Dimsdale & Horsewood

- From 1922-29 British unemployment averaged 7.9%.

- It is widely view that this was the result of deficient aggregate demand, something that was tackled in the 1920s and 1930s with expansionary fiscal and monetary policy and a weaker exchange rate.

- Keynes advocated in 1929 a three-year public works programme of 100million per annum, approximately 2% of GDP, and argued that this would stimulate aggregate demand and raise employment by 500,000. Dimsdale and Horsewood have found that such a stimulus would have incurred crowding-out effects, weakened Britain’s fiscal position, and created around 330,000 jobs. Their model ‘suggests that the major determinant of the rise of the natural rate of unemployment in the interwar period was the fall in real...

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