Key Information:

1 postwar boom, crisis and recovery, 1918-39

Beginning

- emerged from the war economically damaged for many reasons

- war lasted longer than they thought and commanded more resources as a result

- been loaned large sums from America's Wall Street

- had been cut off from valuable export markets by German U-boats; sank 40% of our merchant shipping, in 1914 exports were 1/3 of income but by 1918 only 1/5

- industries forced to switch to war production instead of supplying export markets

- by 1918 lost >3/4m men which impacts on production

- total financial cost was £3.25b

- continues to import the prewar amounts which led to a negative balance of payments throughout the 20s

- debts inccured were 136% of annual economic output in 1919; trade damaged severly

- by 1920 total debt was £8b, budget was £800m and £300m went straight on paying off debts

- 1908 standard rate of income tax was 5% but rose to 25% by 1924

Boom

- short lived boom, 1918-20

- lack of wartime restrictions meant everyone started buying; war meant that many had accumulated considerable savings in cash and bonds

-throughout 1919 consumers and businesses spent their savings; individuals buying items like coffee, soap and cigarettes and businesses bought and sold stocks/shares

- amount of shares issues: 1918=£65m by 1920=£384m

- investors bought old industries: shipyards, cotton mills, coal mines; poor investment choices as the monopoly that GB once had prewar had vanished due to new competitors, USA, Japan, South America;industries outdated and had received little wartime investment

- 1919 there was a surplus of ships

- wartime industries returning to civillian use couldn't keep up with demand; goods in short supply were expensive which meant demand declines and the boom ended

Crisis

1920-21 recession ->

- unemployment levels u to 12%;by 1921 2 million workers unemployed; areas such as south Wales and Tyneside effected the worst as old industries collapsed

- crisis in coal industry led to a wave of strike action

-cost of living increased by 25%, 1918-20; wages stagnated

- caused by

- deflation: government cut spending by 75% 1918-20; bank of england raised interest rates to 7% (expensive to borrow); drained available money to spend on the economy; by end of the decade debt had rose from 120% of GDP to 160%

- loss of export trade: global economy no longer dominated by GB; competitors had taken advantage of GB disruptions during the war (i.e. u boats); e.g. loss of textiles, Japan supplied India and South East Asia with cotton and silk during WW1 which meant the industry in the north west of england declined

-underinvestment: in the steel industry output was lower than rivals during war and by 1920 a growing number of GB manufactures began to import USA steel for its superior quality and price; by 1937 GB steel foundaries produced 83000 tonnes pa by USA were producing 210000 tonnes and Germany produced 125000 tonnes

-industrial relations: in order to prevent a general strike in 1919 DLGhad bought of GB workers in the main industries (coal,rail,docks) with generous pay and working hours; as workers were mainly former soldiers they were unwilling to lose these conditions when times became tough; creation of 8 hour working day = 13% decrease in working hours with no increase in productivity; wage rates stayed high = products overpriced and uncompetative

- attempts to solve problems, 1921-4 ->

- geddes axe: 1921 DLG appointed Sir Eric Geddes to implement cuts; high taxes were blamed on high spending so wanted to cut tax; Geddes recommended £87m cuts 1922-3 budget, came from military and health/welfare/housing (£205.8m 1920-1 to £182.1m 1922-3)

- tariffs and free trade: pre war GB used free trade, post war used tariffs; free trade means domestic industries have to compete with foreign competitors;tariffs (protectionism) means adding tariffs to certain goods that are imported into the country to protect struggling domestic industries who can't compete with foreign prices.

- because of the depth of the rcession many members of the government considered using tariffs, DLtryG had always believed in free trade over tariffs and when he left office in 1922 Stanley Baldwin called an election to and impose tariffs with the public's support (he took over from Bonar Law, not elected) but lost to Labour

- Ramsey MacDonald and the economy ->

- had campaigned on the issue of unemployment and critised Baldwin's failed attempts

- when he was president however he was unable to make any real improvements and blamed it on the complexities of government

- MacDonald lacked a parliamentary majority which meant he required support from other parties which he didn't receive

- pressure to present labour as moderate made him reluctant to do things such as increase spending

- between 1921-4 unemployment declined from 12%-6.5% but rose during MacDonald's premiership to 8% in 1925; meant there was a fall in inflation from 15%in 1920 to <1% in 1924 ; inflation fell because spending had collapsed due to unemployment not because of MacDonald

- Baldwin's second administration, 1924-9 ->

- Baldwin's chancellor of the exchequer was Winston Churchill; he had never held this position before

- value of the pound was decided by the Gold Standard, used prewar when economy was booming; Gold Standard was suspended during the war but in 1925 Churchill returned to the Gold Standard because it would look bad for GB if we didn't and he thought a competitive economy could not be built if the government made it easy.

- exchange rate in 1925 was £1 = 4.85 US; this made the pound appealing to foreign investors but also made it cost more to borrow money making it hard for businesses and didn't provide employment opportunities

-businesses wanted off the Gold Standard and had to make up for high cost by reducing wages or putting them on short-hour contracts

- 1931 September the bank was forced to admit it couldn't keep the pound in the Gold Standard; interest rates already at 8%; withdrew from Gold Standard and devalued the pound (enabled GB economy to recover quicker than other countries)

-Depression, 1929-34 ->

- October 1929 a stock market crash on Wall Street USA; as USA had surpassed GB as largest importer it meant that it had repercussions worldwide; global trade contracted by 66% over 5 years; GB exports declined by 50% which was worth 1/3 of the countries Gross National Product (GNP)

-collapse affected coal, dock work, cotton, iron, steel and ship building; shops where the workers of the industries spent their wages were affected by the loss

- unemployment was 1m in 1929 went to 2.5m 1930; put pressure of government so tax revenue delcinedbut the amount of people applying for financial assistance increased

- 1931 GB economy shrank by ~5% but the government prioritised keeping the pound in the Gold Standard system and supporting its value (withdrew September 1931)

-Labour government's response->

- chancellor of exchequer was hilip Snowden who believed that unemployment relief should come from taxing the wealthy and corporate profits; as profits slunped and the wealthy concealed their wealth the cost of providing for the unemployed was unsustainable

- economist John Maynard Keynes suggested government spending on public works (i.e. new roads and jobs) but Snowden refused

- knew that bankers had little patience for further spending as the value of bonds would decrease; only area they could increase was jobs in the defence industry

- during the summer of 1931 there were rumours that the budget would be unbalanced and USA started to panic sell the pound causing it to slump in value; to reassure financiers the government proposed spending cuts and introduced a 10% cut in unemployment assistance; kept the pound stable but caused hardship for the poorest which split the labour party

- the split meant the government resigned in August 1931

-national government's response ->

- the special areas act: introduced 1934; identified Tyneside, south Wales, west Cumberland and Scotland as regions in direct need of government assistance but they only received a small part of the investment

- a new steel works in Ebbw Vale brought some jobs to depressed south Wales valley but it was too little too late

- king edward VIII visited Dowlais in Wales 1936 stating 'something must be done' about the poverty and unemployment

- hunger marches: famous march from Jarrow to Tyneside in 1936 called the Jarrow Crusade; marches aimed to raise attention

Recovery

- depression did not last as long as other countries, between 1932-7:

- real income rose 19%

-GNP rose 23%

- exports increase 28%

- unemployment feel from 17%-8.5%

- economic growth averaged 4% a year 1934-7

- removal from the Gold Standard enabled:

- a cut in interest rates. borrowing was cheaper which enabled more spending and job creation whilst making it ess attractive to save money which increased spending too. fueled a housing boom in southeast and midlands, mortgages in 1930 =£316m by 1937=£636m . cut in rates referred to as a 'Cheap Money' policy.

- government allowed a degree of inflation the national government stimulated spending which led to slight price rises, e.g. spent money on road building which increased e car industry

- devaluation of the pound made exports cheaper and more competative

- banks were more willing to spend

- national government also stimulated economic growth by restructuring war debts so they only cost 25% of tax revenue instead of 40%

1b: Responding to economic challenges