If only we could return to the 1930s …

17 December

By Sue Konzelmann, a Reader in Management at Birkbeck, University of London and Frank Wilkinson, a founder member of the Institute for Employment Rights and Emeritus Reader, University of Cambridge.

Both Government and Opposition spokespersons offer the same dire warning. They claim that anything other than persistent austerity will “return the country to the 1930s”. Such claims demonstrate their complete ignorance of what was actually achieved in the 1930s.

In the economic recovery of 1932 to 1938, real GDP increased by 24%, employment grew by 14%, unemployment fell by 36%, the current accounts balance of payment improved by £48 million and real wages increased by more than 4%. Over the same period, national debt as a % of GDP, fell from a peak of 178 in 1932 to 146 in 1938, indicating the advantage of increasing prosperity over austerity for settling debts.

The background

In 1931 the British economy was in deep recession, mainly due to the fall in demand for British exports caused by the Great Depression in the USA. This reversed the £100m surplus on Britain’s 1929 balance of payments, creating a £100m deficit in 1931 and triggering a major economic downturn.

Britain’s foreign exchange position had been precarious since 1924, when the Treasury returned to the Gold Standard and overvalued British prices by an estimated 10%. Attempts by employers to cut wages to restore profitability led directly to the 1926 General Strike. The overvaluation of Sterling also exposed it to continuous international speculative pressure, keeping British interest rates high.

Under this austere monetary regime, the economy was already semi-stagnant during the second half of the 1920s and unemployment remained at around 1.5 million. The 1929 recession in Britain was thus largely a consequence of the fall in exports resulting from artificially high prices and the globalisation of the USA’s Great Recession.

Speculative attacks on sterling intensified, Britain’s balance of payments slumped into deficit, the recession deepened, unemployment increased and the growing cost to the exchequer added further to the budget deficit. In response, the government cut unemployment pay, causing political turmoil and stoking the economic crisis. Sound familiar?

Defense of sterling also drained gold and foreign currency reserves despite substantial borrowing from abroad. The extent of the financial crisis was revealed when, in June 1931, the Macmillan Report highlighted the parlous state of Britain’s short-term debtor position, and in the following month, the May Committee Report forecast a budget deficit of £120 million by April 1932.

In September 1931, Britain was finally forced off the Gold Standard and by the end of the year, sterling had already depreciated by 30%, stemming the run on the pound. This allowed a reduction in the Bank Rate from 6% in September 1931 to 2% by June 1932 – a move principally designed to lower the cost of public debt by allowing a re-issuing of the 1917 War Loan at 3.5 rather than 5%.

Austerity versus prosperity

Following the rate cut, the Government agreed to expand the money supply to stimulate the economy. Loans became plentiful and cheap, triggering a major house building boom which led the economic recovery from 1933 to 1937, after which re-armament took over as the main driver of economic growth.

The building boom lifted house completions from an average of 120,000 in the 1920s to 346,000 in 1937; the number of building workers grew from 857,000 in 1932 to 1,035,000 in 1937. Over the same period, employment in manufacturing increased from 6 to 7 million, with the output of cars and consumer durables growing particularly rapidly.

This consumer-led boom became self-sustaining as the income of those newly employed in house building and consumer goods manufacturing was spent on new houses and improved life styles.

By 1937, British output was 50% up on 1932 levels (20% higher than in 1929), unemployment had fallen by over half (although it remained higher than in 1929), non-agricultural employment rose from 10.2 million in 1929 to 11.5 million in 1937, and there was a striking increase in productivity. Coincidentally, the national debt was substantially reduced, from a high of 178% of GDP in 1933 to 110% in 1940.

However, the economic picture was not geographically uniform, with unemployment concentrated in the north and west where traditional industries were located. The 2nd World War effort galvanised the UK’s full productive capacity and extended economic recovery to the depressed regions.

The experience of the 1930s provides an object lesson for today. It offers a route map out of the stultifying effect of current Treasury financial orthodoxy, and the competition between the political parties to see who can increase tax least and cut expenditure the most.

The 1930s demonstrated that improved exchequer performance can be least painfully achieved by increasing real incomes and lowering unemployment. Another clear lesson from the 1930s is that you can further increase the effectiveness of such a strategy by concentrating the economic recovery on social needs. Now, as then, the need for appropriate housing should have high priority.