Depression and Recovery?

IN recent years the economic performance of Britain in the inter-war period has proved an attractive subject among economic historians. It is, of course, a particularly convenient period for historical analysis: it begins with the effects of one world war and ends with preparations for a second, even more disastrous, one. And from the viewpoint of social and economic history the most dramatic feature of the period is the persistently high level of unemployment. Indeed, what might be called the traditional view is that these years were overcast with economic depression which brought severe hardship to large sections of the community. This characterisation has its origins in the literature of the period itself. There is, for example, the bleak picture painted by Orwell’s The Road to Wigan Pier (1937) and the social decay and disillusion portrayed in Greenwood’s novel, Love on the Dole (1933). Moreover, such events as the General Strike and the ‘hunger marches’ bear testimony to the degree of social and political tension which existed.

BEFORE we examine the data in detail, it is first of all important to distinguish between the cyclical features of the economy and its longer-term growth performance. Economic theorists have for long wrestled with the complex problem of relating these two aspects to one another, and in historical terms the problem is probably insoluble. As Svennilson has pointed out (1954, 12–13) in his study of the European economy in the inter-war period, the economic historian can indicate the relationships between the two aspects of economic change but cannot integrate them into a general explanation.

IT is appropriate to begin with some comments on monetary policy since, over the earlier part of the period, it was considered to be a major economic issue. Present discussion, however, will concentrate mainly on the period leading up to the return to gold in 1925, because it is this aspect of financial policy which is most commonly alleged to have affected the growth performance of the economy. It is attractive to depict this episode as one in which ‘villainous’ bankers, led by Montagu Norman, Governor of the Bank of England, dictated policy to successive governments regardless of its broader economic consequences, which they did not understand, and heedless of its social costs, which they considered to be unavoidable. And all the while they thwarted Keynes’s efforts to persuade the Government to adopt an alternative course. And even when this charge is stripped of its polemics, there remains a substantial case against Norman and a small circle of Treasury officials and City bankers. Put simply, the argument is that restrictive monetary measures, which were aimed at restoring conditions suitable for the return of operation on the gold standard, created high unemployment and undermined the ability of the economy to adjust its industrial structure to the changed circumstances of the post-war years. This thesis has been recently supported by Pollard (1970) in a survey of financial policy between the wars.⁶

COMMENTATORS, from the Balfour Committee of the late twenties onwards, have pointed to the growth of major new sectors in industry during the inter-war years. Motor-vehicle production increased rapidly, though not evenly, from 1922 onwards; and in 1930 Britain became the largest producer of passenger and motor vehicles in Europe, by overtaking France which until then had led the field. This growth was associated with a marked fall in prices — by nearly 50 per cent between 1924 and 1937 — while the average factory price of all cars produced fell from £259 in 1924 to £130 in 1935. Rayon production shot up during the 1920s and the total continued to grow, though less rapidly, during the 1930s. The electrical industry contains a number of branches and there is therefore no really satisfactory overall measure of its performance. Nevertheless, there are ample data available to illustrate the various aspects of the industry’s expansion. For example, the number of cookers sold rose from 75,000 in 1930 to 250,000 by 1935, while the number of radio receivers increased from around half a million in 1930 to nearly two million by 1937. And, as with cars, production of these consumer goods was accompanied by a marked fall in prices.

FLUCTUATIONS in external trade were clearly an active element in the cyclical downswings of the early part of the period, but thereafter the relative stagnation of British trade can be regarded as more of a long-term drag on the economy. The statistics of trade which were available in the inter-war period, and which have been used directly by some earlier historians, contain a number of inaccuracies. Since then there has been a great deal of reworking of the figures by a number of experts, and the pattern of British trade is now fairly clear.

IT is possible to argue that shortcomings in this field constitute the most important factor in limiting growth of the economy between 1918 and 1939. Certain aspects of policy have already been considered. But before other areas are reviewed, it is as well to draw attention to the scale of the Government’s indirect effect on the economy. Even in the pre-war period U.K. public expenditure (central and local) average 12 per cent of gross national product, and this made the Government by far the largest economic institution in the country. Over the war period itself, the proportion increased to one-half, though during the twenties and thirties it dropped back to an average of between 24 per cent and 29 per cent, with a sharp rise to nearly 35 per cent over the rearmament period of 1938–9. It is necessary to qualify this, however, by the fact that in 1929 about one-quarter of public expenditure was accounted for by interest payments on the national debt, as compared with 6 per cent in 1913. And the official attitude towards income and expenditure was dominated by the Treasury’s Gladstonian view that the reduction of the national debt was the primary task of public finance. Direct expenditure on goods and services by public authorities averaged between 12 per cent and 16 per cent of gross national product between 1920 and 1937, with a sharp rise to 20 per cent in 1938.

UNEMPLOYMENT levels have to be seen against the background of a substantial rise in the labour force between 1918 and 1939: the number of insured employees rose from 11.5 million in 1923 to nearly 16 million by 1939. It must be emphasised, however, that figures for the total labour force are subject to some significant margin of error. Estimates have to be made, since not all workers were insured and it is practically impossible to calculate what proportion of women can be counted as part of the labour force. Nevertheless, in broad terms, the increase resulted from a steady fall in the death rate so that the average age of the population and of the labour force was rising. This conjunction of factors led to a great deal of concern in some quarters because of fears of an eventual decline in total population with the consequent burden of an increasing proportion of retired people. Although these fears were not realised, the nature of the change in the population and the labour force did have immediate economic effects. It exacerbated the unemployment problem and reduced the level of occupational and geographical mobility.