Saturday, 3 November 2012

The Economy During Interwar Britain

We've seen how the economy functioned prior to war and during the First World War in the last few blog posts, now we'll move on to the economy between the two world wars. Instability is the major recurring theme in this period. We see two major recessions, one between 1920 and 1922 and another from 1929 to 1932. There's also a slight one between 1937 and 1938, but this wasn't as sever. If you look at this in context with the rest of the world, Britain's economy is actually relatively stable yet still under-performing comparatively to the other large economies. If we look at growth statistics we can see that in the latter half of the interwar era the economy was growing at a respectable 2.2%, however before this the economy actually shrunk and therefore the growth average for the whole interwar period (1913-1937) isn't at all impressive.

There were many weaknesses to the interwar economy, as you'd expect. Firstly, international trade was falling. We'd relied so heavily on it in the 1870-1914 period but now it was dwindling rapidly. In 1913, international trade and services was at 30% of GDP. In 1938 it was only 15%. The levels of trade did not exceed the 1913 levels until after the Second World War. One of the causes for this fall in trade is that world output grew faster than world trade. Essentially this meant that demand for Britain's goods would fall because the market was getting more competitive as supply was increasing. Here are some statistics to back that point up:

  • 1929 - There is 80% higher production of manufactured goods than in 1913.
  • Britain's market share for manufactured goods fell from 30% in 1913 to 22% in 1937.

An example of this downturn in trade can be seen in the cotton industry. In 1914, Britain was a net exporter of cotton, with 80% of what was produced being shipped abroad. Other markets around the world, such as India, began to become self-sufficient behind tariff walls and therefore didn't import as many. Other countries such as Japan began to produce cotton too at a lower cost because of the low-wages. Because of this British cotton exports halved over the period 1913 to 1936.

Another issue with the economy is the mass unemployment. In the good years it's still at 8%, in the worse years it could reach as high as 17%. However, the issue was mostly geographical, or regional. The north of England, Wales, Scotland and Northern Island were the worst affected. These ares tended to rely a lot on the older Victorian industries such as coal and cotton. In the South and the Midlands, new developing industries were adopted, such as cars and chemicals and therefore unemployment here was at a reasonable level. Old industries were failing and not enough new jobs were being created to keep the unemployment down. 

Some economists began to argue that the problem with the economy was an inflexible labour market after 1914. Why was this? Well, trade unions had gained a lot more power, there were generous unemployment benefits giving no incentive to find work and institutions could set their own minimum wage rates. This made wages pretty stuck and unable to change much to changes in prices. However, it isn't crystal clear that wage flexibility was that much greater than before 19144. Benefits only got better as time went on. Keynes got involved and argued that government monetary and fiscal policy was the problem... debate ensues!

Thanks for reading!


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