The Crisis of the Sterling

In an international sense, the 'Golden Years' weren't quite so great. Sterling had major problems. Although as a whole the world is booming, external problems in the British  economy were starting to show. The fastest area of trade growth between major economies was in manufactured goods, yet Britain's share of manufactured trade fell from 25% in 1950 to 11% in 1970. The balance of payments was also perceived as weak because of its volatility. Visible trade was constantly in deficit and invisible trade in surplus, but the magnitude of these fluctuated a lot meaning there was never a consistent surplus. It was weakened further by the Sterling balances.

Sterling balances is the term given to debts accumulated during the Second World War. This figure stood at roughly £3.5 billion by 1950. The gold and foreign exchange reserves covered roughly 1/5th of this, although this figure was increasing. In 1957 exchange controls were removed and there was a danger than holders of the pound would sell up. The government needed to strengthen their reserves in order to stop this run on the sterling from occurring. It needed to run a persistent balance of payments surplus.

The government needed to resolve Britain's balance of payments problems. It had three routes to go down: protectionism, devaluation or deflation and 'Stop-Go'. Protection would've been opposed by the US and other members of GATT and EFTA, therefore that option was ruled out. Devaluation took place in 1949 to $2.80 as a war adjustment, but any further devaluation was difficult because of being part of the fixed exchange rate system of Bretton Woods. It would also conflict with the Sterling Area. The Sterling Area was what laid behind and held together the Commonwealth. It also supported the City of London's position as a global financial centre. Devaluation of the sterling would cause a collapse of the Sterling Area and would be unfavoured electorally. The final choice was the route taken. Bouts of deflation would be implemented to cut imports to improve the balance of payments position. However, the way the government went about it ultimately failed. They were too timid with their squeezing of the economy because they wanted to protect their full employment objectives and therefore foreign currency reserves stayed low and the sterling crisis continued.

One of the main issues Britain had was that state spending abroad was offsetting all private sector surpluses in the 1960s. The state was spending nearly £200 million a year in aid to the Commonwealth and £313 million in overseas military spending. Without this being cut any attempt to improve the balance of payments would be in vain.

Eventually, the Sterling had to be devalued. The Balance of payments crisis just prior to 1967 was the last straw and the Sterling was devalued to $2.40. Military spending was also cut back. There was some short term success from this, the balance of payments was in surplus by 1969 but it didn't last long as inflation and wage rises meant any gains were soon wiped out. The Sterling Area gradually faded away after this. It just could no longer be maintained with the decline of Sterling as a global currency. The empire was also in the process of breaking up as Commonwealth countries were beginning to gain independence and demand their own currency to complete this process. The demise of Britain was in full swing.

To conclude, we can say that during the 60s and 70s it was realised that the British economy was no longer in a position to support a global currency. The balance of payments was a persistent problem for the economy because of a wrongly held belief that Sterling was still a major currency. The problems did not end with the 1967 devaluation. 

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!

Sam. 

Britain and the International Economy, 1870 - 1914

During the period from 1870 up to the start of the First World War in 1914 the British economy changed a lot. As well as this, the international economy as a whole had a spectacular change around so that conditions in 1870 in no way matched those in 1914. Firstly, world trade was growing. The rate at which it was growing was outstripping world output which shows the industrialisation, falling transport costs and mass emigration that was happening across the globe. In Britain, trade grew 35 fold over the 19th century.

Let's focus more on Britain now. Foreign Trade stayed fairly constant in the time period given, in terms of the fact it was at 30% of GNP in 1870s and also at this level in 1913. As a bit of background, it was at 10% in the 1830s and 17% in the 1850s. During 1870 and 1913 foreign trade as a percentage of GNP did fall, but it recovered just before the First World War. The majority of this foreign trade was in the form of manufactured goods, although it was declining. For example, 56% of exports in 1870 were textiles but textiles only made up 37% in 1910. As far as imports go, we imported a lot of food and raw materials because we weren't self sufficient in these, apart from coal.

We'll move on to the balance of payments position for Britain now. Before 1914, imports exceeded exports. Exports of goods only made up two thirds of our imports between 1870 and 1900. However, it wasn't all bad because Britain had a very sophisticated 'invisible' sector for this time; this comprised of business services and overseas investment. With the exports of these included in the mix Britain actually ran a surplus which increased between 1851 and 1913. We have many reasons as to why a lot of funds were leaving the country in terms of these 'invisible' goods, they are split into two groups: 'pushing' funds out factors and 'pulling factors'.

'Pushing' funds out factors are basically the factors in Britain that meant it was in the best interests of investors to send their money abroad. They include:

•  The safe investments in Britain gave very poor returns compared to the equivalent abroad.
• High return investments in Britain were all very high risk.

The other factors are called 'pulling' factors. These are factors that come from the countries abroad that encourage investment. They include:

• Large infrastructure spending abroad because of industrialisation. 
• Overseas governments were issuing bonds with returns of 4-5% in comparison to the 2% return in Britain.

Britain played a vital role in the world balance of payments during this time period as well. We ran deficits with industrial countries and surpluses with the primary producers. So, we were in deficit to countries such as the USA but ran surpluses with countries in Asia and South America. 

Some contempories came to the conclusion that Britain was in a weak position at the time. They argued that Britain's share of world exports was falling and they were beginning to import more and more manufactured goods. The British exporters were falling behind in more advanced products. They had solutions, however. They felt British business needed to be more efficient in their production techniques to make them competitive on the world market again. They also felt that government policy was to blame, especially free trade. The idea behind free trade was that it would maximise the wealth of all nations by the theory of comparative advantage, and this in turn would maintain Britain's dominant position in the world economy. However, most major economies didn't adopt it and the protectionist countries actually grew faster than Britain after 1870. 

I'll round things off there. Basically, we can conclude that from 1870 to 1914 Britain was comparatively having a bit of a rough period. It kept a surplus on its balance of payments and was still very much a key player in the world economy. But, other countries were catching up. Britain had lost its place as the dominant exporter of manufactured goods and was adopting policies (free trade) that weren't effective. Next I'll move on to the interwar period of the British economy to see how that changed. Thanks for reading!

Sam.