The Transformation of Policy Between the Wars

Immediately after the First World War, the government's aim for policy was to get the economy back to the 'normality' experienced prior to 1914. This sort of thing included the government playing a limited role in the economy, more integration with the world economy and restoration of the gold standard, free trade and a balance budget.

Initially these three final points are achieved. The budget is eventually balanced, albeit a higher budget than previous years due to the increase social spending and maintenance of the national debt. During the 1920's the policy of free trade is also pretty much restored. Britain gets back on the gold standard in 1925 at the rate of £1 = $4.86. Germany and France both rejoin the gold standard at a similar time, along with most other leading economies. Why did we return to the gold standard you may ask? Well, firstly it helped achieve the restoration of pre-war 'normality'. Also, it aimed to try and stabilise the currency which would in turn help out trade. Another feature of the gold standard was to allow the monetary system to function on its own. What I mean by this, is that if the country runs a payments surplus then gold will flow into the country, interest rates will be decreased so wages and prices will fall. This will in turn cure the surplus. It also works the opposite way for a payments deficit. A final point is that the gold standard was a means of stopping politicians from meddling with the money supply!

However, pre 1914 the gold standard worked but after the war and during the 1920's it just didn't. There is a list of potential reasons for this:

• Why the gold standard worked pre-1914:
• It was developed gradually over time.
• Capital and labour was freely moving.
• The central bank could use interest rates to protect the currency, independent of the government. 
• London was still a financial centre.

• What changed in the 20's?
• There was a rush to return to the gold standard.
• More protectionism and less migration due to barriers.
• Central banks were under pressure from politicians.
• Paris and New York now competing against London as financial centres. 

Mr. Keynes pops up again in this debate. He pointed out that British prices had risen faster than the US', so starting at the same £1 = $4.86 rate would be an overvaluation of the pound. Although this shouldn't have matter because the gold standard should re-adjust prices, Keynes doubted it would work. He thought it would have bad domestic effects including interest rates needing to be kept at 4.5-4.5% and due to this borrowing would become expensive and investment would suffer.

The world slump is the next chronological step in the economic history of Britain. The recession of 1929 - 1931 started because of the Wall Street Crash in the US. This meant massive balance of payments problems. In 1931 came the European Banking Crisis and so in Autumn of that year Britain was forced off of the gold standard. This was first portrayed as a temporary change, but gradually the realisation came about that it was for good. Interest rates were cut to 2% to encourage borrowing and investment which would boost the economy again! Amazingly, there was a recovery. GDP rose as investment rose and Britain actually now compared well with other global economies. It would be easy to say all of this was because of the gold standard, but it isn't true as many other factors were also contributing to the recovery of the British economy. What the slump did cause, however, is the abandonment of free trade between 1931 and 1932. 

Keynes had the idea that investment from the government was something that was necessary for the economy. But, the treasury wasn't in agreement with this theory. They believed it would unsettle foreign investors and worsen the national debt. Keynes thought that there was no point in cutting wages because demand and consumption would suffer. What was needed was public investment which would boost the economy via the multiplier effect. The treasury argued it would be inflationary and any more borrowing would get out of control. The only time borrowing was allowed was in a one-off circumstance for rearmament!

Thanks for reading again guys, that'll be it for economic history for a while... I promise! Haha.

Sam. 

Protectionism (Macroeconomics)

Protectionism refers to the protection of a domestic industry from foreign competition. There are many types of protectionism which i'll run through later on in this post. The free movement of goods and services is restricted between countries and economic blocs to try and protect a countries own industries from the powers of competition from abroad. The main types of protectionism are as follows:

• Tariffs
• Quotas
• Voluntary Export Restraints
• Foreign Exchange Restraints
• Embargoes
• Red Tape

Tariffs is very much self-explanatory. A tariff, or tax, on a good being imported into the country from abroad.  The effect of the tariff will be moving the supply curve of the good backwards by the value of the tariff. A tariff will protect domestic firms, especially new firms, by making it more expensive for goods to be imported and therefore raising the price, allowing home-grown firms to compete more. It's useful when it comes to goods from the likes of China and India. These countries have such low costs of production that they can afford to sell the goods at prices much lower than those of domestic firms in the United Kingdom. Therefore, these tariffs add to the production cost meaning that imported goods will cost more and allow domestic firms to compete more. 

A quota is also a fairly self-explanatory form of protectionism. It is a limit on the supply of a good or service into a country from abroad. An example would be a quota restriction on the import of t-shirts from China. The government may create this quota in the form of a number of goods, i.e 20,000 t-shirts per year, or they could do it by value, i.e £4 million worth of t-shirts per year. Supply of the good will fall which will in turn help domestic industries once again to compete as well as potentially raise the price of the goods. A problem with quotas, however, is that it can cause international disputes such as the one between China and the EU about the importing of Chinese textiles. More can be read about that by clicking here.

Voluntary export restraints are an agreement between one country and another to limit their exports to each other of certain goods. This is normally made between countries who are on good terms with one another or who are in the same economic bloc. Foreign exchange restrictions are a type of protectionism that doesn't appear much. This is when a government seeks to reduce imports by limiting the amount of foreign exchange made available to those within the country who wish to buy imported products. Basically, the supply of foreign money to buy these imports will be limited so not as may goods can be purchased from abroad. 

The final two now: embargoes are a ban on the import or export of products to/from a particular country. For example, a ban on weapons to a country with poor human rights records. Red tape is the idea of making importing difficult by creating lots of paperwork and procedures to delay and therefore discourage the imports. 

There is, of course, an argument for going ahead with protectionism. Firstly and potentially most importantly, it gives the government the ability to control imports which can therefore improve the trade balance. If the trade balance is in the red the government can use any form of protectionism in an attempt to curb spending on imports and improve the trade balance. Protectionism is very beneficial to declining domestic industries as well as the new industries. Both these industries aren't at the stage to be totally competitive and therefore could easily be wiped out from cheap imports. However, protecting them by limiting imports or raising the price allows these firms to get a proper foot in the market, expand and grow enough to be able to compete with the cheaper imported goods and services. Finally, it's also a method for generating revenue for the government if the protectionism comes in the form of a tariff. This tariff placed by the government goes straight in their pocket and can therefore help to eradicate budget deficits as well as improve investment power. 

With all advantages does come disadvantages, and the case of protectionism is no exception. Consumers will experience a welfare loss due to higher prices and the loss of consumer surplus. It can also be regressive for low income families as the protection will effect everyone equally, therefore those with less money will feel it the most. Raw materials may well become more expensive. This is far from beneficial for domestic industries as production costs will rise and therefore profits will be squeezed. Retaliation is another big thing that could crop up as a direct result. Putting a form of protectionism on imports from a certain country could cause that country to do the same back, which will restrict the exporting potential of the country and could worsen the balance of trade.  Finally, maybe a minor disadvantage, but there is the administration and implementation costs of the protections to take into account.

That pretty much sums up protectionism for you. Decide or yourselves whether you think they're beneficial or not, but at the end of the day forms of protectionism will always be used. Thanks for reading guys, stay tuned and share the blog if you find it useful!