How Britain avoided the worst of the Great Depression

For Britain, the Great Depression really wasn’t especially great, or particularly depressing. John Stepek explains why.

For the last month or so, I've been talking about the Great Depression the run up to it, the unfolding of the Crash of 1929, and the aftermath.

But clearly, it's mostly been US-focused. And maybe you're wondering, what was going on in Britain at this time? How come we don't really have the same folk memory of the Great Depression?

Well, there's a very good reason for that.

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The truth is that for Britain, the Great Depression really wasn't especially Great, or particularly Depressing...

There was no booming Britain in the 1920s

The 1920s was a boom era for the US. For Britain, though, the 1920s were hardly roaring. Things weren't tough all over; London was swinging, as ever, but in the industrial areas (pretty much everywhere else), life was hard and unemployment was high.

This is the first key point to grasp about Britain's relatively mild experience in the Great Depression we didn't have a massive bust because we didn't have a massive boom either.

The US was the big winner from the First World War. Europe, on the other hand, was now broke. And of all the major powers, Britain was most committed to repaying its debts and regaining its pre-war financial position in effect, we wanted to restore sterling as the global reserve currency.

That meant maintaining relatively tight monetary and fiscal policies. As Liaquat Ahamed puts it in is book, Lords of Finance, "Britain had pursued the most orthodox and prudent financial policies of any European power, and had been rewarded with the highest unemployment rate in Europe and a limping economy."

Then, in 1925, under the chancellorship of Winston Churchill, Britain went back onto the gold standard. In other words, the value of the pound was fixed to gold at a specific level. And because America owned most of the gold, we were in effect locked into a fixed exchange rate against the US dollar.

It's worth noting that Churchill not a man who could ever be accused of fiscal responsibility himself was never keen to go back onto the gold standard. And he later saw it as one of the biggest mistakes he ever made.

As Ahamed explains, Churchill had a pretty good grasp of the situation, even although he had no economics background. But Montagu Norman, governor of the Bank of England, was wedded to the idea of returning to gold. Norman won.

A pound was now valued at $4.86 the pre-war exchange rate. The idea of the pound ever being worth nearly $5 is quite staggering now, and the reality is, it wasn't worth it then either. America was on its way to being the pre-eminent power, and Britain was passing the baton. We were overvalued, and they were undervalued.

It's tough exporting goods when your currency is too high. And it's hard to get out of debt and we were very indebted at the time when the "real" value of your debt keeps rising because of rampant deflation (Britain was stuck with deflation from around 1926 to 1934).

This made the misery in the industrial parts of Britain even worse, and meanwhile, the national balance sheet continued to deteriorate. Efforts to balance budgets merely made things worse. And the crash of 1929 and resulting collapse in global trade was the last straw.

Something had to give. So in 1931, amid much political upheaval, Britain came off the gold standard (the US would do something very similar in 1971).

Everyone thought it'd be the end of the world. In terms of how it looked, it was embarrassing for the country. And it certainly rattled global markets.

Indeed, to get a flavour of how unthinkable it was, I'll give you a passage from Piers Brendon's excellent book on the 1930s, The Dark Valley. When a journalist had suggested the idea of abandoning the gold standard:

"Sir Warren Fisher, head of the Civil Service and permanent secretary to the Treasury, got to his feet, his eyes flashing, his face flushed with passion' and said that any such suggestion is an affront to national honour' and quite unthinkable'".

A week later, the deed was done. As the saying goes, never believe anything until it's officially denied.

How Britain evaded the worst of the Great Depression

But really, despite the histrionics, in abandoning the gold standard, Britain was simply rectifying its earlier error. The outcome was very similar to what happened in 1992, when Britain left the European Exchange Rate Mechanism.

Once sterling's link with gold was severed, Britain was able to cut interest rates, the threat of deflation was eliminated, and exports picked up too, because the value of sterling cratered. Monetary policy was easy, whereas in the US for example, it was tight.

And yet, because the rest of the world was struggling too, import prices still fell, despite the drop in sterling. This meant that "real" wages actually rose in the UK, which enabled higher consumption to offset the fall in exports.

Of course, that's not to say for a minute that everything was fine. The same groups who suffered pretty much everywhere else continued to suffer in Britain industry was in decline and the 1930s were particularly hard in the North, central Scotland and in Wales (this is when George Orwell wrote The Road to Wigan Pier). Efforts to improve the welfare state and to introduce specific schemes to try to stimulate growth in these areas were just sticking plasters.

Yet, even so, compared to pretty much every other major global economy, Britain had a relatively easy ride in the 1930s. Indeed, the recession of the 1930s was shorter (in Britain) than the one we've just been through.

All change is traumatic

If there's a lesson to take from this, it's the same one that we've been reminded of time and time again when a government cannot make good on its financial promises, it will change the terms. A developing economy will out and out default. But a developed one will too just in a sneakier way.

That's what quantitative easing is. And I'm not necessarily saying that this is a bad thing. Given the choice between a depression and cheating well, maybe cheating is best.

On the other hand, we all know what happened at the end of the 1930s. All those pressures end up coming out somewhere. Britain's exodus from gold triggered a domino effect. Another 25 countries abandoned the gold standard immediately, and others followed Japan dumped it in December that same year.

It makes no sense to stick to an outdated, damaging system of values. However, if you upturn the whole thing, then you have be aware that as everyone is left scrabbling around for a new set of values, you don't know what'll come crawling out of the woodwork.

Brendon observes: "The collapse of the international standard of valuation bred greater disillusionment with capitalism." Isn't this what's happening right now?

The abandoning of the gold standard led people to question how they could place value on anything. Today, the sight of central banks printing money from thin air raises similar questions.

What is money? Does it have any intrinsic value? Or any value at all? If it does, then from where does its value derive? And if it doesn't, then why are we spending most of our lives in the pursuit of this thing that a central bank can print from thin air?

This leads to a lot of confused thinking and leaps of logic. Against what other backdrop could something like the bitcoin phenomenon arise? Or the idea of a universal basic income, paid to an idle serf class by their benevolent tech industry overlords?

I'm hopeful that the geopolitical backdrop is healthier than in the 1930s. But make no mistake, we are currently going through a similar period of economic, political and monetary soul-searching. And the contours of what will emerge are far from clear.

John Stepek

John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.