Advertisement
Merryn's Blog

What we can learn from the 1930s about economic recovery

The 1930s is usually seen as a time of economic misery for Britain. But the country bounced back from recession much faster and with much more vim than we are doing today.

Most of us think of the 1930s as a time of utter economic misery in the UK. We think of the horribly high rate of unemployment; of the nastiness of the lives of the men depicted in Orwell's The Road to Wigan Pier; and of course of the Jarrow march.

Advertisement - Article continues below

But next time you drive between Glasgow and Edinburgh, or take one of the main roads into London, keep an eye out for something that suggests this version might not be giving the whole story. What? The hugely confident art deco industrial buildings that went up during the period.

There's London's Hoover factory, the Pyrene factory on the Great West Road, the Firestone factory (now demolished), Battersea power station (the National Grid started operating in 1933), Speke airport (Liverpool), the Daily Express buildings in Manchester and Glasgow, the Shell Mex building and many, many more. You can see more on these gorgeous buildings here and here.

Advertisement
Advertisement - Article continues below

Look at all those, and you might ask yourself if it was really all so bad. I'm reading a pamphlet just out from the Centre for Policy Studies and George Trefgarne that rather suggests it was not. There was unemployment and deprivation in parts, says Trefgarne, but look at the economic data and you'll see the same isn't true of the whole.

Advertisement - Article continues below

It is four years since we tumbled into recession this time round, and no recovery is in sight. But four years after crisis first hit in the 1930s one wasn't just in sight, it was well underway. Industrial production hit its previous peak in 1934 and the economy grew at nearly 7% in 1935. Between 1934 and 1939, growth averaged nearly 4% a year in real terms; unemployment halved; housebuilding, car manufacturing, textiles, pottery and aircraft production all boomed; and those fabulous commercial buildings popped up next to arterial roads everywhere.

So what happened? Good economic policies, says Trefgarne. Tough spending cuts including an immediate 10% cut in the salaries of civil servants and to benefits came in fast.

There was also a series of high profile trials of those who had indulged in too much in the way of financial exploitation in the 1920s. That turned out to be good practice too: once the population felt they'd had a little retribution confidence in the financial system was easier to restore.

Advertisement - Article continues below

At the same time taxes were not raised but cut - the top rate was a mere 37.5%, peanuts by today's standards. The government kept loose money very cheap. And finally, there was the debt conversion, in which Chamberlain wiped £20m off interest costs in one go by cutting the payments on the War Loan from 5% to 3.5% (more on this in another blog).

Advertisement
Advertisement - Article continues below

That all this happened and that it worked suggests we should be paying more attention to the 30s than we are, says Trefgarne: they are clearly of "major current significance".

And the lessons he thinks we should learn? First, in the wake of a financial and fiscal crisis a government should cut spending quickly. Second, it should keep money cheap. Third, it should create confidence by making it clear that banks are sound and bad bankers are in prison. And fourth, it should make clear that as soon as it is possible, taxes will be cut.

Advertisement - Article continues below

This all seems perfectly sensible. But there is a problem with extrapolating too many of the policies of the 1930s out to our own situation. Why? Because the 1930s kicked off with a game changer for Britain that might have been the thing that caused the boom the rest might have been all but irrelevant. That thing? The exit of sterling from the gold standard.

In 1930, Britain was still on the gold standard at the pre-war rate of $4.86. It was forced off it in the autumn of 1931. The pound then fell 30%, and was knocking around $3.40 by Christmas. Trefgarne gives the end of the gold standard in the UK similar billing to most of the other policy shifts of the time. But my guess is that it was this, rather than Chamberlain's deliberate polices, that made the real difference.

With that in mind, perhaps the real lesson we might take from this is that financial crises are very often caused by the fixing of currencies, and in particular the fixing of currencies at the wrong rate. And that they can be ended by unwinding said fixes.

It is worth noting that back in the 1930s the countries that left the gold standard fast recovered much faster in the 1930s than those who hung on until later in the decade. While Britain was growing, France which refused to dump the Gold Standard until 1936 was contracting (by 1.6% by the end of the decade).

Something for the Europeans and perhaps the Chinese (with their fix to the US dollar) to bear in mind.

Advertisement
Advertisement

Recommended

How long can the good times roll?
Economy

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019
Beyond the Brexit talk, the British economy isn’t doing too badly
Economy

Beyond the Brexit talk, the British economy isn’t doing too badly

The political Brexit pantomime aside, Britain is in pretty good shape. With near-record employment, strong wage growth and modest inflation, there is …
17 Oct 2019
An economics lesson from my barber
Inflation

An economics lesson from my barber

On reopening his shop after lockdown, Dominic Frisby’s barber doubled his prices. It’s all part of the post-Covid inflation process – and we’re going …
8 Jul 2020
Boris Johnson’s grand infrastructure plan needs some small print
UK Economy

Boris Johnson’s grand infrastructure plan needs some small print

Grand infrastructure projects are all very well, but it is the small stuff that delivers the big returns, says Matthew Lynn.
5 Jul 2020

Most Popular

House price crash: UK property prices are falling – so where next?
Property

House price crash: UK property prices are falling – so where next?

With UK property prices falling for the first time in eight years, are we about to see a house price crash? John Stepek looks at what’s behind the sli…
2 Jul 2020
How “support” and “resistance” can help you spot trading opportunities
Sponsored

How “support” and “resistance” can help you spot trading opportunities

Technical analysis can help traders manage risk and decide where to enter and exit a trade. One simple form of technical analysis is the concept of “s…
6 Jul 2020
A first-half home run for investment trusts
Sponsored

A first-half home run for investment trusts

The investment trust sector has seen some extraordinary performance in the first half of this year. Max King looks at what's behind it, and asks: is i…
7 Jul 2020