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.

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.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

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.

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.

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).

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".

Advertisement - Article continues below

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.

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).

Advertisement - Article continues below

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




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

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
UK Economy

Coronavirus: Big Brother widens his embrace

The coronavirus crisis has led to a massive expansion of the state into all areas of daily life. Should we be worried?
4 Apr 2020

Three things matter for the UK housing market now – and “location” isn’t one of them

The UK housing market is frozen. And when it does eventually thaw out, the traditional factors that drive prices will no longer apply. The day of reck…
1 Apr 2020

Most Popular


Three things matter for the UK housing market now – and “location” isn’t one of them

The UK housing market is frozen. And when it does eventually thaw out, the traditional factors that drive prices will no longer apply. The day of reck…
1 Apr 2020

Has the stockmarket hit rock bottom yet?

The world's stockmarkets continue on their wild and disorientating rollercoaster ride. Investors are still gripped by fear. So, asks John Stepek, have…
2 Apr 2020

What does the coronavirus crisis mean for UK house prices?

With the whole country in lockdown, the UK property market is closed for business. John Stepek looks at what that means for UK house prices, housebuil…
27 Mar 2020

Oil shoots higher – have we seen the bottom for the big oil companies?

Just a few days ago everyone was worried about negative oil prices. Now, the market has turned upwards. John Stepek explains what’s behind the rise an…
3 Apr 2020