Great Depression in the United Kingdom

Overview

The United Kingdom economy had been severely damaged by World War 1 by serious human losses, to which were added the losses of many of its overseas markets and many of its overseas assets. Recovery was hampered by a severe post-war depression and - after rejoining the gold standard in 1925 at its pe-war parity with the dollar - by an overvalued currency and a struggle to resist massive gold outflows to the United States. (It was in an attempt to stem those outflows that the Bank of England persuaded the Federal Reserve Bank to engineer a monetary expansion in 1927.) The economy suffered a sharp "slump" (the term used in Britain to denote its share of the great depression) between 1929 and 1931, and the government was then forced by further ouflows, to leave the gold standard - after which the economy showed a steady export-led recovery. There was considerable labour unrest but no banking crisis.

Post-war recovery, 1919-24

Economic policy in the aftermath of the war was directed mainly at the restoration of a balanced budget. There had been large deficits during the war with less than half of 1918 spending paid for from tax receipts. In the two following years spending fell as a result of cuts in defence budgets, but tax rates were not reduced. There was thus an abrupt change from a strongly expansionary fiscal stance in 1918, to a strongly deflationary stance in the following two years, and sharp rises in the Bank of England's discount rate added to the downward pressure on economic activity. That downward pressure was at first offset by a surge in consumer expenditure, but in 1920 and 1921 the economy fell into a deep recession. National output fell by 6 per cent in 1920 and a further 9 per cent in 1921. Prices fell by 10 per cent and unemployment rose to 11 percent .
The recession was followed by a partial recovery and a six-year period of economic growth that was not strong enough to bring about a major reduction in unemployment.

Return to the gold standard 1925

In his 1925 budget speech, Winston Churchill announced the country's return to the pre-war gold standard. He forecast that the consequence would be a great revival in international trade as nations united by the gold standard would 'vary together, like ships in harbour whose gangways are joined and who rise and fall together with the tide'. It would do so, moreover at the pre-war exchange rate of $4.87 to the £ - a substantial increase on the then current rate. The move was met with general approval at the time. It was strongly supported by Montagu Norman, the Governor of the Bank of England, and by Benjamin Strong, the Governor of the New York Federal Reserve Bank who had written early in the year that "Mr Norman's feelings, which are shared by me, indicated that the alternative - a failure to resume gold payments...would be followed by a long period of unsettled conditions, too serious really to contemplate... - and incentives to governments ...to undertake various types of paper money experiments and inflation" . Among the few who disapproved was John Maynard Keynes, who argued in a tract on monetary reform that price stability should take priority over exchange stability.

In 1975, however, it was described by John Kenneth Galbraith as "perhaps the most decisively damaging action involving money in modern time" - and that represents current consensus among economists.