1b: Responding to economic challenges

Chapter Summary: - after a brief post war boom, a devastating economic slump led to a huge increase in unemployment and poverty from 1920-21 - the Conservatives hoped protectionism and tariffs would revive the economy but this was electorally unpopular the hardest hit areas were the regions associated with heavy industry, the south Wales coal fields, the shipyards of Tyne and Clydeside and the mining areas of northern England - following the Wall Street ash in the USA, Labour's spending plans in 1929-31 came under immense pressure because of Britain's struggling economy - during the 1930s the depressed regions suffered disproportionately to the rest of the country . The National Unemployed Workers' Movement organised several hunger marches, protesting against poverty and the means test - in more affluent parts if the country the 1930s were a time of growing living standards, jobs and consumer goods - the government tok control of large sections of the British economy during WW2 - the Labour party wished to continue government intervention in the economy after the war and pursued a policy of nationalisation - from 1950 to about 1975 the world experienced global economic boom that Britian benefited from - during the same period both Labour and Conservative parties had a broad agreement over the management of the economy, with a commitment to full employment, nationalisation and tolerance for a degree of price inflation - a retreat from empire and mass immigration not only reduced government expenditure overseas but also resulted in new skilled workers  and low cost labour in Britian - the 1950s saw a relaxation in consumer credit and an increase in new products available to buy, leading to a dramatic increase in consumer spending - in the late 1950s the first sign that the consensus on the economy was being challenged came from within the Conservative Party senior treasury ministers resigned, arguing that Macmillan should adopt monetarist policies - Macmillan hoed that people would be sensible in their spending and unions would show restraint in their pay claims, but this was naive - throughout the 1960s inflation began to gradually increase and by 1970s so did unemployment - Harold Wilson's attempt to modernise the British Economy were undermined by his high spending plans, his refusal to devalue the pound and relative economic decline - by 1970 Edward Heath planned to introduce monetarist and free market policies, but trouble with inflation and the unions prevented this - in 1976 Britain applied for a loan from the IMF and was forced to adopt neo-liberal policies, which included cts to state spending and free market reforms

Key periods: Short post war boom:1918-21 Recession: 1921-29 Depression: 1929-34 Partial recovery: 1934 WW2: 1939-45 post war austerity and recovery: 1945-51 Affluence(?): 1951-79

Key Information: 1 postwar boom, crisis and recovery, 1918-39 Beginning - emerged from the war economically damaged for many reasons    - war lasted longer than they thought and commanded more resources as a result    - been loaned large sums from America's Wall Street    - had been cut off from valuable export markets by German U-boats; sank 40% of our merchant shipping, in 1914 exports were 1/3 of income but by 1918 only 1/5     - industries forced to switch to war production instead of supplying export markets    - by 1918 lost >3/4m men which impacts on production    -   total financial cost was £3.25b - continues to import the prewar amounts which led to a negative balance of payments throughout the 20s - debts inccured were 136% of annual economic output in 1919; trade damaged severly - by 1920 total debt was £8b, budget was £800m and £300m went straight on paying off debts - 1908 standard rate of income tax was 5% but rose to 25% by 1924 Boom - short lived boom, 1918-20 - lack of wartime restrictions meant everyone started buying; war meant that many had accumulated considerable savings in cash and bonds -throughout 1919 consumers and businesses spent their savings; individuals buying items like coffee, soap and cigarettes and businesses bought and sold stocks/shares  - amount of shares issues: 1918=£65m by 1920=£384m - investors bought old industries: shipyards, cotton mills, coal mines; poor investment choices as the monopoly that GB once had prewar had vanished due to new competitors, USA, Japan, South America;industries outdated and had received little wartime investment - 1919 there was a surplus of ships - wartime industries returning to civillian use couldn't keep up with demand; goods in short supply were expensive which meant demand declines and the boom ended Crisis 1920-21 recession -> - unemployment levels u to 12%;by 1921 2 million workers unemployed; areas such as south Wales and Tyneside effected the worst as old industries collapsed - crisis in coal industry led to a wave of strike action -cost of living increased by 25%, 1918-20; wages stagnated  - caused by    - deflation: government cut spending by 75% 1918-20; bank of england raised interest rates to 7% (expensive to borrow); drained available money to spend on the economy; by end of the decade debt had rose from 120% of GDP to 160%    - loss of export trade: global economy no longer dominated by GB; competitors had taken advantage of GB disruptions during the war (i.e. u boats); e.g. loss of textiles, Japan supplied India and South East Asia with cotton and silk during WW1 which meant the industry in the north west of england declined    -underinvestment: in the steel industry output was lower than rivals during war and by 1920 a growing number of GB manufactures began to import USA steel for its superior quality and price; by 1937 GB steel foundaries produced 83000 tonnes pa by USA were producing 210000 tonnes and Germany produced 125000 tonnes    -industrial relations: in order to prevent a general strike in 1919 DLGhad bought of GB workers in the main industries (coal,rail,docks) with generous pay and working hours; as workers were mainly former soldiers they were unwilling to lose these conditions when times became tough; creation of 8 hour working day = 13% decrease in working hours with no increase in productivity; wage rates stayed high = products overpriced and uncompetative - attempts to solve problems, 1921-4 ->    - geddes axe: 1921 DLG appointed Sir Eric Geddes to implement cuts; high taxes were blamed on high spending so wanted to cut tax; Geddes recommended £87m cuts 1922-3 budget, came from military and health/welfare/housing (£205.8m 1920-1 to £182.1m 1922-3)    - tariffs and free trade: pre war GB used free trade, post war used tariffs; free trade means domestic industries have to compete with foreign competitors;tariffs (protectionism) means adding tariffs to certain goods that are imported into the country to protect struggling domestic industries who can't compete with foreign prices.    - because of the depth of the rcession many members of the government considered using tariffs, DLtryG had always believed in free trade over tariffs and when he left office in 1922 Stanley Baldwin called an election to and impose tariffs with the public's support (he took over from Bonar Law, not elected) but lost to Labour - Ramsey MacDonald and the economy ->    - had campaigned on the issue of unemployment and critised Baldwin's failed attempts    - when he was president however he was unable to make any real improvements and blamed it on the complexities of government    - MacDonald lacked a parliamentary majority which meant he required support from other parties which he didn't receive    - pressure to present labour as moderate made him reluctant to do things such as increase spending    - between 1921-4 unemployment declined from 12%-6.5% but rose during MacDonald's premiership to 8% in 1925; meant there was a fall in inflation from 15%in 1920 to <1% in 1924 ; inflation fell because spending had collapsed due to unemployment not because of MacDonald - Baldwin's second administration, 1924-9 ->    - Baldwin's chancellor of the exchequer was Winston Churchill; he had never held this position before    - value of the pound was decided by the Gold Standard, used prewar when economy was booming; Gold Standard was suspended during the war but in 1925 Churchill returned to the Gold Standard because it would look bad for GB if we didn't and he thought a competitive economy could not be built if the government made it easy.    - exchange rate in 1925 was £1 = 4.85 US; this made the pound appealing to foreign investors but also made it cost more to borrow money making it hard for businesses and didn't provide employment opportunities    -businesses wanted off the Gold Standard and had to make up for high cost by reducing wages or putting them on short-hour contracts    - 1931 September the bank was forced to admit it couldn't keep the pound in the Gold Standard; interest rates already at 8%; withdrew from Gold Standard and devalued the pound (enabled GB economy to recover quicker than other countries) -Depression, 1929-34 ->    - October 1929 a stock market crash on Wall Street USA; as USA had surpassed GB as largest importer it meant that it had repercussions worldwide; global trade contracted by 66% over 5 years; GB exports declined by 50% which was worth 1/3 of the countries Gross National Product (GNP)    -collapse affected coal, dock work, cotton, iron, steel and ship building; shops where the workers of the industries spent their wages were affected by the loss    - unemployment was 1m in 1929 went to 2.5m 1930; put pressure of government so tax revenue delcinedbut the amount of people applying for financial assistance increased    - 1931 GB economy shrank by ~5% but the government prioritised keeping the pound in the Gold Standard system and supporting its value (withdrew September 1931) -Labour government's response->    - chancellor of exchequer was hilip Snowden who believed that unemployment relief should come from taxing the wealthy and corporate profits; as profits slunped and the wealthy concealed their wealth the cost of providing for the unemployed was unsustainable    - economist John Maynard Keynes suggested government spending on public works (i.e. new roads and jobs) but Snowden refused    - knew that bankers had little patience for further spending as the value of bonds would decrease; only area they could increase was jobs in the defence industry    - during the summer of 1931 there were rumours that the budget would be unbalanced and USA started to panic sell the pound causing it to slump in value; to reassure financiers the government proposed spending cuts and introduced a 10% cut in unemployment assistance; kept the pound stable but caused hardship for the poorest which split the labour party    - the split meant the government resigned in August 1931 -national government's response ->    - the special areas act: introduced 1934; identified Tyneside, south Wales, west Cumberland and Scotland as regions in direct need of government assistance but they only received a small part of the investment    - a new steel works in Ebbw Vale brought some jobs to depressed south Wales valley but it was too little too late    - king edward VIII visited Dowlais in Wales 1936 stating 'something must be done' about the poverty and unemployment    - hunger marches: famous march from Jarrow to Tyneside in 1936 called the Jarrow Crusade; marches aimed to raise attention Recovery - depression did not last as long as other countries, between 1932-7:    - real income rose 19%    -GNP rose 23%    - exports increase 28%    - unemployment feel from 17%-8.5% - economic growth averaged 4% a year 1934-7 - removal from the Gold Standard enabled:    - a cut in interest rates. borrowing was cheaper which enabled more spending and job creation whilst making it ess attractive to save money which increased spending too. fueled a housing boom in southeast and midlands, mortgages in 1930 =£316m by 1937=£636m . cut in rates referred to as a 'Cheap Money' policy.     - government allowed a degree of inflation the national government stimulated spending which led to slight price rises, e.g. spent money on road building which increased e car industry    - devaluation of the pound made exports cheaper and more competative    - banks were more willing to spend    - national government also stimulated economic growth by restructuring war debts so they only cost 25% of tax revenue instead of 40%

Key information 2 Creating a managed economy, 1939-51 Just like in WW1, the government/PM (Winston Churchill) took control of war production and developed several ministries to control wartime economy, they were given extensive legal powers to intervene and take over the running of essential industries. The war - military expenditure    - GB had managed a degree of rearmament before the war but there were still shortages     - in 1940 when there were extreme shortages and GB appeared to be losing, the state intervened further meaning that production and expenditure went up. produced 15000 aircraft in 1940 rising to 47000 in 1944 and between 6-8000 tanks per year.    - 1939, 15% of nation income - 1945, 51%f national income    -economic aid    - between 1939-41 the USA offered GB considerable help despite it being a neutral country    - the 1939 American Neutrality Act initially allowed GB to buy supplies with cash only but by Dec 1940 GB's cash and gold reserves were spent so they arranged a credit agreement known as the Lend-Lease-Agreement where GB would pay the bill post war    - American Liberty Ships were important; filled with oil, timber, coal, food supplies and essential raw materials; was an economic lifeline given the German U-boat attacks on GB merchant shipping as they couldn't attack USA ships post war austerity - by the end of WW2 GB had >£4b debt to the USA; repaying this plus the interest cost £70m a day - GB trade damaged severly again as GB economy shrank by 1/4 and trade by 2/3 - not only had GB ships been destroyed but other countries were ruined and could no longer afford to buy GB products whilst the USA benefited from all the loans they gave during the war - economist John Maynard Keynes visited Washington Aug 1945 to negotiate GB emergency loans with the belief it should be a non-repayable gift in recognition for GB war efforts; this was not reciprocated by USA - bleak conditions wee underlined by the arctic winter in 1947 that led to rationing being reintroduced -    GB expensive world role    - 1948 George Marshall (US secretary of state) proposed extensive loans to Europe out of fear of communism; GB was one of the biggest recipients of Marshall Aid in 1948 having £2.7b    - GB failed to use Marshall Aid to reinvest in industry and used it to pay for general expenses    - GB continued with the policy of national service until 1965 and got involved with other conflicts during 40s and 50s    - GB had a large army based in Germany and keeping the civilians fed from past German occupation took up food and supplies    - by 1950 GB investment in infrastructure was 9% of GDP (despite NHS) whereas Germany spent 20% and Japan also put efforts into it's infrastructure too -nationalisation    - the state took control of coal, power, railways, ship building and banking with the aim of creating full employment from them    - Labour introduced the acts to nationalised businesses: The Coal Industry Nationalisation Act 1946; The Bank Of England Act 1946; The Transport Act 1947; The Electricity Act 1947; The Gas Act 1847; The Iron and Steel Act 1949    -    shareholder of the businesses were compensated when they were nationalised; e.g. the private rail companies were bought for £1b but the total cost was £2b, this left little money to modernise and improve the service - full employment between 1947-51 - percentage of world trade dominated by GB grew from 17% in 1939 to 20% in 1950 and exports grew by ~ 80% - after 1948 the economy grew by 4% pa

Key information 3 The response to economic challenges, 1951-79 - there was a huge expansion in the world economy during the 50s and 60s in a global recovery led by new technologies - although GB had a consumer boom it also had a decline  - personal expenditure grew and consumer demand fuelled the economy, GB spending more than it earned, led to: balance of payment issues, devaluation, inflation, union disputes, unemployment in the 70s conservatives and the post war economy, 1951-64 - 1951 conservatives returned to power and were opposed to any further nationalisation, rationing and controlling the economy - by 1954 all rationing was over - political consensus meant: a commitment to full employment (using Keynesian style schemes) and a mixed economy ( would not nationalise further but would not reduce it either) - unemployment averaged 500000 with lows of 300000 - end of the empire    - in 1918 GB had the largest empire in the world but in the 50s it declined    - 1947 India was granted independence despite being the largest and most important imperial possession    - Ghana 1957; Jamaica 1962; Uganda 1962; Kenya 1963; Malaysia 1957: granted independence     -  got rid of the colonies as they cost more than they were worth and made GB look bad in light of recent events (WW2) -stop go economics    - 1954-64 there was a growth in consumer affluence and the peoples ability  to borrow and spend more on consumer goods    - the government encouraged the spending but struggled to deal with its consequences    - government relaxed laws on consumer credit and borrowing but had to employ stop go economics    - conservatives allowed the consumer economy to grow but with spending came inflation and an increase in imports (balance of payments issues)    - to counter this Macmillan (under Eden as chancellor of exchequer) deliberately slowed the economy by increasing interest rates and taxes; led to exports becoming less competitive and resentment from taxpayers    -    demonstrated that you couldn't control employment and inflation - Managing the economy, 1957-64    - despite rising living standards GB was falling behind compared to other countries: Japan had 12% growth in 1960 but GB only had 4%    -Macmillan believed in 'one nation' where everyone, despite class, worked together for the benefit of the country    - experimented with corporatism; uniting labour, management and government to achieve goals    - set up 2 organisations to do this: NEDDY (national development council and office) and NICKY (the national incomes commision)    -NEDDY= where management and unions could discuss issues and co-operate with one another; assumed that they would want to work together but NEDDY was unable to enforce any legal control and so all agreement were voluntary    -NICKY= advisory council made up of economists and industry experts who gave guidance to employers and unions over 'considerable' pay increases but could not enforce its decision - economic problems by 1964    -unemployment in 1963 grew to its highest level since WW2, 878000    - increased consumer spending increased demand for foreign goods and GB experienced a balance of payments problem which threatened the pound    - Aug 1961 the government refused to devalue the pound and borrowed £714m from the IMF to support it The Wilson government and the economy, 1964-70 - aimed to modernise the economy  - prices and income tax    - there were recurring balance of payment deficits, gradually increasing inflation and failure of voluntary wage restraint    -  created an incomes policy that gave the government legal powers to limit pay claims    - the national board on prices and incomes (NBPI) was created to regulate pay settlements    - Prices and Incomes Act 1966 which forced statutory wage freeze for 6 months to curb inflation    - Prices and Incomes Act 1967 allowed wage increased in companies who could prove they were increasing productivity and output -technology    - believed technology could improve the economy    - Ministry of Technology set up in 1964 headed by Tony Benn from 1966    -   main achievement was creation of the supersonic passenger plane, Concorde  -The IRC    - Industrial Reorganisation Corporation; promoted efficient practices in industry and offered loans to companies who wanted to implement new efficieny measures    - promoted mergers between businesses where the economics wold be more efficient; many of them failed though e.g British Leyland made from Leyland Motors and the British Motor Corporation which we given a £25m loan to merge however they couldn't keep up with other companies from Europe and Japan and were then known for poor quality as they operated at a loss and required subsidies -devaluation    - 1967 pound was reduced from $2.80 to $2.40 (14%)    -  led to Callaghan's resignation as chancellor in protest The heath government and the economy, 1970-4    - intended to reject corporatism and embrace free market ideas    - got rid of the IRC    -    made cuts to council houses, free school milk and raised charges on prescriptions    - believed it was private businesses who should help the economy not the state; wanted to reduce tax pressure    - first budget cut was >£330m and abolished the NBPI    -    he didn't think of: the mounting inflation nationally or internationally or the unemployment rates which rose 8% from the 50s (2% by end of 50s and 6% by early 70s) -new economic thinking    - one of the biggest problems 1974-79 was inflation    - by mid 70s prices were rising faster than wages reaching >30% by 1975    - unions ignored pleas from government to stop wage demands due to worsening living conditions and increased prices    - by 1975 Labour Chancellor Denis Healey began to challenge labours committment to full employment and felt that pumping money into the economy was pointless and the cause of inflation -the IMF loan    - by early 1976 the confident that international banks and currency traders had in GB had rapidly declined due to inflation and strikes    - meant the value of the pound had slumped and the government was forced to take another IMF laon    -   loan was agreed by September 1976 when the value of the pound had declined by nearly 20% from $2 to $1.63    - the IMF loaned GB £4b  but there were conditions: had to prove it was capable of repaying it debts by agreeing to a £3b spending cuts    - when healey announced this he was called a traitor by the left of the party but he argued that GB was living beyond its means    - the left of the party, led by Tony Benn, proposed an alternativ strategy and argued that the welfare state needed to be protected from cuts imposed by the IMF by: using trade barrier to keep out foreign imports; making GB economically self sufficient by investing in industry and nationalisation; withdrawal from the EEC    -    the strategy was referred to as a siege economy and cllaghan dismissed Benn's arguments and unworkable and unrealistic    - by supporting heal, Callaghan indicated a move away from post war Keynesian consensus towards monetarist thinking (tight reign on money supply to prevent inflation, would cause some unemployment but inflation was already doing that)

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