Economic Recovery in the UK:
Lessons from the 1930s
Nicholas Crafts
The UK in the 1930s
Real GDP
GDP
Unemployme Stock Market
Deflator
nt (%)
Prices
1929
100.0
100.0
8.0
100.0
1930
99.9
99.6
12.3
80.5
1931
94.4
97.2
16.4
62.8
1932
95.1
93.7
17.0
60.2
1933
96.0
92.5
15.4
74.3
1934
102.8
91.7
12.9
90.3
1935
106.6
92.6
12.0
100.0
1936
109.9
93.1
10.2
115.9
1937
114.7
96.6
8.5
108.0
1938
118.2
99.3
10.1
88.5
Relevance to Today
• First fiscal consolidation and then fiscal
stimulus at the ZLB
• 4 per cent growth from 1933-37 but
double-dip recession in 1932
• The initial growth strategy was based on
raising the price level and taking control of
monetary policy away from the B of E
The 1930s Recovery: 1st Phase
• Started during fiscal consolidation which
between 1930 through 1934 reduced structural
deficit by 4%GDP
• Strong growth 1933-35 based on monetary
stimulus which offset negative impact of fiscal
policy: cf. the ‘foolproof way’ to escape the
liquidity trap
• Exit from gold standard plus cheap money
provided stimulus; housing investment led the
recovery
The 1930s Recovery: 2nd Phase
• From 1935 onwards rearmament takes
centre stage
• Large exogenous fiscal shock with short
term interest rates held constant
• Suggests significant fiscal multiplier in
1930s conditions
The “Managed Economy” in
1930s UK
• Post-1932 policy package included capital
controls, devaluation, tariffs, cheap money and
cartels
• Understandable as a short-term fix at a time of
high unemployment; raise P, reduce RW
• Regrettable in terms of long-term implications for
productivity performance; retreat from
competition very hard to reverse
Medium-Term Implications of
Devaluation
• Permitted cheap money policy
• Nominal and ex-post real interest rates fell
• Fiscal sustainability improved as deflation ended
• International competitiveness improved; change
in net exports modest contribution to demand
growth during recovery
Exchange Rates (1929 = 100)
Pound/Dollar
Pound/French
Franc
Average
Exchange Rate
1929
100.0
100.0
100.0
1930
100.1
99.9
99.6
1931
93.3
93.2
93.7
1932
72.1
71.9
75.2
1933
86.8
68.2
77.0
1934
103.8
62.0
75.4
1935
100.9
59.9
74.5
1936
102.3
66.9
77.7
1937
101.8
100.5
84.7
1938
100.7
137.6
86.9
Source:
Dimsdale (1981)
Double-Dip Recession
• Quarterly GDP estimates reveal that after initial
recovery in late 1931/early 1932 there was
another recession in 1932 q2 and q3
• So, unlike the USA, devaluation did not signal
the turning point
• Adds weight to Eggertsson (2008) argument that
devaluation was not sufficient in USA but had to
be part of bigger package ( the New Deal) that
committed to future inflation
Quarterly Real GDP Estimates
(Mitchell et al. 2011)
19291
97.5
19311
93.6
19331
94.4
19292
98.9
19312
93.1
19332
96.0
19293
99.9
19313
92.8
19333
97.6
19294
99.9
19314
93.7
19334
99.1
19301
100
19321
94.0
19341
101.2
19302
99.1
19322
93.4
19342
102.6
19303
97.8
19323
92.9
19343
103.5
19304
95.9
19324
94.6
19344
104.0
The ‘Cheap Money’ Policy
• Was a coherent framework arrived at by mid1932 with HMT not B of E in charge (Howson, 1975)
• Aim to raise the price level and to underpin this
by holding exchange rate at $3.40 then FFr. 88
(Howson, 1980)
• Short term interest rates kept at lower bound
and real interest rates fell
• Credible because it was clearly in HMT’s
interests as a route to recovery that did not open
Pandora’s Box and improved fiscal arithmetic
Interest Rates (%)
(Dimsdale, 1981; Chadha & Dimsdale, 1999)
Bank Rate
Treasury
Bill Rate
Yield on
Consols
Real Short
Rate
Real Long
Rate
1929
5.50
5.26
4.60
5.26
5.14
1930
1931
3.42
3.93
2.48
3.59
4.48
4.40
8.63
9.73
8.01
9.20
1932
1933
3.00
2.00
1.49
0.59
3.75
3.39
5.11
0.66
7.24
5.65
1934
1935
2.00
2.00
0.73
0.55
3.10
2.89
0.80
0.59
4.26
3.59
1936
1937
2.00
2.00
0.58
0.56
2.93
3.28
-2.86
-2.09
1.22
0.93
1938
2.00
0.61
3.38
-2.56
0.99
Fiscal Policy
• Became ‘Keynesian’ only with rearmament
• Early 1930s is episode of tightening (over-riding
automatic stabilizers) provoked by worries about fiscal
sustainability
• Defence expenditure rose from £118 mn. in 1934 to
£181 mn. in 1936 and £353 mn. in 1938
• Defence Loans Act in 1937 to use deficit finance of
military - £400 mn. over 5 years; ‘defence news’ has
significant effect on real GDP; fiscal multiplier may have
been about 2
Fiscal Indicators (% GDP) (Middleton, 1996)
Public
Debt
Receipts
Outlays
Budget
Surplus
Debt
Interest
Constant
Employment
Budget
Surplus
1929
1930
1931
1932
158.4
159.2
169.8
173.6
23.8
24.1
25.9
27.4
24.5
25.5
28.2
27.9
-0.7
-1.4
-2.2
-0.5
7.7
7.6
7.7
7.8
0.4
1.1
2.5
3.0
1933
1934
1935
179.2
173.1
165.0
26.9
25.6
25.0
26.5
25.1
25.3
0.4
0.5
-0.3
7.0
6.2
6.0
4.2
3.2
2.0
1936
1937
1938
158.7
147.2
143.8
25.0
24.5
24.4
25.7
26.0
28.1
-0.7
-1.5
-3.7
5.7
5.4
5.2
0.8
-0.1
-1.5
Estimates of Net Present Value of Changes in
Expected Defence Expenditure (£ 1938 million)
1934Q1
0
1936Q3
0
1934Q2
0
1936Q4
0
1934Q3
+15.7
1937Q1
+393.0
1934Q4
+51.5
1937Q2
0
1935Q1
0
1937Q3
0
1935Q2
0
1937Q4
0
1935Q3
0
1938Q1
0
1935Q4
+178.7
1938Q2
+98.8
1936Q1
+159.5
1938Q3
+29.1
1936Q2
0
1938Q4
0
The 1930s: Onward and Upward?
• Trend growth did not increase (Greasley & Oxley, 1996;
Mills, 1991)
• Correctly measured, the labour productivity gap
with the US widened further
• TFP growth remained modest and investment
stayed low
• This is not the optimistic picture that the overcommitment school painted
Real Output/Hour Worked in Manufacturing
UK growth
(% per
year)
US growth
(% per
year)
US/UK
(UK = 100)
1870
195.2
1870-90
1.58
1.75
1890
201.9
1890-1913
1.33
2.11
1913
241.2
1913-29
2.46
3.05
1929
264.5
1929-37
2.90
3.35
1937
274.0
Source: de Jong and Woltjer (2011); data kindly supplied by Herman de Jong.
Competition and Productivity
Performance
• Literature on postwar UK says weak competition
a big problem for productivity until 1980s (Crafts,
2012)
• Weak competition in product markets nurtured
infamous industrial relations and management
problems
• Vested interests politically strong enough to
block strong anti-trust and trade liberalization
policies (Mercer, 1995) so 1930s legacy lasted a
long time
UK Protectionism
• Tariffs on UK manufacturing remained at
1930s levels until the mid-1960s; when
trade costs fell mark-ups collapsed
• Median tariff twice that in West Germany
in the late 1950s (PEP, 1962)
• Major reason for weak competition in UK
product markets in the early postwar
period
Trade Costs Index
(Jacks et al., 2011)
UKFrance
UKGermany
FranceGermany
ItalyGermany
1929
100
99
99
110
1938
121
122
133
112
1950
122
142
112
127
1960
122
115
91
101
1970
110
105
73
79
1980
74
66
55
61
Market Power and UK Productivity
Performance (Broadberry & Crafts, 1992, 1996, 2011)
• In 1930s increased market power substantially
reduced productivity growth
• 1930s tariffs did not improve productivity
performance
• In early postwar years, collusion undermined
productivity performance
• Both pre- and post-WWII, high CR3 associated
with low levels of UK labour productivity relative
to US
The “Managed Economy”
Revisited
• Can see why the policy target of raising prices
seemed important
• But, depending on how this is achieved, raising
the price level can have bad supply-side
implications (cf. the New Deal) and in 1930s
UK this is big downside
• Retreat from competition hard to reverse and
would sustain bad management and
dysfunctional industrial relations later on
Lessons
• Conventional inflation targeting may be
inappropriate with fiscal consolidation at the ZLB
• Fiscal stimulus can help recovery when interest
rates are held constant if sustainability not an
issue
• Severe recessions can risk bad supply-side
policies that can seriously damage long-run
growth – perhaps the EU and WTO are useful
constraints