Lessons from the Great Depression
for the Making of Economic Policy
British Academy Conference, 16-17 April 2010
British monetary and fiscal policy in the 1930s
Roger Middleton*
(University of Bristol)
*
Address for correspondence: Professor Roger Middleton, School of Humanities, University of Bristol,
11 Woodland Road, Bristol BS8 1TB, UK. <roger.middleton@bristol.ac.uk>
This preliminary version is not to be cited without permission.
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§1.
Introduction
1.1
I have been asked to comment on Price Fishback‟s paper on US monetary and fiscal policy in
the 1930s by discussing UK policies during that decade on a classic „compare and contrast‟
type basis. What follows is thus a very brief outline of what we think we know about British
monetary and fiscal policy between 1929-39, with special attention paid to cross-country
differences in the real economy, the institutional context for policy, the policy debate and
policy effectiveness.
1.2
We start from the basic difference in the real economy: the British economy did not
experience a „great depression‟ in any meaningful sense between 1929-32; similarly, its
„recovery‟ was of a different of magnitude with, relative to the US, greater scope to argue for
the positive effects of government macroeconomic policies even if they did fall far short of
what Keynes and other economic progressives considered desirable and deliverable. Using
annual data we chart in Figure 1 the relative paths of real GDP on a 1929 base: these show a
peak-trough fall in the UK (1929-31) of 5.4% and for the US (1929-33) 26.6%, with the
respective 1937 values being 16.4% and 5.3% above their 1929 levels. No wonder then that
from an international perspective Schumpeter for one questioned whether Britain experienced
a great depression in any meaningful sense (cited in Richardson 1967, p. 17).
1.3
In terms of the downturn, we do now have higher frequency data for the UK and this gives a
more pronounced peak-to-trough loss of between 7.6% (quarterly data) and 8.0% (monthly
data) and a trough-to-peak rise of 26.5 on both quarterly and monthly,1 but we lack these data
1
Mitchell et al. (2009, tables 2A, 1A). Turning points respectively 1930.I and 1932.III; and January
1930 and - twin troughs - September 1931/July 1932; then 1938.I and January 1938.
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for the US. Even so, the relative mildness of UK income losses remains as does the
pronounced recovery after 1932. However, the UK output-employment elasticity was
relatively high (Middleton 1981, p. 277), such that the contraction phase of the real economy
was manifest in a significant rise in unemployment and fall in employment: labour force
unemployment rose from an annual average of 1.5m (7.3%) in 1929 to 3.4m (15.6%) in 1932
and was still at 1.8m (7.8%) by 1937 (Feinstein 1972, T126). The figures used by
contemporaries, the administrative by-product of the national insurance scheme, gave much
higher unemployment rates, peaking at 23.0% in January 1932.2
1.4
The rise in unemployment in Britain and the peak attained were thus far less significant than
in the US. However, two issues are particularly important for the British story in comparative
context:
1.
2.
unemployment had high political salience even before the 1929 downturn as the
1920s has been widely perceived as one of economic underperformance (Pigou‟s
„Britain in the doldrums‟); the June 1929 election had been dominated by
unemployment and an early version of the Keynesian solution; and the 1929 downturn
was not related to the breaking of a domestic boom; and
because of the characteristics of Britain‟s fiscal system (a high cyclical macromarginal budget rate, a measure of the automatic stabilizing properties of Britain‟s
budgetary system, upon which see Middleton 1981, p. 275-8), rising unemployment
after 1929 quickly translated into a severe budgetary crisis. This peaked in the
summer of 1931 and when, combined with a banking crisis, resulted in the collapse of
the Labour government and the advent of a (Conservative-dominated) national
government for the remainder of the decade.
1.5
In these circumstances, it is not difficult to understand why mitigating the downturn and
seeking to promote recovery became the policy issues that they did for both economic
orthodoxy and heterodoxy.
§2.
Historiography of British economic policy in the 1930s
2.1
In the last major western downturn, c.1979-82, the great depression of c.1929-32 became a
much used vehicle for rival camps of macroeconomists to test their nostrums about the then
contemporary economic world through competing models of this earlier period of
macroeconomic turbulence (analysis of the great depression historiography is woefully
underdeveloped, but see Szostak 2005). Such retrospectives have happened far less this time,
whilst of course far from Keynes and the Keynesians being the object of attack by the
majority, there has arisen a veritable publishing industry seeking to revive Keynes and to the
rehabilitate the Keynesian solution (most recently Clarke 2009; Skidelsky 2009). That said,
as we now turn to examine macroeconomic policy in the 1930s we do so on the basis that
there has been little new work since the 1980s/early 1990s on either interwar British
economic performance or macroeconomic policy.3 Recent work has tended to be interested
more in microeconomic policies (for example, Greaves 2005 on industrial policy) and there
is, post Broadberry and Crafts (1996), something of a consensus about the longer-term
2
3
Capie and Collins (1930, tables 4.4); on a seasonally adjusted basis the national insurance series peaks
at 22.5% in August-September 1932 (table 4.5).
Solomou (1996) summarises the state of play subject, of course, to his (with Kitson) strong version of
the role of protection in ensuring recovery after 1932 (Kitson and Solomou 1990).
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consequences for economic performance of the macro-micro mix of policies adopted in
1930s Britain.
2.2
A basic methodological problem has bedevilled all work on the impact of interwar
macroeconomic policy, and especially post-September 1931 when there occurred with the
abandonment of gold and subsequent depreciation of sterling, a significant reorientation of
British economic policy in the next nine months: in sequence, a managed floating exchange
rate; tariff protection for manufactures; „cheap money‟ and regained monetary policy
independence; and, after a longer lag, even a loosening of the fiscal stance. With a certain
understatement, Solomou (1996, p. 112) writes that such was the clustering of these
momentous policy changes that it is „extremely difficult to distinguish individual policy
impacts‟.
§3.
Policy regime
3.1
The concept of „policy regime‟ is, of course, anachronistic for this period, but it is a
legitimate device and has been applied usefully by Bordo and Schwartz (1999, p. 151) for
monetary policy, as „encompass[ing] the constraints or limits imposed by custom, institutions
and nature on the ability of the monetary authorities to influence the evolution of
macroeconomic aggregates‟; by Eichengreen (1992) in terms of the key role exercised by the
gold standard for generating policy credibility about the implicit policy target of price
stability and the explicit goal of maintaining the exchange rate; and, from a public choice
perspective, by Buchanan and Wagner (1977) on the role played by the nineteenth-century
balanced budget rule in constraining Leviathan. In my own work (principally Middleton
1996), I have tried to synthesis these approaches to generate an interlocking, nineteenthcentury fiscal constitution which was carried forward after the First World War but did not
survive the Second World War.
3.2
Comprising three elements, the minimal balanced budget rule, the gold standard and free
trade, the traditional defences of the minimalist state, the nineteenth-century fiscal
constitution provided the bedrock for British economic policy in the 1920s, and especially
after 1925 when the return to the gold standard was secured at the prewar parity. Freedom
from political interference for monetary policy, fiscal policy and trade policy was thus the
explicit goal; however, it was to be more pronounced as rhetoric than as reality:
1.
2.
3.
4
free trade had never been complete before 1914 and, with the First World War and its
immediate aftermath, acquired a strategic dimension;
fiscal policy was assailed by constant pressure group lobbying; Churchill as
Chancellor used fiscal window-dressing to create the illusion of maintaining nominal
balanced budgets, whilst in any case, the budget was no longer minimal as for the first
time in peacetime government had real demand leverage: in 1932/3 central
government expenditure was 25.2% of GDP as against 6.9% for the US federal
government in 1932; the figures for 1932 in terms of total public expenditure were
27.9% and 21.2% respectively;4 and
monetary policy, both before and during the period of the restored gold standard, saw
severe tensions between the Chancellor and the Governor of the Bank of England
UK data: Middleton 1981, table 5; 1996, table A1.1); US: Carter et al. (2006, III, series Ca1; IV, series
Ea14, Ea15.
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over interest rates.
3.3
There were important differences in the policy regime as between Britain and the US and not
just relating to the much greater fiscal leverage exercised by the British central government as
against the US federal government. The two countries had very different prewar policy
trajectories, but above all very different economic experiences of the war, not least in terms
of domestic and international indebtedness. In Britain in 1913/14, the ratio of national debt to
GDP was 0.26 and debt interest to public expenditure 0.08; over 1921/2-1932/3 the averages
were respectively 1.55 and 0.36, a huge rise (Middleton 1982, p. 54 n26; see also ForemanPeck 2002). This debt overhang forms the essential background to British monetary policy
and international economic policy thereafter.
3.4
Trade policies were the most distinctly different, with the dominant narrative being that the
Smoot-Harley tariff contributed towards the US downturn becoming a global depression,
whereas for the UK the formal abandonment of free trade (a temporary measure in November
1931, codified April 1932) is part of the standard explanatory set – albeit contested – for
Britain‟s domestic economic recovery from 1932. For fiscal policy, there is obviously
considerable overlap on the issue of the Keynesian solution, but it is important not to lose
sight of the pressures for public sector growth which were independent of the stabilisation
debate and were stronger in the UK than the US. Finally, on monetary policy the Federal
Reserve System was new relative to the Bank of England and very differently structured,
with – post Benjamin Strong – the US less committed to promoting international economic
cooperation. Importantly, exit from the gold standard was very different for the two
countries: the US acted unilaterally in 1933, whereas Britain was forced to abandon gold in
September 1931 as a toxic mix of budgetary, banking and balance of payments crises made
the status quo unsustainable. As Eichengreen and Sachs (1985) have argued in what has
become the orthodoxy, almost a stylised fact of the 1930s, those that left the gold standard
early tended to be the first to recover in the 1930s. In what follows we now focus in turn upon
monetary and fiscal policy.
§4.
Monetary policy
4.1
Figure 2 charts monthly movements in the two official interest rates, the Bank of England
base rate and the Federal Reserve discount rate (Figure 3 consumer prices; Figure 4 the
nominal $-£ and three effective exchange rate measures). Interest rates formed the major
monetary policy instrument for both countries, both during and after the restored gold
standard regime. The Bank of England perceived itself as a price taker before September
1931, with London following New York and maintaining a positive differential. There is a
broad consensus amongst economic historians about interwar monetary policy, with little new
work since the foundational studies of Moggridge (1972) and Howson (1975), though Nevin
(1955) is still relevant (and especially for the impact on the housing market of cheap money),
and, following Broadberry‟s (1986) more formal macroeconomic analysis of policy impact,
there has been some further model exercises and a steady trickle of cross-country studies in
which Britain necessarily features strongly (for example, Chadha and Dimsdale 1999 on
longer-term movements in real interest rates).
4.2
Monetary policy independence, of course, did not exist with the gold standard, but once a
floating exchange rate was secured and policy-makers had recovered from the initial panic
about inflation (fears that an uncontrollable depreciation of sterling would result in imported
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inflation, this being an added reason for quickly securing fiscal retrenchment to maintain
confidence), nominal interest rates fell to 2% and were maintained there for the remainder of
the decade (bar a short lived spike associated with the onset of the war).
4.3
The standard questions asked about the role of monetary policy after September 1931
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concern its effectiveness with respect to:
1. exchange rate objectives;
2. the promotion of economic recovery through higher investment, and especially in the
housing market;
3. the relaxation of the fiscal stance made possible by the significant reduction in the interest
burden of the national debt; and
4. the extent to which there was a trade-off between cheap money and greater fiscal
activism.
4.4
To date Broadberry (1986, pp. 64-5, 142-3) remains the only concerted attempt to assess the
first two questions within a macroeconomic model. His modelling yields low interest
elasticities for investment (-0.11 for non-housing and (long-run) -1.1 for housing) with the
major effect of monetary policy being through the external sector, the depreciation of sterling
1931-3 raising output by about 3%. Much, of course, has been claimed for the role of a
house-building boom in the recovery of the 1930s, along with an older strand of structural
change in industry (the „old-new‟ industries debate) partly driven by rising real incomes over
the depression period. Broadberry (1986, pp. 25, 61) allocates about half the rise in housing
investment 1931-3 to the advent of cheap money, with net investment in housing exceeding
net total investment 1932-3.
4.5
As regards the third question, it is arguable that further tax rises and/or retrenchment in
expenditure were avoided in 1932/3 and above all 1933/4 because of the lessened debt charge
on the budget; and, on the fourth, the trade-off, we can defer that until our treatment of fiscal
policy and the Treasury view upon the (in)efficacy of long-financed public works. At this
stage, all we need to report is that key policy-makers in the Treasury and Bank of England
accepted that cheap money could be imperilled by an inappropriate setting of fiscal
instruments.
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4.6
8
Relative to current thinking about US monetary policy during the recovery phase, as
recounted by Fishback (2010), we can highlight the following:
1.
2.
3.
4.
whilst nearly everyone agrees with the basic Friedman and Schwartz (1963) thesis
about the negative role played during the depression phase, there is much less
agreement about the recovery phase, with a traditional narrative that emphasises
premature fears about inflation in 1936-7 leading to an unnecessary constraint on
money supply growth. There is no comparable critique about British monetary policy
for this late recovery period, notwithstanding contemporary concerns about the
Treasury‟s funding complex (Howson 1975, p. 99);
the Federal Reserve, as the Bank of England, maintained its commitment to the gold
standard until the very end, but once free of the „golden fetter‟ it pursued a sustained
policy of interest rates cuts, culminating in a discount rate (at 1%) half of that of the
Bank of England. Rates stayed low also in real terms, lower than in Britain where
prices continued to fall until 1936 whereas consumer prices started rising in 1934 in
the US;
the US story is much more a banking story than is the case in the UK, whilst recent
developments in the study of monetary policy have themselves focused on its
microeconomic impact, on individual banks and on individual bank failures for
macroeconomic activity;
Romer (1992, p. 781) is still the strongest version of the monetary policy induced
recovery, but it is a dichotomous position („Fiscal policy, in contrast, contributed
almost nothing to the recovery before 1942), whereas when the historiography is
viewed in the round there is an evident pluralism which acknowledges the need for
diverse causal explanations, including the transmission mechanisms (Szostak 2005). It
is worth noting here, and we will come back to it with fiscal policy, that the results of
a recent 27 country simulation exercise of monetary and fiscal policies found that,
notwithstanding banking systems in distress and interest rates approaching zero, „The
most successful economies during the 1930s were those whose governments pursued
the least “orthodox” policies‟ (Almunia et al. 2010, p. 250).
§5.
Fiscal policy
5.1
The recent rehabilitation of Keynes does not yet extend to revisiting the impact of policies
that were pursued in the 1930s let alone the possible impact of policies that were not pursued
but ought to have been, pace the Keynesian solution. The foundational work here is Thomas
(1981) and Middleton (1981) and the debate generated by the latter: the Broadberry (1984)Middleton (1984) exchange and then Turner (1991), all as a reaction to the sort of traditional
view, here represented by Richardson (1967, pp. 211–12):
[The] government did not have a fiscal policy as such in the 1930s. The
nearest it came to an attempt to control the public finances with a view to
recovery was its stress on a balanced budget, not with the direct aim of
stabilization but rather to restore business confidence at home and confidence
in sterling and the government‟s ability to meet the crisis abroad … [Broadly]
speaking, fiscal operations were destabilizing in their effects over the 1930s as
a whole. The budget was balanced at the trough of the depression, and this
failed to impart a direct stimulus because expenditure was not increased. Later
in the decade, when the economy was entering boom conditions there was a
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tendency for a budget deficit to develop becauase of the requirements of
rearmament expenditure. This was the opposite of what was desirable on
stabilization grounds. On the other hand, high levels of expenditure on
rearmament and other items acted counter-cyclically in the recession of 19378, though this was not a conscious policy … British economic policy in the
1930s hardly provides a model of a counter-cyclical fiscal policy.
[emphasis added]
5.2
Such judgements were made using the actual budget balance as the summary measure of
fiscal influence. This is, of course, subject to the well-known problem, explored first for the
US in Brown (1956) famous paper, on the endogenity of the budget. Middleton (1981),
whose results are in Figure 5, first adjusted the actual central government budget balance
(Bc/Y) for the authorities‟ fiscal window-dressing to produce a new balance measure (B/Y)
and then used a Brown (1956) type methodology to calculate a constant employment surplus
measure (B*/Y*). On this basis, fiscal policy was contractionary throughout the depression
phase and well beyond, though it did – via rearmament - impart a very significant stimulus
which ensured that the 1937-8 recession was of short duration (a conclusion augmented by
Thomas‟ 1983 important work on rearmament) and that the economy was growing rapidly by
the eve of the Second World War.
5.3
Broadberry (1984; 1986, ch. 15) disagreed on two counts: first, he favoured a weighted fiscal
leverage measure to accommodate the differential demand effects of the expenditure and
taxation sides of the account in recognition of the balanced budghet multiplier; and secondly,
to incorporate a potential Pigouvian real balance effect, whereby falling prices increased the
real value of outstanding government debt, he calculated a wealth effect for consumption (for
a fuller account and critque, see Middleton 1996, pp. 382-6). On this basis Broadberry
estimated fiscal policy to be expansionary in the crucial depression and early recovery phase,
1930/1-1933/4. My response (Middleton 1984) was sceptical on both conceptual and
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empirical grounds: there was no evidence of a positive balance budget multiplier for 1930s
Britain, whilst I also questioned whether there would be a real balance effect when so much
public debt was held by institutuions and, in my view, much more likely that uncertainty
swamped positive price signals with respect to consumption (Broadberry 1986, p. 55
estimated the elasticity of consumption with respect to the price level at -0.05). Since it was
my constant employment balance measure rather than Broadberry‟s fiscal leverage measure
that then got applied in a number of studies of Britain and other quite different countries (Eng
1992; Abbott 1997 and Cohn 1992; see also Blejer and Cheasty 1991 for a methodological
review), this method and its conclusions found majority favour. Nonetheless, as the next
contributor (Turner 1991, p. 515) to the literature noted, „the debate has not been settled
conclusively because the analytical framework used has not been the appropriate one to
determine whether budgetary policy was expansionary or not.‟
5.4
Turner (1991) denies the second Broadberry proposition, that of a real balance effect, but
developes the first through a weighted fiscal leverage measure which accords different
wieghts to shifts in expenditure and changes in taxation, producing a new weighted and
cyclically adjusted series which suggests that, relative to 1929/30, fiscal policy was slightly
expansionary in 1930/1; that there was a tightening in 1931/2 (no doubt because of the
September 1931 emergency measures); then a slight relaxation in 1932/3; a further
contraction in 1933/4; and then a steady loosening thereafter. Turner‟s (1991, p. 521) final
conclusion is that the magnitudes of the changes involved were so small that fiscal policy was
broadly neutral during the depression years and that, since recovery was already under way
before the fiscal stabnce became expansionary, then „fiscal policy cannot be seen as a causal
factor in either the slump itself or the subsequent recovery.‟
5.5
Since Turner‟s intervention there has been no methodological breakthrough in how to
construct a cyclically-adjusted budget measure and no new contributions to this particular
debate. To make some further progress it would be desirable to work with the public sector
rather than central government (as Middleton-Broadberry-Turner have done) and then to
develop a range of cylically adjusted budget measures. However, no one as yet has done this,
but we report in Table 1 Britain‟s public finances by economic classification (relevant for
any weighting exercise) to derive the following at actual employment:
1.
2.
3.
4.
5.
the combined public authorities deficit fell from 0.7 to 0.5% between 1929-32;
for expenditures which could be considered to be exhaustive or nearly so on the first
round (current goods and services plus gross capital formation plus current grants to
the personal sector) there was a rise of 3.3 percentage point of GDP btween 1929-32;
offsetting the overall rise on the expenditure side of 3.4% of GDP there were tax rises
of 3.6%, with taxes on income rising slightly more than taxes on expenditure. The
prevailing ethos amongst the interwar business community was that taxes on income
were the most deflationary.
looking at the recovery phase, 1932-7, reductions on the receipts side dominated
movements in expenditure programmes, themselves – unsurprisingly given the
automatic stabilisers – dominated by a fall in current grants to the personal sector. The
beginnings of rearmament are also evident on the expenditure side; and
the rearmament phase sees an unprecendented peacetime surge in expenditure on
current goods and services, this financed by borrowing as the combined authorities‟
deficit was by 1939 some 8.3% of GDP.
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Table 1 Public sector accounts by economic classification, changes in % points of GDP at actual employment,
1929-39
A. Total public expenditure
Current
Current
grants
Current
goods
Gross
to
grants
and
capital
personal
paid
Debt
services formation
sector
Subsidies abroad
interest
Total
1929
9.2
2.6
4.4
0.5
0.1
7.7
24.5
1930
9.5
2.8
5.1
0.5
0.1
7.6
25.5
1931
10.2
3.3
6.5
0.5
0.1
7.7
28.2
1932
10.1
2.8
6.6
0.6
0.1
7.8
27.9
1933
10.1
2.2
6.4
0.7
0.1
7.0
26.5
1934
9.9
2.1
5.9
0.7
0.1
6.2
25.1
1935
10.2
2.4
5.8
0.8
0.1
6.0
25.3
1936
10.9
2.9
5.4
0.7
0.1
5.7
25.7
1937
11.7
3.3
5.0
0.6
0.1
5.4
26.0
1938
13.4
3.6
5.0
0.7
0.1
5.2
28.1
1939
19.8
2.9
4.5
0.8
0.3
5.0
33.2
Change (% points of GDP):
1929-32
0.9
0.2
2.2
0.1
-0.0
0.1
3.4
1932-7
1.6
0.5
-1.6
0.0
-0.0
-2.4
-1.9
1937-9
8.1
-0.4
-0.5
0.2
0.1
-0.4
7.1
Taxes on
expenditure
10.6
10.3
11.0
12.0
12.1
12.0
11.8
12.0
11.6
11.3
11.5
Taxes
on
capital
1.7
1.7
1.7
1.7
2.0
1.7
1.8
1.8
1.8
1.4
1.3
National
insurance
contributions
1.7
1.7
1.9
2.1
2.1
2.1
2.1
2.1
2.0
2.0
1.8
1.5
-0.5
-0.1
0.0
0.1
-0.5
0.3
-0.1
-0.2
B. Total receipts
Taxes on
income
1929
6.2
1930
6.5
1931
7.5
1932
8.2
1933
7.3
1934
6.4
1935
6.0
1936
5.9
1937
6.2
1938
6.9
1939
7.4
Change (% points of GDP):
1929-32
2.0
1932-7
-2.1
1937-9
1.2
Gross
trading
surplus
1.1
1.2
1.3
1.4
1.5
1.5
1.4
1.4
1.3
1.3
1.3
Rent,
interest
and
dividends
2.0
2.2
2.1
1.9
1.9
1.8
1.8
1.8
1.7
1.7
1.6
Current
grants
from
abroad
0.5
0.6
0.5
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
Total
23.8
24.1
25.9
27.4
26.9
25.6
25.0
25.0
24.5
24.4
24.9
0.3
-0.0
-0.1
-0.1
-0.3
-0.1
-0.5
-0.0
0.0
3.6
-2.9
0.3
Source: Derived from Middleton (1996, app. I).
5.6
What emerges above all from this rough and ready analysis is that, relative to the significant
rise in unemployment during the depression phase, the fiscal adjustments, both discretionary
and non-discretionary (the automatic stabilisers), were small. This scaling issue applies
particularly to public sector capital formation, upon which, of course, much of the Keynesian
solution debate revolved. Public sector investment, whioch was dominated by local spending,
averaged but 3.2% of GDP during the depression phase, but it did rise at least between 192931 as the Labour government undertook a public works programme to mitigate rising
unemployment. On the issue of stabilizing effectiveness, and for the 1930s as a whole, as
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Figure 6 shows, deviations in public investment from trend were neither synchronised nor
equivalent in scale to those of deviations in private investment. Over the whole interwear
period public investment was destabilizing.
5.7
This leads inextricably to the whole issue of fiscal policy in relation to public works and the
Keynesian solution. The Keynesian solution debate peaked in the 1980s and there has been
little subsequent literature. We report in Table 2 the widely employed estimates by Hatton
(1987) of the simulated effects of a £100m (equivalent to about 2.5% of GDP) public
spending programme in 1930 on two exchange rate scenarios and with a range of values for
the short-run multiplier.
Table 2 Simulated effects of a £100m public spending programme, 1930
Multiplier value
Low
Medium
(1.25)
(1.50)
A. With fixed exchange rate
Income change (£ millions)
125.0
150.0
Employment change ('000s)
345.6
414.8
Change in budget balance (£ millions)
-50.0
-40.0
Change in current account
-26.3
-31.5
balance of payments (£ millions)
B. With floating exchange rate
Income change (£ millions)
167.0
214.0
Employment change ('000s)
461.8
591.7
Change in budget balance (£ millions)
-33.2
-14.4
Exchange rate change (%)
-5.1
-6.5
Source: Hatton (1987, table 2).
5.8
High
(1.75)
175.0
483.9
-30.0
-36.8
269.0
743.8
7.6
-8.2
Unsurprisingly, the income and employment effects were greatest if exchange rate regime
flexibility was permitted, but that was contrary to policy and even so the simulated effects
BA conference April 2010: Middleton, British monetary and fiscal policy in the 1930s ver 1
13
would not support the Lloyd George proposal, made for the 1929 general election and with
Keynes‟ backing, that a public works pogramme of £100m would bring unemployment back
to „normal‟ levels within a year. All the major simulation exercises since Thomas (1981),
which derived from work for his 1975 thesis, have been sceptical about whether the scale of
unemployment could be lessened significantly through loan-financed public works, though
for different reasons. Glynn and Howells (1980), who focused on the depth of the depression
(1932), adduced three grounds for their scepticism: first, the issue of scale whereby tpo
generate 2.8m many-years of employment would have required a fiscal stimulus of 12.617.0% of GDP, this between 56 and 76% of central government expenditure; the structural as
well as cyclical nature of the unemployment problem; and the adverse impact on business
confidence of huge governemnt borrowing, such that:
Even before one asks where the funds to meet the [budget] deficit might have
come from, the required amount can already be seen to be in the realm of
political and economic fantasy. … In 1931 the prospect of a much smaller
budget deficit had given rise to a major financial and political crisis.[Glyn and
Howells 1980, p. 42]
5.9
The most recent simulation by Matthews (1989) is very differently inspired, being from the
perspective of new classical rather than Keynesian economics and very much focused on
supply-side constraints. Matthews‟ simulation addresses directly the „Lloyd George can do it‟
pledge and entailed shocking (with monetary accommodation) the British economy for three
succesisve years with £300m p.a. spending packages on the assumption of a floating
exchange rate. He concluded „the expansionary programme could have had powerful effects
on unemployment dependent on the supply regime assumed‟; indeed, „Lloyd George could
… have done it , but not at all for the reasons imagined by the Keynesians‟ (pp. 398, 401) for
the transmission mechanism was through inflation reducing the real wage and consequent
longer-term gain in competitivenmess.
5.10
It remains to report the fiscal policy aspect of the cross-country study by Almunia et al.
(2010) and then to compare and contrast with Fishback on US fiscal policy. On the former,
the 27 country testing found small monetary policy effects but very much more substantial
potentital for fiscal policy (short-run multipliers of 2.5; longer-run 1.2), potential not realised
in most of their countries: „Where significant fiscal stimulus was provided, output and
employment responded accordingly. Where monetary policy was loosened, recovery
occurred sooner.‟ (p. 250). But, on the whole, fiscal policy was not used; it was not that it
was ineffective.
5.11
With respect to US fiscal policies, we start from the very different instiutional frameworks
and conditions for fiscal policy with respect to Britain. The similarities, of course, are that in
neither country did government deliberately embark upon large loan-financed public works;
in neither country was the Keynesian solution tried in peacetime, though in effect – via
rearmament – it was operative in Britain after 1937. Fishback shows that:
1.
2.
3.
spending growth predated Roosevelt;
both the Hoover and Roosevelt administrations ran Federal budget deficits because
they did not override the automatic stabilisers (cf Britain in autumn 1931 whgere the
new government took tough deiciions on expenditure and tax, but believed they were
quickly rewarded through policy credibility which made cheap money possible);
the Hoover-Roosevelt deficits were not Keynesian because not deliberate and too
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4.
5.
14
small to exercise significant demand leverage (following Brown 1956 and Peppers
1972);
highlights recent work on the sub-national aspects of New Deal spending
programmes, which in terms of employment generation concentrates attention on the
purpose of Federal grants and their terms (Fishback 2010, table 1); and
identifies new work (not replicated for Britain) on the supply-side effects of fiscal
policy: how tax rates and tax structures impacted upon spending and investment.
§6.
Conclusions
6.1
One major difference between the two countries is that the current turbulence has not caused
anything like the revival of interest in interwar British economic history as has occurred in
America with its great depression. This is, of course, partly about the place of the role of the
„great depression‟ in US national life and that the current turbulence originated in the US. It
is noteworthy that the sorts of budget deficits that have been routine in the US and UK since
2008 (between 10 and 15% of GDP) approximate to the size of the fiscal stimuli that would
have been necessary in face of the level of unemployment of the early 1930s, though of
course unemployment in contemporary Britain and the US is well short of interwar peaks.
6.2
Clearly, all we have done here is recount the British literature and identify a few obvious
continuities and differences in the two countries‟ fiscal records. Given the similarities, and
the inevitable contemporary revival of interest in Keynesian fiscal activism, the comparative
economic and policy histories could be further pursued in a number of directions. I suggest
two particularly fertile areas: attempts to influence expectations through macroeconomic and
other policy instruments; and how, and with what data, contemporaries formed their
assessments of business cycle turning-points and the effectiveness or otherwise of their policy
interventions. From the British perspective, and looking back from today‟s turbulence and
uncertainty on the now more than eighty years since the Keynesian solution was unveiled for
the 1929 general election, one is struck by the paralysing effects of depression. The policy
space at the time always appears smaller than is adjudged by later commentators.
Investigating expectations and contemporary data sources will help unlock how
contemporaries perceived their policy space.
§7.
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