2M - Economic issues: the Depression and financial crisis
Learn how the Depression developed into Britain's financial crisis, how departure from gold, cheap money and protection altered policy, and why recovery affected industry, agriculture and trade differently.
Depression, trade and financial crisis
The Wall Street Crash of October 1929 was a major event in the international downturn, but the Depression was a wider collapse in demand, credit and confidence. Countries reduced imports, banks and borrowers encountered financial difficulties, and governments erected trade barriers. Britain depended on overseas markets and earnings from international services, so a contraction in world activity struck several parts of its economy at once.
Export-dependent industries were particularly exposed. Coal, cotton, shipbuilding and heavy engineering already faced structural weaknesses; fewer foreign orders brought further production cuts and unemployment. Workers losing income reduced their own spending, transmitting the downturn to shops and other businesses. Unemployment approached three million at its early-1930s peak, though the measure mainly counted insured workers and did not capture every form of underemployment or hardship.
The financial crisis of 1931 must be distinguished from the broader Depression. International banking failures, especially in central Europe, encouraged withdrawals from London. The Bank of England lost reserves as holders sought to convert or move funds. Defending sterling's gold parity required reserves and measures to maintain confidence, while a depressed economy increased welfare spending and reduced revenue.
The May Report's deficit forecast intensified demands for budget cuts and contributed to the Labour Cabinet's collapse. But a balanced budget did not automatically stop international investors withdrawing funds. The crisis showed the vulnerability of a fixed currency commitment when foreign confidence and domestic economic conditions moved against it.
Leaving gold and adopting cheap money
Britain suspended the Gold Standard in September 1931. It was a forced response to reserve losses, rather than the execution of a long-prepared recovery plan. Sterling's exchange rate could now fall, making British goods cheaper to foreign buyers and imports more expensive in pounds. This helped some producers compete, though it could not restore demand in countries suffering their own depression.
Departure also reduced the need to keep interest rates high solely to defend a gold parity. Cheap money, associated with low interest rates from 1932, made borrowing less costly. The conversion of the major War Loan in 1932 from a 5 per cent to a 3.5 per cent coupon reduced the government's debt-service burden and formed part of the wider move towards lower interest rates.
Cheap money
A policy of keeping interest rates low so that borrowing and debt servicing cost less. In the 1930s it encouraged activities such as housebuilding and investment once Britain no longer had to defend the old gold parity.
Lower mortgage costs helped private housebuilding. A family able to buy a suburban home created demand not only for builders but also for bricks, timber, glass, furniture and household electrical goods. This gave domestic industries a source of demand less dependent on weak overseas markets. It also favoured households with regular earnings and access to credit; a long-term unemployed worker could not borrow merely because the rate was lower.
The government still valued budgetary restraint. Cheap money was not the same as a large deliberate programme of deficit-financed public works. Recovery relied heavily on private domestic demand, currency adjustment and selective intervention. From the middle of the decade, rearmament added a further source of orders, particularly for engineering and related industries.
Tariffs and imperial preference
The National Government moved away from Britain's traditional commitment to broad free trade. The Import Duties Act of 1932 introduced a general 10 per cent duty on many imports, with exemptions and provision for additional duties. It was not an identical 10 per cent charge on everything entering Britain. Policymakers wanted revenue, protection for domestic production and a means of negotiating trading concessions.
At the Ottawa Conference of 1932, Britain and the dominions developed agreements providing imperial preference. Goods from parts of the empire could receive more favourable treatment than goods from outside it, while Britain sought better access for its manufactures in imperial markets. The policy aimed to build a more sheltered trading network in an increasingly protectionist world.
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