The British Economic Policy

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The British Economic Policy


Before the 20th century, Britain was still ranked as one of the world’s largest economy. It was amazed that such amount of wealth was created by a middle-size island, whose population and land are only halved of many other countries. However, there was a reduction in the status of Britain since 20th century, with its total output and productivity were surpassed by U.S and other west Europe countries (Maddison, 2003). To regain its status in world trade, since 1918, British has implemented a series macroeconomic policies revolving around the restoration of the gold standard. Through long and strenuous preparation, it completed the restoration in 1925. However, the return to gold standard did not bring back glory status, but endless unemployment and social unrests instead. Finally, in 1931, the faltering British economy finally frustrated under the great depression. The country once in the center of the international gold standard, became the first one to quit the exchange regime built by itself.

The British economic decline during the interwar period has attracted significant attentions of researcher and policymakers. Many literatures focused on the mechanism of gold standard and interpret it as a cause to the decline. However, much less attention was given to the issue why did the state insist the gold standard even after the state presumably realize the detriments the gold standard brought.

Temin (1991) analogizes the gold standard as an ideology and argues that once in the ideology, nations could not be thinking without it. Hall (1986) argues that there was a specific institutional setting in Britain, providing the incentives or disincentive for its player to response. During the interwar period, both workers and investor, faced a disincentive to consume or investment. As a result, the Britain slowed at introducing new technologies and then lagged in economic growth. Hall (1986)’s argument implied that the insistence of gold standard might be rooted in the institutional setting. However, why the British did not take more active movement to change the institutional setting? ORDER YOUR PAPER NOW

This research will be mainly focused on answer the two questions raised above: the institutional context of how Britain make the economic decision, and why Britain incapable of transforming that institutional settings. The first section demonstrates varied environment of the interwar period, which was once the incentives before war but the disincentives in the interwar. The second section will analyze the pattern of Britain’s economic policy since 1918 to 1930s, including the macroeconomic policy and the industrial policies. In the final section, the British institutional setting of the policy making will be identified. Influenced by the early industrialized experiences and specific political system, the Britain institutional setting rendered the policymaker more probably to insist gold standard.

1. General Macroeconomic Context after the World War 1

Britain has experienced several fundamental difficulties since the 19th century. Furthermore, the varying international environment may bound Britain longer to these difficulties. All of those changing seems not be considered in the decision to return to gold standard (Cairncross and Eichengreen, 2003)

1.1 Economic Decline

The underperformance of British economic can be traced to the late 19th century. According to Matthew (2003 et al.), the rate of economic growth has decreased from 2.6% in 1800-1860 and further plugged into 1.1% in 1913-1937. This lag could be partly attributed to the effectiveness of utility new technologies (Roselli, 2012). Between the 1929 and 1932, the nominal GDP in Britain suffered the more than 11 % contraction, accounting for more than 20% of the industrial production (Mitchell, 2014). Furthermore, this disappointing growth rate of Britain was distributed unevenly. The infant industry such as dyestuff, enjoyed more growth under the protection of tariff, than traditional industries such as coaling, and textile, faced fiercer competition (Cairncross and Eichengreen, 2003).

1.2 Weakening Balance of Trade

On the export side, Britain’s also suffered the weakening advantages in its trade balance. Taking the advantage of the lower labour cost and readier technology, the competitor in Europe has gradually penetrated British share of world export. In the context that the oversupply of coal, iron, textile products, the barter term of trade of British is gradually deteriorated. The British trade of balance stayed deficit for much of the period over 1920s (Sayer,1976). This stability resulted by Britain’s continuous comparative advantage in ‘invisible’ sectors, such as insurance, banking, brokerage service, and foreign investment. This ‘invisible’ surplus was usually capable of offsetting the trade deficits, allowing a total surplus on the current account, made up 9% to 13% of GDP from 1918 to 1978 (Feinstein, 1972). ORDER YOUR PAPER NOW

Although facing little alarms across the 1920s (Kitson and Solomou, 1991), British external account also experienced disturbance tendency. In coincident with a smaller contribution from ‘invisibles’, a 27 % decline of exports from 1920 to 1932 triggered a rapid reduction in the current account surplus and an increase in deficit from 1931(Cairncross and Eichengreen, 2003). This weakening trade of balance imposed extreme pressure on the price of sterling.

Therefore, it is argued by Eichengreen (2008) that the situation for prewar gold standard keeping stabilized has no longer existed. Since the World War 1, the world has become more and more imbalanced. Britain, the once strongest creditor country, was turned into debtor after the war, while United States accumulated the inflow of gold from war benefits and the reparation. Thus, the United States and Britain had reserved foreign roles. This enlarged world imbalance surfaced the endogenous fragility of gold standard. As Temin (1991) elaborates, gold standard imposed asymmetric responsibilities between countries experiencing payment deficits and surpluses. Deficit countries must protect its gold reserves, otherwise, investor would question the convertibility of the currency and short any domestic-currency assets. While for countries with trade surplus, there would be no such concerns. Therefore, an international cooperation would be imperative to help the countries with difficulties out of trouble (Eichengreen, 2008).

When the decline of British exports had enlarged the trade deficit, the rise in the bank rate would affect the domestic economy by deflation mechanism (Thomas, 2010). First, a higher interest rate would attract the dear money to benefits the balance of payment. Second, to create a payment surplus, authorities would encourage more exports by reducing the price and curtailing profit rate for enterprise. In the final step, lower profits would be transmitted to reduction in cost, especially the wage. Therefore, without the flexible adjustment of price, the consequence would be the high level of unemployment, which is over 20% in the 1921, and over 10 % at the beginning of 1924 (Crafts, 2012).

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