1.2- Responding to Economic Challenges Flashcards
1
Q
Economic legacy of World War One
A
- Loss of trade –During WW1 British ships were occupied shipping essential war supplies -with 20% being sunk in the process - and could not be used for exports. Economic rivals ( US and Japan) filled the gap left by a decline in British exports, took over British markets. Britain was also unable to trade with countries she was at war with - many of these countries became more self-sufficient, producing goods within the country that they had previously imported from Britain, and continued this practice one war had ended.
- Debt – the war cost Britain £3.25 billion with debts of £8 billion by 1920– mainly to US banks. Wartime debts rose to 160% of income by 1924.
- Value of the pound fell. Britain had been forced to abandon the gold standard in 1914, in order to be able to print enough money to cover the immense costs of the war. This decision resulted in a rise in inflation and a drop in the value of the pound (£1 was valued at $3.19 in 1919),
- Inflation rose to 25% in 1918 which impacted upon prices.
-
Technological development accelerated in the war – particularly in medicine and transport, radio.
Use of machine tools and assembly-line techniques encouraged employment of semi-skilled labour, taking jobs away from skilled workers. Britain fell behind in technological development - Countries like France and Germany saw many of their factories destroyed, were forced to purchase new, more modern machinery, giving them an edge over their British counterparts. Foreign industries to overtake British ones after WW1- by 1918 Germany was producing twice as much steel as Britain - nearly 900,000 men were killed - British Workforce
2
Q
ineffective solutions to economic problems - Interest rates and value of the pound
A
- Government set high interest rates to curb inflation and raise value of the pound against
other currencies= curbed economic growth - more expensive for businesses to
borrow and invest, people more likely to save then spend - Britain returned to the gold standard in 1925- following the report of the Cunliffe Committee in 1919,
restored the pound to its pre-war value of $4.86 in 1925.
disastrous for traditional industries. The high exchange rates made British exports more expensive and less competitive, industries such as coal, steel, shipping
and textiles had an even harder time selling abroad. -
Keynes famously argued Sterling was overvalued by 10% compared to the dollar –this, coupled with America’s low interest rates made American exports far more advantageous than British ones, further
damaging Britain’s export market.
3
Q
ineffective solutions to economic problems - Tax, spending and balancing the budget
A
- To reduce inflation and repay war debts as quickly as possible taxes were raised each year after 1918 from £18 per capita in 1919 to £24 per capita in 1922
- Lloyd George appointed a** Commission of National Expenditure under Sir Eric Geddes** to find out where savings could be made
- 1922 Geddes Axe led to £24 million of cuts in spending on education, pensions, unemployment benefit, housing and health
- Defence cut from £190 million to £111 million
- Spending cuts contributed to growing unemployment
- unemployment never fell below 1 million during the war years
4
Q
neffective solutions to economic problems - protectionism
A
- Government policies of ‘protectionism’ introduced duties and limited tariffs on foreign goods in order to protect Britain’s traditional industries, which struggled after WWI.
- These policies may have helped in the short term but in the long term they created a lack of incentive to modernise in order to compete with new foreign traders
- Industries avoided introducing the changes needed to become competitive in the long term, and so failed
- Protectionist policies and tariffs also incited other countries to elect their own ‘tariff walls’ which further limited international trade.
- After WW1 Britain struggled to reclaim dominance of the market -
- By 1933 unemployment had reached 60% in shipbuilding areas, and 49% in iron and steel industries – demonstrating how a failure to modernise created the decline in traditional industry.
- Newer industries, such as chemicals and cars, were neglected.
5
Q
How did the rise of trade unions impact the economy
A
- War had caused a huge growth it trade union membership – between 1915 and 1918 membership rose from 4.3 to 8.3 million –trade unions had far greater power and influence.
- During the harsh 20’s employers in traditional industries were forced to cut costs – yet attempts at introducing** pay cuts or longer working hours were met with harsh resistance from the trade unions**
- In 1926 – the year of the General Strike, there were 323 strikes launched, which led to a total of 162.23 million working days being lost.
- Trade unions led to a lack of wage flexibility which resulted in employers firing workers to keep costs down
- As a result unemployment never fell below 1 million between the two world wars.
- TUS halted the progress of certain industries, particularly as their foreign competitors had much greater access to cheap manual labour (the US’s influx of immigrants gave it a huge advantage for economic growth).
6
Q
Why was the 1930s referred to as the hungry 30s
A
- The term ‘the hungry thirties’ refers to the 1930s being a period of depression and high unemployment. This was partly a political term begun by left wing historians in the 1940s wanting to darken the name of the Conservative Party, who they blamed for devastating economic slump of the early 1930s.
- Modern historians have countered this view arguing that it is too simplistic. They argue that there was no single trend that identified that most people suffered a decline in living standards in this period.
- A commonly held view now is that the impact of the depression on Britain was uneven
- The areas that were hit the hardest were those that centred on the staple industries, such as coal in
the north and in south Wales, textiles in Yorkshire and shipbuilding in Scotland and the Tyne – in the town of Jarrow in the north-east of England every man was made redundant after the coal mine, steel works and Palmer’s shipyard closed - Jarrow March in 1936 - Unemployment rose to 2.5 million (25% of the workforce) in 1933, but it was higher in the north of Britain
- The depression also lowered productivity for the whole country, and so demand for products such as coal and steel fell – with coal use in the UK dropping from 180 million tonnes in 1929 to 155 million tonnes in 1935
- However, while these areas suffered from high unemployment, areas such as London and the south east remained prosperous as consumer industries enjoyed boomed.
- This encouraged the two nations view of poor and rich and north and south.
7
Q
Why was the pound devalued in 1931
A
- The Great Depression led to a fall in exports by 50% and unemployment rising to 2.5 million in 1933.
- The government cut spending and maintained high interest rates to preserve the value of the pound,
which was still attached to the Gold Standard. - This policy divided the Labour government (Labour were particularly against the 10% cuts in
unemployment benefit) , who resigned which led to the formation of the National Government in
1931. - 12 000 Soldiers mutiny in Scotland 1931 in opposition to pay cuts - leads to change in policy
- The National Government removed the pound from the Gold Standard and devalued the pound; the
pound depreciated from $4.80 to $3.40
8
Q
Impact of pound being removed from gold standard 1931
A
The removal of the pound from the Gold Standard allowed for a quicker recovery from the depression compared with other countries.
* Unemployment fell from 17% to 8.5% between 1932 and 1937.
* Interest rates were cut from 6% to 2% leading to greater borrowing. This policy was called ‘Cheap
Money’.
* Rate of long term government borrowing cut by 1.5% slashing the cost of government debt
repayment
* Greater borrowing triggered a** boom in mortgages** and house building.
* Exports were cheaper as prices of British goods fell by 45% and sales went up by 28%.
* Industrial production rose by 46%.
9
Q
Impact of second world war on economic policy
A
- Churchill expanded the government’s role in managing the war economy and created a series of ministries which had a specific role in economic management
- These ministries had extensive powers of economic management.
- The government also controlled prices through controlling production levels.
- The National Government transformed Britain into a managed economy; rationing and conscription
introduced immediately, Registration for employment made compulsory in 1941; 8.5 million work
orders issued, By 1945 1/3 of citizens involved in war work - The growth of state intervention led to a huge increase in war production and military spending.
Between 1941 and 1945, over half the government spending was on military.
and continued to be priority after war- 10% of GDP in 1951
10
Q
what was the impact of austerity economic measures in 1940s
A
- In 1945, Britain had accumulated £4 billion worth of debt to the USA and with an additional loan in 1945, it would cost Britain £70 million a day just to finance the debt.
- There was a £700 million deficit
- The Attlee Government embarked upon a series of austerity measures – which was a programme of
cuts in government spending, controlling private spending and rationing of goods. - This was unpopular with the British public – the most outraged were the trade unions, who were
requested to accept a wage freeze or face legal pay restraints. - However, austerity measures did not work alone. With the harsh winter of 1947 led to an economic
crisis which hit industrial production and Britain having to pay for goods in dollars and not pounds, making imports more expensive, Attlee was forced to devalue to pound in 1949.
11
Q
impact of nationalisation on key industries in 1940s
A
- The nationalisation of key industries was a centrepiece of Attlee’s economic policy.
- The aim of nationalisation was to create full employment and to ensure the effective management
of the key industries, which had been for too long inefficient. - By 1950 10% of the work force were employed in nationalised industries
- The nationalisation of coal, the Bank of England, transport infrastructure, electricity, gas, iron and
steel cost the government over £2 billion in buying out the previous owners of the key industries. - This meant that the government had little money left over to invest in the key industries in
modernising them. Eventually, this left them lagging behind international competitors.
12
Q
economic approach of Butskellism of 50s and 60s
A
- The 1951-64 Conservative governments largely accepted Labour’s post war welfare reforms and approach to managing the economy along Keynesian lines. - but reprivatisation of steel and road
- Both parties accepted the commitment to full employment and a mixed economy.
- Such was the closeness of the economic policies of Labour and Conservative governments of the
1950s, The Economist coined the phrase ‘Butskellism’ to describe this consensual approach. - ‘Butskellism’ came from the names of the Conservative Chancellor, R. A. Butler, and the Labour
leader, Hugh Gaitskell.
13
Q
illusion of affluence in 50s and 60s
A
‘You’ve never had it so good’ – the illusion of affluence (macmillian)
* The 1950s was seen as a period of affluence with increased consumer spending - Consumer spending rose by 45%
* This increase was based on the ability for people to borrow money to spend. This had significant consequences –
- Growth in inflation (around 4%)
- Increase in imports which led to an imbalance in balance of payments.
encouraged by Stop-go economics **
* The Conservative governments of 1951-64 encouraged this growth in consumer spending by relaxing laws on borrowing and credit (low interest rates and taxes).
* However, when the problems of inflation and import prices became serious, controls to slow the economy down (raising taxes and interest rates and lowing wages) were put in place.
* This inconsistent policy** towards economic growth was called ‘stop-go economics’ and demonstrated that** controlling unemployment and inflation was impossible.**
14
Q
corporatism of 50s and 60s
A
- It was clear in the 1950s that Britain was lagging behind its world competitors in terms of economic growth (2.3% a year compared to 5.6% in Italy and 5.1% in Germany).
- Macmillan’s 1957-63 government decided to follow a corporatism policy – a managed economy uniting labour, management and government through corporations to plan and achieve economic goals. He set up two department nicknamed NEDDY and NICKY
- NEDDY – The National Development Council and Office. Aimed to produce reports for future of economy. Recommended pay freezes and tax increases. Not popular
- NICKY – the National Incomes Commission. NICKY was an advisory body for unions and management. Tried to steer course of wages. Trade unions refused to cooperate with it at all.
- met considerable opposition from within Tory Party , treasury and capitalist media = quick u turn
- corporationist ideas continued by Wilson through Department of Economic Affairs
15
Q
what is Dash for growth post 1950s
A
- launched 1963 after conservatives abandon corporatism
- Dash for growth’ was simply a demand management strategy based on the idea that injecting high
levels of demand into the economy for a sustained period would stimulate investment, raise
productivity, and thus enable the expansion to become self- sustaining. - Inevitably, the policy was a complete failure, higher demand simply led to more imported goods, a
massive balance of payments deficit occurred, and capital ran scared from the faltering British economy. - The Tories lost to Labour and never had to deal with the consequences of this policy
