Metroboom: lessons from Britain’s recovery in the 1930s

The consensus view of the 1930s as a universally destitute place is a myth, writes George Trefgarne in Metroboom: lessons from Britain’s recovery in the 1930s, published by the Centre for Policy Studies on Friday 16 March.

While the mood was depressing in 1931, by the middle of the decade, recovery had come and a British boom was underway. There are important lessons for our own time as to how and why this was achieved – as Vince Cable recognised when he wrote in his leaked letter to the Prime Minister last week: “Finally, the economy will continue to struggle while the construction industry remains so depressed. By contrast the big recovery in the 1930s was driven by a combination of new industries (cars and chemicals) and construction: estates of semis and lots of council housing.”

There were of course deep pockets of severe poverty in the “Special Areas”, so powerfully described by among others George Orwell in The Road to Wigan Pier. But after the financial crisis of 1931, healthy economic growth averaged 4% a year in real terms between 1934 and 1939,stimulated primarily not by rearmament but by the successful tax and economic policies of the National Government.

The mid-1930s was a time of vibrant innovation and industrial growth. Housebuilding, car manufacturing, aircraft production and textiles all boomed while unemployment fell by almost a half between 1932 and 1937.

See here for a video clip of Neville Chamberlain commenting on his 1935 budget speech where he describes how, just four years after the financial crisis of 1931, sound finance on the part of the government resulted in restoration of previous cuts in salaries and wages.

This healthy recovery in the 1930s is in sharp contrast to the UK in 2012. Today, four years after our financial crisis, the economy remains frail, growth sporadic while unemployment is still rising.

Five lessons can be drawn from the economic policies pursued first by Labour’s Philip Snowden and later by Neville Chamberlain:

1. Spending cuts work. Tough spending cuts – including an immediate 10% cut in benefits and civil service salaries – quickly led to balanced budgets and maintained the confidence of citizens, businesses and international investors. Today’s cuts are much shallower in comparison.
2. Austerity in the public finances must be matched by a cheap money policy to encourage the private sector to expand. While this was achieved in the 1930s, the appropriateness of today’s Quantitative Easing policy is far less certain.
3. Confidence in the legal and political foundations of the financial system must be restored. The early 1930s saw a number of high profile trials of those who had misbehaved in the previous decade. Today, nothing similar has happened and public confidence in the banks remains low.
4. Tax cuts work. From 1934 on, Neville Chamberlain’s tax cuts for families and the low paid gave a further boost to business confidence. The top rate of tax was only 37.5%. A similar approach is needed today.
5. Press on with welfare reform. The National Government failed to do enough for the long-term unemployed and for those areas which had been hit particularly hard by the recession. Today’s Coalition must not make the same mistake.

Finally, while everyone has to make sacrifices, we should do so confident in the knowledge that, in Chamberlain’s phrase, the quicker we can put down Bleak House, the sooner we can embark on Great Expectations.

View Neville Chamberlain giving his 1935 budget speech:

Media Impact:

• BBC News: VIDEO: Daily Politics Soapbox: George Trefgarne's 1930s lesson
• George Trefgarne, Conservative Home: How did a Conservative Chancellor deliver 7% growth after the 1930s Depression?
• The Telegraph: UK companies are sitting on billions of pounds, so why aren't they spending it?
• Neil Collins, Financial Times: Oh for the halcyon days of the 1930s
• Ryan Bourne: Lessons on long-term bonds: Keynes on 1932 debt conversion
• Ed Conway, Sky News: Policy Needs To Be More Like The 1930s, Not Less
• Daniel Hannan MEP, The Telegraph: The real lesson of the 1930s: cuts work
• Anthony Hilton, The Independent: The 1930s example can build confidence and give a foundation for recover
• Daniel Knowles, The Telegraph: George Osborne's aim: be like Neville Chamberlain

George Trefgarne - Friday 16th March 2012