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Happy Days: Britain’s Not So Great Depression

Updated: Jun 9, 2020

Stephen Clark

For many, Britain in the 1930s is the age of the Jarrow Marchers, Orwell’s The Road to Wigan Pier (1937), and the darkening clouds of fascism. However, there is another side to the decade. GDP grew, in real terms, by an average of 2.14 percent in the 1930s, and by an average of nearly 4 percent between 1934 and 1940.1 As a result, the 1930s was also the age of the vacuum cleaner, the motor car, and the cinema—a time when consumer spending and the middle class grew.

Given these two possibly conflicting narratives, an expert panel and distinguished guests examined Britain’s economic performance in the 1930s. Are there any parallels to be drawn between then and now? Scott Urban, an expert on international finance at Hertford College, Oxford, moderated.

To understand Britain’s particular economic performance in the 1930s, explained Olivier Accominotti, Associate Professor of Economic History at the London School of Economics, is to enter the debate about the causes and ramifications of the Great Depression in general. Friedman and Schwartz provide one of the earliest, and certainly one of the most influential, interpretations of the Great Depression.2 They outline how monetary contraction and bank failures were responsible for the magnitude of the economic slump. However, their work looked only at the United States. Since the 1980s scholars have looked for a common cause for the Great Depression. Eichengreen’s seminal work explains how the gold standard and the international monetary framework that existed in the 1930s transmitted deflationary pressure across the globe.3 As a result, not only America but a host of other countries saw deflation and severe economic contraction during the period.

This was the point of departure for Nicholas Crafts CBE, Professor of Economics and Economic History at the University of Warwick, to explain why Britain’s experience of the 1930s differed from that of America and many other European countries. Reflecting on his own extensive research and that of other scholars,4 Crafts was clear that Britain did not experience a “Great Depression”. Britain’s downturn was relatively short and mild: real GDP had returned to its pre-crisis (1929) peak by 1934, and the economy had grown by 18 percent by 1938. By contrast, US real GDP remained below its pre-crisis peak until 1940,5 and that of the Gold Bloc countries remained below pre-crisis peak until 1938.6 Indubitably Britain’s downturn was of a different magnitude to that felt by the US and other countries. Why did Britain not share the bleak fate of many other countries? Britain’s departure from the gold standard in September 1931 proved to be the decisive factor. This departure and subsequent devaluation allowed the country to regain control of monetary policy. This in turn allowed the Treasury to pursue a “cheap money” policy aimed at increasing the price level, thereby reducing real interest rates. This stimulated the economy, particularly the housing market—Crafts showed that over 290,000 houses were built without state assistance in 1935 alone.

Nevertheless, in some respects Britain’s economy performed poorly in the 1930s. Tobias Straumann, Professor of Economics at the University of Zurich, and Nicholas Crafts both pointed out that, while the country did not experience deflation on the scale of other countries, in 1938 the price level remained below its 1929 peak. Most damagingly, the country witnessed high levels of unemployment. Nationally, unemployment peaked at 17 percent in 1932, but in some regions high levels persisted throughout the decade. In 1937 unemployment remained 14 percent in the North West, 16 percent in the Scotland, and 23.3 percent in Wales. By contrast, in London the level was only 6.4 percent. In many respects the regional disparities that exist today were already apparent in the 1930s and explain why, for some, the decade is still seen as one of deprivation and hardship. The discussion of Britain and the Great Depression is timely. The world we inhabit today is one that has recently endured—and some countries continue to endure—a wrenching economic contraction. Moreover, the economic levers politicians and central bankers have at their disposal are being questioned, much as they were in Britain in 1931 when the country left the gold standard. The Great Depression was also perhaps the world’s first “global” depression, when the economic links between countries played an important part in transmitting the contraction in output. International co-ordination of economic policy (or the lack of it) was a key issue at the time. It continues to be a critical issue today, most prominently in the Eurozone.

There are distinct parallels, when it comes to the co-ordination of economic policy and the travails of the Eurozone, between events in Europe in the Great Depression and in the recent recession. Accominotti and Eichengreen show that both in the 1920s and 1930s and in the 2000s, debtor countries saw huge capital inflows followed by outflows.7 Between 1925 and 1932 Austria, Germany, and Hungary (AGH) saw private and official capital inflows of around 4 percent of GDP per annum. Similarly, between 2004 and 2008 Greece, Ireland, Italy, Portugal, and Spain (GIIPS) saw inflows of a comparable magnitude.

In 2011 the GIIPS saw private capital outflows of around 8 percent of GDP, while in 1931 the AGH saw outflows of around 4 percent of GDP. The central difference between these two periods is the support available to the debtor countries. In 1931 official inflows were not enough to offset the private capital loss, whereas post-2008 official inflows provided greater insurance to the embattled Eurozone countries.

Nevertheless, the problems in the Eurozone continue, and here the seminar drew parallels between the gold standard and the euro. Urban has shown in his work that under the gold standard many countries opposed a nominal depreciation of the exchange rate.8 Today the Eurozone countries cannot, or will not, countenance a nominal depreciation because this would involve leaving the Eurozone. Therefore they must pursue an “internal” devaluation to push down costs in an attempt to regain competitiveness or countenance capital controls so that they can retake control of fiscal and monetary policy. Capital controls were briefly introduced in Cyprus and continue to be used in Greece. In the Great Depression robust growth only returned to countries once they had left the gold standard and regained control over their monetary policy. Policymakers need to reflect on whether many Eurozone countries can properly recover without a nominal depreciation of their currency: would leaving the Eurozone, like leaving the gold standard, be the best course of action?

The Great Depression struck a blow to orthodox economic thinking. The gold standard was perhaps the most famous example of the orthodoxy that existed at the time, but there were others too. Middleton explains that in the 1930s British economic policy broke from the past: tariffs were imposed, the exchange rate devalued, and eventually the government adopted a looser fiscal stance.9 In all these cases change went against the prevailing orthodoxy, for good or ill. On September 3, 1931, not long before the departure from the gold standard, a UK cabinet memo stated: “It would be difficult to devise a measure that would give a greater shock to the world’s trade and credit than departure from the Gold Standard.”10 Similarly, the imposition of tariffs in 1932 went against the free-trade orthodoxy that had dominated British economic and foreign policy since the nineteenth century, and the 1920s and 1930s saw the beginnings of industrial policy in Britain. Cartels were encouraged and industries protected from foreign competition:11 policies similar to those pursued in other countries with similarly little positive effect.12 What did not change until later in the decade was the government’s commitment to running balanced budgets. One effect of exiting the gold standard was that balanced budgets were seen as more important than ever in safeguarding the value of sterling. This changed in 1937 when rearmament spending resulted in a looser fiscal policy.

Severe economic upheaval in the 1930s resulted in questioning of accepted economic theories. Today we witness a similar phenomenon. In the wake of the recent crash there was a reaction against the “neoclassical orthodoxy”, but more interesting have been discussions about how economic policy should be conducted in a world of low interest rates (the zero lower bound), low growth, and, in some countries, high public and private debt burdens. One contentious point during the seminar was whether the change in British economic policy in the 1930s constituted a “regime change” that was consciously brought about by the British government. Crafts argued that the Treasury took explicit control of monetary policy and instituted a “cheap money” policy that convinced the markets that they were serious about raising the price level. Given the country’s significant debt stock (158.4 percent of GDP in 1929), it was in the Treasury’s interest to bring down the debt burden by raising the price level. As a result, inflation expectations were raised and both nominal and real economic growth ensued.

Does Britain’s success hold lessons for countries such as Japan, which have been trying to raise inflation expectations for nearly two decades? Straumann was not convinced, noting that regime change is a lot harder to effect than it may appear in hindsight. Although notionally independent, there has been a great deal of political pressure put on the Bank of Japan to raise the price level, and a great deal of monetary stimulus, with (so far) very little effect. Two more radical solutions were discussed. The Bank of Japan (and possibly other central banks facing economic circumstances similar to those in Japan) might adopt an explicit nominal GDP (NGDP) target. This idea has been proposed by Scott Sumner, among others.13 The central bank would target a certain level of nominal GDP at a specified date, remaining neutral as to whether that target was achieved through inflation or through real growth. The goal, however, would be to ensure that positive and negative shocks to real growth were appropriately addressed by monetary policy. Given low growth in real and nominal GDP, NGDP targeting could constitute a necessary regime change.

A second, arguably more radical, policy change would be to entrust monetary policy to the finance departments rather than the independent central bank. This would signify a reversal from the current orthodoxy, but would replicate the situation in Britain in the 1930s. The explicit politicisation of monetary policy is not something that has been widely suggested. Yet in his recent book Adair Turner, a member of the UK’s Financial Policy Committee, argues that central banks should monetise the debt and stimulate domestic demand by giving newly printed money to households or businesses.14 This would be a radical and controversial break from the past—in effect, a regime change. Furthermore, given the significant political pressure placed on organisations such as the Bank of Japan, it remains a moot point whether de jure authority would have any more effect than the de facto power some politicians already hold over monetary policy. Nevertheless, if more countries experience decades of low or no growth, such radical suggestions may gain greater traction.

To return to the initial paradox: it is clear that the 1930s was not a decade of economic woe for Britain, though high growth in some areas was offset by high unemployment in others. It is therefore simplistic and lazy to define the decade by its bleakest elements. The decade was one of profound change as economies and economic thought responded to the Depression. While it was the decade of Orwell, it was also the decade of Keynes, and the decade that brought fame to Friedman. It was the decade when some people trooped on hunger marches, but many also trooped to see Hitchcock’s film The 39 Steps (1935). The decade provides a warning and a lesson for today’s policymakers. It is a warning to learn from history—for many, the 1930s represented a failure to learn from the mistakes of the 1910s—and a lesson to embrace innovative ideas when faced with new challenge.


  1. Bank of England, Three Centuries of Macroeconomic Data. Available at: onebank/threecenturies.aspx.

  2. M. Friedman and A. J. Schwartz, A Monetary History of the United States, 1867–1960 (Princeton University Press, 1963).

  3. B. Eichengreen, Golden Fetters: The Gold Standard and the Great Depression, 1919–1939 (New York: Oxford University Press, 1992).

  4. N. Crafts and P. Fearon (eds), The Great Depression of the 1930s: Lessons for Today (Oxford University Press, 2013). R. Middleton, “The Constant Employment Budget Balance and British Budgetary Policy, 1929–39”, Economic History Review, 34, 2 (1981), 266–86.

  5. Bureau of Economic Analysis, US Economic Accounts. Available at:

  6. The Gold Bloc countries are Belgium, France, Italy, Netherlands, and Switzerland; all of these stayed on the gold standard until autumn 1936, apart from Belgium, which exited in March 1935.

  7. O. Accominotti and B. Eichengreen, “The Mother of All Sudden Stops: Capital Flows and Reversals in Europe, 1919–32”, NBER Working Papers, 19580.

  8. S. Urban, “Policy Options for the Euro: Heterodoxy Ahead”, Journal of Common Market Studies, 52, 4 (2014).

  9. R. Middleton, “British Monetary and Fiscal Policy in the 1930s”, Oxford Review of Economic Policy, 26, 3 (2010).

  10. Urban, op. cit.

  11. N. Crafts, “Returning to Growth: Lessons from the 1930s”, Competitive Advantage in the Global Economy (CAGE), Warwick University (2013).

  12. P. Rosenkranz, T. Straumann, and U. Woitek, “A Small Open Economy in the Great Depression: the Case of Switzerland”, University of Zurich Department of Economics Working Paper No. 164.

  13. S. Sumner, “The Case for Nominal GDP Targeting”, Mercatus Center, October 23, 2012. Available at: publication/case-nominal-gdp-targeting.

  14. A. Turner, Between Debt and the Devil: Money, Credit, and Fixing Global Finance (Princeton University Press, 2015).

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