18 December 2014

What did Britain really look like in the 1930s?


“The Tory plan is to return spending on public services to a share last seen in the 1930s,” says Ed Miliband. Oh no, we’re supposed to think, not the 1930s! Not the Great Depression and the Jarrow March and the Road to Wigan Pier! Not the long lines of men in cloth caps queuing at soup kitchens!

Well, here’s a fact that may surprise you. The 1930s saw more economic growth than any other decade in British history. It’s true that there were patches of deprivation. As in all times of economic transition, some industries declined while others rose. The poverty of the Jarrow Marchers was genuine: theirs had been a ship-building town, devastated by the collapse of international orders.

Yet these were golden years for new industries such as electrical appliances and aviation and cars, the years when Morris, Humber and Austin became household names. The 1930s also saw an unprecedented boom in construction, as the comfortable suburbs of Betjeman’s Metroland spread across England. The Battersea Power Station raised its minarets over the capital, a symbol of self-confidence in architecture.

Such growth brought scant comfort to the unemployed of Jarrow – or the North East more generally. Still, the national statistics speak for themselves. Unemployment fell from over 2.5 million in 1931 to less than 1.5 million in 1937, with annual growth averaging 4 per cent between 1934 and 1939.

Getting the 1930s right is important because, as George Trefgarne argued in his 2012 CPS paper, Metroboom, our false collective memory of the period continues malignly to influence our politicians. For them, the lesson of the 1930s goes something like this. “Faced with a downturn in demand, foolish MPs, tied to their laissez-faire dogma, did nothing, and so allowed the recession to become a depression. We must avoid their mistake by spending more public money whenever it looks as though the economy is in trouble.”

Here, for example, is Ed Miliband:

“When politicians shrug their shoulders in the face of other people’s despair, they are not just abdicating responsibility, they are making clear choices. That is as true now as it was in the Great Depression during the 1930s.”

Here is Ed Balls:

“The promised private sector recovery failed to materialise as companies themselves sought to retrench. Unemployment soared. The Great Depression soured world politics and divided societies.”

In fact, precisely the opposite was true. Britain responded to the 1929 crash by cutting spending drastically and, in consequence, soon saw a return to growth. The United States, by contrast, expanded government activity unprecedentedly under the New Deal, and so prolonged the recession by seven years. Yes, seven years. Here is the conclusion of a major study published in 2004 by two economists at the UCLA, Harold L Cole and Lee A Ohanian:

“President Roosevelt believed that excessive competition was responsible for the Depression by reducing prices and wages, and by extension reducing employment and demand for goods and services. So he came up with a recovery package that would be unimaginable today, allowing businesses in every industry to collude without the threat of antitrust prosecution and workers to demand salaries about 25 percent above where they ought to have been, given market forces. The economy was poised for a beautiful recovery, but that recovery was stalled by these misguided policies.”

“Misguided” is putting it gently. Among other things, FDR had got it into his head that the root cause of the recession was the collapse in farm prices. His solution was to try to drive them up again by destroying surplus produce. Yes, you read that correctly. At a time when people were queuing at soup kitchens, federal agents were impounding and eliminating healthy food.

And yet every intern with an economics A-level who passes through my office will tell me, as a matter of empirical fact, that Roosevelt’s pump-priming rescued the US economy. We are so in thrall to this bogus version of American history that we have forgotten the true version of our own.

It’s worth running over the chronology. When the crash came, Britain’s deficit rose to £170 million – a trivial sum by today’s standards, but regarded in that prudent era as calamitous. Philip Snowden, the Labour Chancellor in the National Government, made everyone in the state sector, from cabinet ministers to benefits claimants, accept a cut of between 10 and 20 per cent. The one exception was the judges who – precisely as they did in Ireland during the recent austerity measures – declared themselves to be constitutionally exempt.

Snowden was succeeded by Neville Chamberlain, whose later miscalculations as Prime Minister have effaced from history his successes as Chancellor. In 1932, he set out his approach with admirable clarity.

“There is no magic in it. The application of the principles of sound finance has established confidence in industry. Confidence has begotten enterprise and enterprise has increased employment and profits, so that revenue has increased faster than expenditure.”

It was true. By 1934, the economy was running a healthy £31 million surplus, and Chamberlain was able to cut taxes. “We have finished the story of Bleak House,” he told the Commons, “And are sitting down this afternoon to the first chapter of Great Expectations.”

Contrasting the American and British experiences, we are left with an inescapable conclusion. Cuts work, and trying to spend your way out of recession doesn’t.

The trouble is that the Keynesian version of the 1930s has wormed its way into our national consciousness, like one of those false recovered memories that led to wrongful convictions for child abuse some years ago. It’s a story that may be past the point of correction.

Still, if only for the record, let me set down the real lesson of the 1930. The best way to recover from a crash, not least for low earners, is to bring spending back under control. Growth follows, jobs are created, and the people taking those jobs thereby gain the most secure route out of poverty. If you really want the grainy black-and-white images of poverty, the Steinbeck-type pictures of ruined farmers drifting in search of work and hobos riding the freight trains, do what FDR did, and what Ed Balls now proposes to do: spend.

Daniel Hannan is a Conservative Member of the European Parliament and blogs at www.hannan.co.uk. His other CapX articles can be found here.