The purpose of this chapter is to give an interpretation of the nature and causes of the recovery from the depression of the early 1930s in Britain. We will argue for a slightly different interpretation than is usually found in the standard accounts or in a recent controversial reinterpretation of the period. In particular, stress will be laid on the importance of public policy in the recovery, a view which has tended to be increasingly overshadowed in the discussion.

Recovery Process

International Setting

In the decades before 1914, the British economy was the world's leading exporter of manufactures, services and capital and played a pivotal role in international relations. By the 1920s the economy was seriously weakened: its share of world production and trade in manufactures, which had been 14.1 and 25.4 per cent respectively in 1913, had fallen to 9.4 and 20.4 per cent by 1929. Loss of markets for staple exports exacerbated by the return to the gold standard and depletion of overseas assets limited its ability to attain full employment and to generate capital exports on the prewar scale. With the onset of the depression in the United States, the growth of protectionism and financial instability, the pressure spread to Britain and culminated in the collapse of the international monetary system.

In the period that followed, international economic relations became fragmented and a number of separate trading blocs emerged. That centred on Britain is distinguished by two main features: imperial preference and the sterling area. Under the Ottawa Agreements, relatively free trade was maintained among Empire countries while tariffs were raised against the rest of the world.