The impact of the First World War on Britain’s economy

The First World War did immense damage to Britain's economy and accelerated the decline that had begun in the late 19th century. During the war Britain was less able to supply her pre-war export markets. As a result, countries either produced their own goods or bought them elsewhere. Lancashire, which before the war had dominated the world market in cotton textiles, found itself undercut by Japan and India, whose labour costs were lower. Britain's cotton exports to India declined by 53% between 1913 and 1923. Clydeside, which built a third of all the world's ships in 1913, faced post-war competition from the USA and Japan Britain's export markets for coal were similarly devastated. The number of unemployed in Britain between the wars never fell below a million.

The First World War also saddled Britain with huge international debts. During the conflict Britain lent £1,410 million to its allies, mainly France and Russia, and borrowed £1,285 million, chiefly from the United States. After the Russian Revolution of 1917 the new communist government refused to honour the debts it had inherited from the Tsarist regime, but the Americans continued to demand repayment of the money owed to them by Britain and France A large slice of government revenue in the post-war years was devoted to paying off Britain's war debt to the United States.

'The fourth arm of defence’

The Wall Street Crash in the United States in 1920 caused serious economic problems in Britain. Exports fell, unemployment rose to three million and, in 1931, Britain was forced to abandon the Gold Standard - a cherished symbol of the strength and stability of the pound. The politicians who dominated the National Government, which had been formed in 1931 to deal with the crisis at its worst, were haunted by the fear that rash economic policies would cause the problems to recur.

During the 1930s the Treasury maintained that Britain's economy was 'the fourth arm of defence'. They argued that, as a country dependent on imports for food and many industrial raw materials, Britain needed to maintain a healthy balance of payments. They argued that rapid rearmament would cause a balance of payments deficit because the normal pattern of trade would be upset, if factories switched to war production they would not be producing export goods but would still consume imported raw materials. Britain's balance of payments problems would cause foreign investors to sell the pound and a crisis on the scale of 1931 would recur The Treasury nightmare was that Britain would enter a war with a weak pound and few reserves, and so would be unable to survive a major war without becoming bankrupt after a few months. Britain, it seemed, faced a dilemma. Rapid rearmament to keep pace with the dictators would bankrupt the British economy. Slow rearmament, based only on what the nation couid afford, might mean that the country's armed forces were not strong enough to cope with an enemy attack

When the government did decide to rearm, it found that the munitions industry, starved of orders since 1918, had shrunk in size and capacity. The biggest problem was the lack of skilled labour. Although there was a vast pool of unemployed workers, few of them had the skills to operate machine tools or train others in their use. The government ruled out compelling skilled workers to transfer from consumer industries to armaments factories because, as the Cabinet concluded in 1930. 'any such interference would adversely affect the general prosperity of the country and so reduce our capacity to find the necessary funds for the Service programmes, it would undoubtedly attract Parliamentary criticism '

Economic appeasement

Treasury officials, like their Foreign Office counterparts, were keen on appeasement and believed that the government should do everything in its power to reduce the number of Britain's potential enemies. Some officials argued that economic difficulties in Germany explained why the Nazis were so aggressive As a Foreign Office memorandum put it in January 1936, 'If ... we believe that Nazism is in reality a symptom and not a cause, then it is logical to deal - or at any rate attempt to deal - with it by attacking the cause itself. And what is the cause? Obviously, economic distress.'

Neville Chamberlain, who played an important part in shaping Britain's foreign policy even when he was Chancellor of the Exchequer, believed that economic policy was vitally important to the solution of Europe's diplomatic problems. He shared the Treasury view that German aggression stemmed from economic difficulties. He maintained that the Versailles Settlement, by robbing Germany of important industrial territories in Europe and her overseas colonies, had made the Germans determined to recover them, by war if necessary. If, thought Chamberlain, British diplomacy could help to secure their return, the Germans would have no need to go to war. or even build up armaments in preparation for war.

Chamberlain and the Treasury officials were fortified in this view by a mistaken, but understandable, interpretation of German internal politics. They believed that Hitler was receiving advice from two rival sets of advisers. One group, whom the British thought to be 'moderates', included men such as Schacht, the German Economics Minister, and was believed to share the British view of how to solve Germany's problems. The other group, designated ‘extremists' by the British, was thought determined to make Germany stronger by conquest and war. Chamberlain hoped that judicious concessions to Germany would increase the power and influence of the 'moderates'. This would not only make it unnecessary for Germany to continue her preparations for war but would also reduce international tension. Even as late as February 1939, Chamberlain argued, in a speech in Birmingham, that a mutually beneficial Anglo-German economic agreement could help avoid recession and rising unemployment in Britain.

Unfortunately for Chamberlain, although there were moderates' in Germany, their influence was negligible after 1936 when Hitler demanded that the German economy should be ready for war by 1940. Schacht, who dominated German economic policy in the first years of the Third Reich, resigned from the Economics Ministry in 1937 because he could not restrain Hitler from ignoring economic realities in Germany's rapid rearmament programme. Chamberlain's mistake was to assume that Hitler was a rational leader. Economic appeasement failed because Hitler did not want to be appeased.