Delivering growth while reducing deficits: lessons from the 1930s

Delivering growth while reducing deficits: lessons from the 1930s

3 July 2012


  • Nick Crafts, Professor of Economic History, University of Warwick, report author
  • David Smith, Sunday Times
  • Tim Leunig, Chief Economist, CentreForum
  • Emma Duncan, Deputy Editor, The Economist 
Nick Crafts is Director of the Centre for Competitive Advantage in the Global Economy (CAGE), a research centre in the Department of Economics at the University of Warwick, established in January 2010.
Funded by the Economic and Social Research Council (ESCR), CAGE is carrying out a 5 year programme of innovative research focusing on how countries succeed in achieving key economic objectives such as improving living standards, raising productivity, and maintaining international competitiveness, which are central to the economic wellbeing of their citizens.
Click here to access slides from this seminar.  
Economic conditions in the 1930s were very similar in many ways to those found today: interest rates were already low, the government deficit was high and the world economy was in disarray. Yet the UK economy grew by almost 20 per cent from 1933 to 1937. For Professor Nick Crafts, this success was built on the government announcing that prices would rise and interest rates would remain low, which gave consumers and firms the confidence to borrow and spend, in turn stimulating the economy. 
Professor Crafts began by briefly highlighting UK macroeconomic policies in the 1930s and the positive effects they produced. Noting how interest rates were already at the zero lower bound when Britain entered recession in 1930, he discussed how a reduction of the structural deficit by four per cent between 1930 and 1934 was accompanied by a credible 'cheap money' policy at the Treasury, holding exchange rates and interest rates back whilst allowing prices to rise. This provided a stimulus to businesses and housing developers looking for funds, confidence to financiers and investors unsure when to invest, and an escape route from the liquidity trap.
The main conclusion of this was to suggest that, whilst fiscal consolidation does risk stifling growth or even inducing a double dip recession, it is possible to achieve growth whilst interest rates are at the zero lower bound if conventional inflation targets are changed or abandoned in the short term. Professor Crafts highlighted how in the 1930s, deposit rich building societies could capitalise on a complete lack of planning restrictions to build over 250,000 houses a year, kick starting growth. He also warned of the obstacles any similar plan would face in the current financial climate, particularly due to comprehensive planning restrictions. Finally he urged the audience to avoid the big mistake from the 1930s – the retreat from competition. Lower levels of trade and more cartels protected weak firms and reduced productivity growth.
David Smith reflected on Professor Crafts' thoughts, going on to highlight several reasons for optimism from British economic history. He brushed aside the traditional images of the 1930s as an age of high unemployment, reminding the audience of the emergence of a consumer age symbolised by the multiplicity of chocolate brands in Roald Dahl’s autobiography. All members of the panel firmly agreed that a construction boom in the 1930s had led the nation from depression, with David Smith expressing disappointment that private housing is currently expanding at only 30 per cent of the necessary rate. 
Mr Smith's main focus was on the conclusions of Professor Crafts about the lessons to be learned from the Depression. He also highlighted how loose monetary policy had brought growth in previous recessions, but was quick to point out that Britain's financial sector was much weaker as a result of the financial crisis than the building societies of the 1930s. He was coy about the need for an inflation led recovery, emphasising the very high 'global' inflation produced by external sources such as oil prices, and suggested that we needed nominal wage inflation alongside price inflation to achieve growth. Ultimately though, his message was one of optimism – that the double dip recession, whilst a setback, would be unlikely to leave the British economy 'bumping along' like Japan’s 'lost decade' due to Britain's historic structural resilience and the large cash reserves of British business.
Many of the following questions were centred on alternative routes to recovery – reform of tax policy, increasing employment levels through fiscal stimulus and an export led recovery were all mooted by audience members as alternative strategies. The panel acknowledged their importance whilst noting that the 1930s showed less precedent for them as solutions than a housing led recovery. Firm endorsement was given by all to the suggestions in Tim Leunig and Tim Besley's piece in the Financial Times, which recommends that government should underwrite low interest bonds to reputable housing associations and alter planning regulations to allow the purchase of land and the construction of badly needed new housing. This would bring increased employment and growth, as well as increasing housing provision and council budgets.
Report by James Dinsdale

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