The 1920s are sometimes referred to as the ‘roaring twenties’, but for the UK economy, it was a period of depression, deflation and a steady decline in the UK’s former economic pre-eminence. In the US, the economy boomed on the back of mass production techniques, growing efficiency – and increasingly a credit bubble, which would later contribute to the stock market crash and the great depression. But the UK, tied to the gold standard, the economy experienced a decade of deflation and stagnant growth.
Mass Unemployment in the UK
After the post-war boom of 1919-20 ended, UK unemployment rose sharply to over 10% and stayed high until the Second World War. The unemployment problem was particularly depressing for the many servicemen who returned from the Western front to find a lack of jobs on their return.
Reasons for Unemployment in the 1920s
- Lack of demand. Due to contractionary fiscal and monetary policy, there was insufficient demand in the UK economy, leading to stagnant economic growth.
- Efforts to keep Britain in the Gold Standard, and in particular, the decision in 1925 to return to the prewar level of $4.85. This meant UK exports were overvalued, and also monetary policy had to be kept tighter than necessary (real interest rates very high)
- Supply-side factors. Postwar, UK industries struggled to make the same productivity gains as competitors such as the US. British industries, which had performed well in the nineteenth century, such as cotton, steel, coal and iron faced difficulties from global oversupply and falling prices. There was a sluggishness in switching resources from these old industries to new growth industries like chemicals, rayon and motor cars. Other supply-side factors included a cut in the average working week and industrial unrest.
- Real Wage unemployment. Wholesale prices fell by 25 percent between 1921 and 1929. However, falling prices were not matched by falling wages, as understandably, the increasingly unionised labour movements resisted nominal wage cuts. This led to real wage unemployment.
