In 1920 Britain enjoyed a post war boom. All the savings and bonds locked up in the war years, and Spanish flu pandemic, came pouring out of pockets and into the tills of shops and pubs. Lloyd George‘s Government embarked on a massive programme of house building to produce Homes fit for Heroes. Europe lay stricken by war. Imperial conflicts in Iraq, India and Ireland were grave, but seemed manageable. Yet by 1921 the country had fallen into a dire economic slump. GDP fell by around 8.4%: unemployment rose to 17%; manufacturing, saw a hurricane of closures. What went wrong?
In a nutshell, it was the ancient British disease of failing to invest while trying to live beyond one’s means, which the First World War accentuated sharply. During the war, British access to traditional markets was lost to competitors. It was never regained, leaving a permanent hole in our national book-keeping. One result was that London lost its preeminence as the financial centre of the world, primarily to New York. From that point on, there was never enough money to finance Britain’s global commitments. Down the road lay the first Imperial loss (Ireland 1922) Winston Churchill‘s disastrous return to the Gold Standard in (1925) and the General Strike of 1926, which could have lead to revolution. The point of History is to provide lessons for today; are there any for the British of 2021?
Larry Elliott of the Guardian * summarises our dilemma today. Everything ahead points to nice little boom. Masses of savings piled up in the pandemic are about to be spent. Interests rates will be low, and the Bank of England will be deeply reluctant to raise them soon.The housing market is rising steeply. Everything could be back to a rough normal by July, except that elsewhere LSS has seen mouth-watering GDP growth forecasts of up to 5.2% for the third quarter. What’s not to like?
Problems start in the business sector, especially SMEs. Up to now they have got through COVID on a mix of Government loas, furlough schemes and tax brakes. Many have piled up debts. The result is massive problems in balance sheets. Elliott quotes Ian Kernohan of Heteronomics:
many businesses now lack the working capital that will be needed to allow them to expand as demand picks up in the coming months. “
A short, heady boom will cause grave mismatches in supply and demand, in turn leading to massive trade deficits and rising inflation. Think of the British economy as a runner about to go into a major event without having the necessary muscles or stamina. It was exactly the same in 1921 and the likely outcome is equally poor.
As the grip of Covid eases, the UK looks set for a classic short-lived boom | Economic growth (GDP) | The Guardian
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