The Cabinet Papers banner

Economic slump

The economy and the First World War

Following the First World War the economy suffered from loss of productive resources, capacity and change in the structure of international trade and finance. There was mass unemployment among demobilised servicemen and widespread strikes took place. Britain had left the gold standard in 1914 and responded by increasing the supply of money to stimulate the economy. Production was limited due to substantial decreases in working hours agreed at the end of the war. In 1919 increased consumer demand caused inflation and a price boom.

By early 1920 the Government was more concerned with a desire to return to the gold standard and with the high rates of inflation than with unemployment. In December 1919 the Cunliffe Committee on Currency and Foreign Exchange Rates recommended an early return to the gold standard. The overall objective was to restore pre-war British predominance in international trade, which depended on stabilising the value of sterling around the pre-war dollar exchange rate. This required equilibrium in the balance of payments and the reduction of the money in circulation.

In April 1920 a severe slump accompanied by mass unemployment was caused by a budget that severely cut back government spending, together with a deflationary rise in interest rates. In spite of this, the Bank of England continued to maintain a high interest rate of 7 percent until April 1921, after which point it was gradually reduced.  

Return to the Gold Standard

From 1921 the government's policy began to work, at least in terms of its immediate aims. Severe cutbacks in government spending associated with the appointment of Sir Eric Geddes's Committee on National Expenditure helped balance payments. The reduced supply of sterling increased its value against the dollar. However, the rigorous policy produced widespread strikes. In February 1925 the Chamberlain-Bradbury Committee advised that the value of sterling against the dollar was nearly sufficient to justify a return to the gold standard. Two months later Winston Churchill announced that Britain had returned to the gold standard. The pound was valued against the dollar at the pre-war level of $4.8665. The Governor of the Bank of England, Montagu Norman, was a key figure in decisions about the gold standard and the decision was taken outside of Cabinet.

The return to the gold standard (at the pre-war parity) was followed by a period of relative stagnation as the high value of sterling reduced exports and jobs were lost. Matters were made worse as other European countries such as France, Belgium and Germany returned to gold at lower rates, making their exports more competitive. The General Strike of 1926 was the reaction to deflation and the prospect of further deflation in the future. Unemployment for insured workers (the rate for the working population as a whole was lower, but had no official figure) reached 14 per cent by 1927 and had become a major problem for government, which set up an Unemployment Policy Committee in 1928.

TNA Newsletter Icon

Send me The National Archives’ newsletter

A monthly round-up of news, blogs, offers and events.