There has been a marked resurgence of interest in the economic history of the interwar period, some of it motivated by a desire to find parallels and contrasts with the worldwide recession of the 1980s. The conventional view of UK macroeconomic policy during the 1930s has been that it was successful in breaking a prolonged over-reliance on 19th century staple industries but did poorly in response to the unemployment problem. In Discussion Paper No. 386, Research Fellow Stephen Broadberry and Programme Director Nicholas Crafts review recent literature which calls these verdicts into question.
Econometric research has established that, given the rigidities in nominal wages at the time, the falls in product and import prices associated with the Depression could have substantially raised both wages and the natural rate of unemployment. Broadberry and Crafts present aggregate demand and supply data showing that changes in the natural rate of unemployment in the 1930s were actually quite modest and that the dominant feature is a major contraction followed by a strong recovery in aggregate demand. Archival research shows that the Treasury was conscious of the dangers of greatly increased unemployment. Accepting the political infeasibility of trying to reduce labour market rigidities directly, policy-makers set out to achieve a once-and-for-all rise in prices without triggering a serious inflation, by means of devaluation, tariffs and price-fixing agreements. At the same time they signalled a long-run anti-inflationary stance through a firm commitment to balanced budgets.
Given labour market rigidities and the political constraints, Broadberry and Crafts argue, this was a sensible approach to ameliorating the employment effects of the Depression. But the side-effects on productivity and growth performance were distinctly unfavourable. Although there was a shift towards newer industries with more rapid productivity growth, the gap between UK and US productivity did not narrow and the Depression slowed the modernization of the economy both directly and through induced policy changes. The policy of encouraging firms to collude over price-setting behind tariff barriers stifled competition, tended in important cases to retard rationalization of older industries and reduced firms' incentives to bargain toughly with workers to eliminate overstaffing. The government's obvious embarrassment over high levels of unemployment also undermined its own bargaining power in pressing industries like coal and steel to rationalize production and reduce costs.
Broadberry and Crafts conclude that in fact, UK employment policy was reasonably satisfactory but had adverse consequences for long-term productivity growth. They also note a striking contrast between the supply-side policy of the 1930s and that pursued after the almost equally severe, but stagflationary, recession of the early 1980s. Research on productivity change in the 1970s and 1980s suggests that, in lowering union bargaining power, UK macroeconomic policy in the 1980s has contributed towards a short-term productivity surge in manufacturing. This underlines the likely adverse results on productivity of a policy stance very different from the `cold bath'.

The Implications of British Macroeconomic Policy in the 1930s for Long Run Growth Performance
S N Broadberry and N F R Crafts