Economic History
Inter-war Britain

Many studies have compared the UK's post-war economy unfavourably with that of its Continental European competitors. In Discussion Paper No. 589, Research Fellow Barry Eichengreen compares the relative effects of World War I and the inter-war performance of the UK and Continental European economies to assess the extent to which the peculiarities of the UK experience may have contributed to its post-war difficulties. Although World War I severely disrupted international trade and finance, on which the UK was exceptionally dependent, its commitment to free trade, free markets and the gold standard remained intact. The UK's shares of exports to Asia and Latin America declined as a result of foreign competition, however, and its interest income from abroad fell by some 10%, which led to persistent balance-of payments problems. The wartime government also encouraged industries to collaborate rather than to compete, and the resulting trade associations soon became vehicles for restricting output and rationalizing production. Similar effects obtained elsewhere in Europe, but they seem to have been stronger in the UK. Productivity growth accelerated sharply after World War II, but it continued to lag behind that of other European countries in the 1950s and 1960s.
Eichengreen examines three aspects of the UK inter-war economy to assess whether it set the stage for its post-war acceleration or put in place the shackles that prevented it from subsequently keeping pace with its European competitors. First, aggregate statistics suggest that modernization of technology and equipment proceeded more slowly in the UK than elsewhere: the share of investment in GNP was lower except during 1931-4. Second, mergers which could indicate that UK industries were using existing resources more efficiently by exploiting scale economies and retiring their least efficient capacity during rationalizations instead appear to have protected inefficient firms from both domestic and foreign competition. Third, while structural change the shift of resources between sectors in the UK during 1924-37 took place at twice the rate for 1900-13, it still lagged significantly behind its post-World War II pace.
Eichengreen notes that these are precisely the problems that plagued the UK economy after World War II. His results suggest that it was the public and private sector responses to the economic difficulties of the inter-war period which created these problems in the first place.

The Interwar Economy in a European Mirror
Barry Eichengreen

Discussion Paper No. 589, October 1991 (IM)