Coal in the 1930s
The first lame duck?

It is now generally accepted that Britain's current industrial problems are by no means new. The history of the coal-mining industry in the interwar years and more recently illustrates many of the difficulties created by a stagnant or shrinking market. The apparent economic needs of the industry were reorganization and the closing of surplus capacity, but these measures would have been costly, both to the industry itself and the economy as a whole, either because they required further investment or subsidy, or because they would have led to increased unemployment. The prospect of such heavy costs inhibited private and public policy formulation and generated social and industrial strife. Government policy was largely an exercise in 'damage limitation', which itself generated hidden costs by fostering unproductive firms.

In a lunchtime meeting held on 4 June, Research Fellow Barry Supple examined the the role that conflicts between economic efficiency and social welfare played in the formulation of policy towards the coal industry in the 1930s, and he attempted to illustrate how far these problems have continued into the 1980s. Barry Supple is Professor of Economic History at Cambridge University and the Master of St Catherine's College, Cambridge. He based his lunchtime talk on his contribution to a forthcoming history of the British coal industry.

In the 1920s and 1930s, the coal industry was subject to massive excess capacity. Between 1923 and 1945, employment in the industry fell from 1.2 to 0.8 million, and the British share of the world coal market dropped from 59% to 37%. In part, this can be explained by increased competition, not only from other countries producing coal but also from cheaper substitute fuels. Before 1914 demand for coal was rising at an annual rate of 4%; after the war British exports of coal plummeted and domestic demand remained stagnant.

As a result, the coal industry faced substantial structural problems: its labour force was isolated in mining communities and its capital stock locked into highly specific uses. Average costs appeared too high, and capacity was excessive. Supple noted that labour accounted for 75% of costs, and that after attempts in 1921 and 1926 to reduce wages had led to massive industrial unrest, it was generally recognized that there was a certain level, a 'social wage', below which wages could not be reduced. Between 1929 and 1938, nominal wages in the industry increased by 3% even though retail prices fell by 5%.

The operation of market forces seemed incapable of solving the problems of costs and capacity, Supple argued, and a number of routes normally open for solving the problems of an industry in structural decline were closed. First, there were moral and political, as well as economic, limits to the extent to which wages could be cut or pits closed down. Second, investment and technical and organizational innovation within the industry was necessarily complex, expensive and risky: the pay-off from innovation was uncertain, the response of the labour force was unpredictable, and capital, once invested, could not be withdrawn. These disincentives to further investment together with the fragmented structure of the industry (1500 firms and 3000 mines in 1913) were major barriers to raising productivity. Third, mergers and industrial restructuring, which might have reduced capacity and helped realize economies of scale, would have necessitated massive reorganization. Closures entailed large costs, and the coal-owners were not persuaded of the advantages of larger enterprises. Finally, the fragmented coal industry proved incapable of securing voluntary market control in order to maintain prices.

Although policies to restructure the industry were unacceptable for social reasons, the government was able to compel firms in the industry to participate in marketing and quota schemes. Attempts in the 1920s to maintain price levels by voluntary agreements had proved highly vulnerable to 'free-rider' behaviour on the part of a few coal-owners. Consequently, the 1930 Coal Mines Act established a quota system of market shares in order to restrain competition within the industry and bolster prices. Even this proved inadequate, and in 1936 legislation was passed compelling coal-owners to sell their produce through central marketing agencies. The aim of these schemes, Supple noted, was not so much to limit the overall level of unemployment, but to prevent its concentration in the close-knit coal communities, with the distress and instability it was feared this would entail. The Secretary for Mines claimed in 1933 that the schemes preserved 150,000 jobs and were 'a buffer between the community and economic and social strife in the coal industry'.

Supple argued that in the 1930s, anti-competition legislation achieved substantial success in preserving social stability, although it is difficult to tell whether it had any effect on the level of unemployment. In economic terms, Supple conjectured that the schemes, by raising prices, probably did succeed in containing the number of pits that were unprofitable, but this made no impact on inefficiency. This is hardly surprising, since the quota system was explicitly designed to protect the market shares of pits which were inefficient.

Mergers were recognized to be a useful means for reorganizing and closing excess capacity as well as for stimulating integration and specialization. But although the Act of 1930 included facilities to encourage reorganization, the legislative attempt to rationalize the industry was a failure, partly because of obstruction and the toothlessness of the legal provisions, but also because the government dared not pursue increased industrial concentration and higher productivity at a time of mass unemployment. Even after the legislation was strengthened in 1938, the Chairman of the new Coal Commission felt that Parliament would balk at pit closures and be 'swayed by the contrary stresses of head and heart, recognizing the economic necessity of amalgamations, but fearing their social consequences'.
The state was unwilling to take measures which would aggravate the immediate social problems of the depressed areas, but it was equally unwilling to adopt social policies to alleviate those problems. This timid, uncertain and contradictory policy achieved the worst of both worlds, Supple claimed. It fostered conservatism in the coal industry, which manifested itself in a lack of industrial purpose and continued inefficiency. These conditions were instrumental in shaping a consensus for nationalization in 1945. By the mid-1940s, the coal industry was generally recognized to be ailing, beyond the help of its owners and workforce. Ideological considerations and financial constraints ruled out subsidies to facilitate reorganization and, Supple argued, nationalization was almost inevitable.

Supple argued that although public ownership has solved the prewar problem of securing coordinated action within the industry, it has not solved the problem of balancing long-run economic efficiency and medium-run social welfare. Although a unitary coal industry has facilitated some structural changes, at least in the context of a full-employment economy and generous redundancy payments, the economic, social and occasionally political costs are still daunting. Even when the political will exists to pursue rationalization, as in 1984-5, the industry is still left in a very favoured (and expensive) position with regard to compensation for closures. In the 1930s, the Government's attitude to the coal industry was strongly influenced by social goals, but this was never translated into more positive policies for community welfare in mining areas or for industrial reconstruction. Coal in the interwar period was in effect the first 'lame duck' of British industry. It illustrates the difficult choice for government between allowing excess capacity to be reduced by sporadic liquidations and intervening in a concerted attempt to alleviate the social consequences of a fall in production.

Supple concluded by noting that in the 1980s the situation of coal and other 'lame duck' industries is rather different. Government can act more decisively to deal with overcapacity because the economy and welfare state provide a number of alternative livelihoods for those that might be put out of work. In the 1930s, fuel imports were restricted by transportation costs, whereas in the 1980s, alternatives to UK coal are easily imported and there is intense competition between fuels.

The discussion which followed the talk ranged widely over the problems of the coal industry in the 1980s. One member of the audience pointed out that Japan had taken a radically different strategy, deciding instead to depend on imported fuels, playing suppliers off against each other and avoiding the consequences of declining fuel industries. This, it was argued, had benefitted the Japanese greatly, creating a cheap-fuel economy and allowing resources to be directed into more modern sectors. Supple accepted that this had been very advantageous for the Japanese, but he pointed out that in Britain in the 1930s new industries into which to redirect investment did not yet exist and would have had to be created.
Another questioner wondered whether a decentralized wage bargaining structure would have benefited the industry, by allowing threatened pits to negotiate wage levels which were below the industry average. Although Supple agreed that this would have made the industry more flexible and reduced its total wage bill, he would have expected many pits to have been forced to pay even higher wages, and the consequences for employment and social stability could still not be ignored.

Finally, in answer to a question about the benefits the coal industry could have derived from economies to scale, Supple argued that there were some economies which were not realized. The most efficient companies were prevented from operating at full capacity by the marketing schemes and quotas, and the continued lack of restructuring in the industry throughout the interwar period prevented coordinated decision-making.