Commanding Heights : United Kingdom Economic
Britain is the most industrialized economy in the world, the world's largest trader, Europe's largest manufacturer, and the center of the globe's communications. Britain's laissez-faire empire has led the remarkable boom in world trade that marks the start of the 20th century, exporting the virtues of free enterprise and economic liberalism.
World War I leads to an extension of the regulatory powers of the government in order to mobilize and apply men, munitions, and resources across the empire on a vast scale. The Defense of the Realm Act empowers the government to take over control of the railways, coal mines, and even flour mills. Food rationing is introduced, and new ministries are created for labor, shipping, and food production.
WWI cripples Britain, with 750,000 men lost, spiraling debts, and resources destroyed. Harsh demands on Germany, formerly Britain's largest foreign customer, keep foreign markets depressed. J.M. Keynes predicts Germany's treatment will spawn future conflict. Unemployment soars until a fourth of the workforce is jobless. Widespread strike action in 1921 culminates in full-scale industrial depression.
Return to the gold standard at prewar rates makes industry uncompetitive. Unemployment, foreign debt, and stagnation in the historic economic bases of iron, steel, coal mining, shipbuilding, and textiles keep Britain on a low ebb. Despite a German revival, unemployment stays above 10 percent. A coal-price collapse fuels a miners' walkout and sympathy strikes. The government holds; the General Strike fails.
In 1929 the Great Depression devastates the British economy and that of the rest of the world. A major exporter, Britain is hit hard. By the end of 1930, unemployment doubles, and by 1931 it rises to 25 percent of the workforce. Britain comes off the gold standard and pursues a very strict fiscal policy. Government spending is cut, interest rates are lowered, and import protection begins.
While hardships endure, Britain begins in 1933 to see considerable growth and a rise in prosperity. A modest rise in exports thanks to a cheaper pound, and a major revival in housing construction aided by reduced interest rates, help spark a manufacturing revival. A rise in real wages underpins growing consumer demand and Britain's recovery. From 1933 to 1938 some 2.6 million jobs are created.
During World War II, the state assumes total control over the economy. Government regulation becomes ubiquitous. A host of ministries are created to direct and increase all aspects of production and supply and meet war demands. Vast physical destruction caused by bombing, the devastation of trade, and massive military expenditure backed by loans together wipe out a quarter of the empire's wealth.
The apparent success of Britain's wartime economy helps spur a change of direction. The new Labor government aims to continue state control of production and supply and maintain full employment. Nationalization brings entire industries -- coal, electricity, gas, iron, steel, railways, and road transport -- under state ownership. The "welfare state" is created to carry out public services.
The new Conservative government maintains the nationalized industries, returning only iron, steel, and road haulage to the private sector. The commitment to full employment is retained, and government spending increases. People see a better standard of living, but the defense budget, raised for the Korean War, is a serious burden, and the national health service proves more expensive than planned.
The 1956 Suez and sterling crises, together with rising inflation, cause a contraction in the British economy. A loan from the IMF temporarily stabilizes the situation. Britain's continuing stop-go three-year cycle sees growth resumed in 1957, with unemployment continuing to fall from its Depression-era peak, but the economy's persistent weakness remains.
Britain sees further sterling crises and balance of payments deficits as well as an international loss of confidence as Labor emphasizes social policies. Planning is instituted to try to improve economic performance and break the debilitating stop-go cycle. The first National Plan in 1965 outlines an optimistic blueprint for growth, while a new prices and income policy aims to hold back inflation.
Conservative Prime Minister Heath declares his intention to reverse Labor's wage and price policy, cut public spending, and overcome inflation. But in the face of the crisis Heath makes a U-turn, and resorts in the end to Labor's planning methods. A miners' strike and energy crisis leads to a three-day work week, a state of emergency, and collapse of the government.
Prime Minister Harold Wilson negotiates an end to the strike and three-day week as unemployment and inflation reach post-World War II record levels. The government launches a "Social Contract" with the unions, promising food subsidies and stricter price controls for cooperation and wage restraint. After another sterling crisis and IMF loan, union demands lead to more nationwide strikes.
Prime Minister Margaret Thatcher launches a monetarist revolution in Britain. Public expenditure and the basic rate of tax are cut, while interest rates are raised to deal with inflation. Unemployment soars, and the economy shrinks into a deep recession, but Thatcher refuses to make a U-turn and reflate the economy. A policy of privatization of the state-owned industries begins.
Thatcher urges people to rely on their own resources rather than welfare. Public housing is sold to boost property ownership. Privatization accelerates with more and more of the nationalized industries sold off into the private sector. Thatcher's victory in the miners' strike ends the unions' ability to hold the economy hostage. Unemployment falls, and growth resumes.
Dismantling the state-owned industries and abandoning the goal of full employment exacerbates regional economic differences. The service sector booms while industries like coal, steel, and shipbuilding continue to decline. But the boom turns to bust when 1987's Black Monday sees the world's stock markets plunge, and the government policy of shadowing the Deutsche Mark backfires.
The 1992 sterling crisis and the ensuing Black Wednesday fiasco, which forces Britain to withdraw from the European Exchange Rate Mechanism and devalue the pound, calls the government's economic policies into question. Despite having pledged not to increase taxes, Prime Minister John Major passes a series of tax increases to try to restore Britain's financial equilibrium.
Labor comes to power shorn of its manifesto Clause IV, which called for common ownership of the means of production. Labor now accepts privatization and fiscal and monetary restraint. Prime Minister Tony Blair outlines a "third way" between socialism and conservatism. With its liberalized financial system, Britain is the world's largest source and second largest recipient of foreign investment.
The global slowdown hits Britain with a manufacturing recession, increased bankruptcies, and inflation at 2.8 percent, a four-year high. But economic growth, though under 1 percent, is stronger than in other major European economies. The government faces a crucial decision: whether to advocate British adoption of the European common currency, the euro. A recommendation is promised for June 2003.
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