However, the depreciation can only easily explain the tendency for a rise in exports, and hence economic recovery, until 1936. After 1936, British exports continued to rise, despite remaining stagnant on the Continent, even though sterling appreciated sharply in 1933-1934, as a result of the depreciation of the American dollar. In fact, by 1934, the nominal effective sterling rate had risen significantly relative to the exchange rates of Britain’s European competitors.
Some argue that it was not the depreciation of sterling, however, but British trade policy, that was responsible for the trade-driven recovery. In early 1932, Parliament passed a general tariff, which imposed a 10% import tax, exempting only raw materials. Concessions to these taxes were granted to Commonwealth countries in exchange for them extending their preference towards British imports. Although this was supposed to stimulate both the domestic economy and exports, it seems like an unlikely source of economic recovery seen as imports expanded as fast as exports. In fact, Foreman-Peck (1981) estimates that the General Tariff raised British output no more than 3%; Broadberry (1986b) and Worswick (1984) generally support this figure. Despite arguments by Kitson and Solomou (1990) that the tariff shifted resources towards sectors characterised by scale economies, thus giving output and productivity a boost, it still appears that the influence of the tariff was negligible.
Another factor often mentioned in the literature was the pursuit of a more accommodating monetary policy following the abandonment of the gold standard. Lower interest rates provided much-needed stimulus for recovery. Bank Rate was lowered to 2% in 1932 and remained pegged at this rate for the rest of the decade. This was because the Bank of England discovered the benefits of ‘cheap money’, as previously mentioned. Due to this, long-term interest rates were pushed down, allowing the government to convert the 5% War Loan to a 3.5% stock in 1932, helping the country towards economic recovery. In contrast, countries still on the gold standard, such as France, Belgium, Switzerland and the Netherlands, were forced to maintain high interest rates to defend their reserves. The monetary policy pursued in Britain allowed it to expand its money supply much more quickly than the Continent until 1936, when the remaining members of the gold bloc finally abandoned the gold standard. This explains why Britain was able to recover quicker than the Continent between 1931 and 1934. Other countries which abandoned the gold standard in the early 1930s recovered from the depression in much the same way as Britain, supporting the theory that gold standard and monetary policy were key to economic recovery in the interwar period.
Having established the importance of the depreciation of sterling and of monetary policy in the interwar period, we will now discuss in what ways these two facts lead to economic recovery. The two most prominent sectors which benefited from the growth stimulus of the favourable exchange and interest rates were the residential construction and consumer durables sectors. The increase in house building accounted for 17% of the increase in GDP between 1932 and 1934. In addition, it stimulated output and employment in other sectors through its backward linkages to firms producing bricks, tiles, pipes and other construction materials. House building and associated trades accounted for 30% of the increase in employment in the first three years of recovery, according to Worswick (1984). It is very clear, therefore, that construction made a significant contribution towards economic recovery. This recovery was fuelled by ‘cheap money’, which accounted for half the rise in housing investment at the start of the recovery; rising real incomes, falling construction costs, favourable interest rates and the expansion of the availability of credit and mortgages accounted for the rest.
The declining relative price of consumer durables was also a result of the cost of credit in the interwar period, as well as rising real incomes, according to Bowden (1988). The growing demand for consumer durables in the thirties, just like housing construction, was one of the driving forces out of recession. This is reflected in car ownership, for example, which rose from 5% in 1924 to more than 20% in 1938. It is therefore clear that consumer durables were key to economic recovery.
Although the first of these two factors which lead to recovery, the construction sector, was not a new industry, a great part of the consumer durable came from new industries. According to Mathews, Feinstein and Odling-Smee (1982), structural change between 1924 and 1937 was twice as fast as it had been in 1900 to 1913. The decline of the old export staples ultimately stimulated efficiency, which lead to growth, by freeing resources for more productive uses, according to Richardson (1965). The new industries where output grew fastest in this period include the motor-vehicles, electrical engineering and chemicals industries. However, it must be noted that recovery from these sectors was primarily a domestic affair. Although exports initially rose by 24% in the last quarter of 1932, thanks to the depreciation of sterling, this was not maintained for the rest of the decade. Only 7% of new jobs between 1932 and 1937 were located in export-sensitive industries. Furthermore, the importance of new British industries can be accounted for in the fact that manufactured imports fell from 11.5% in 1926-31 to 8.0% in 1932-7, suggesting that new British industries were gaining ground and thus helping to stimulate growth through increased output.
Nonetheless, it is important to note that both the construction and manufacturing sectors helped recovery at different times. Building activity rose from November 1932, almost coinciding with the beginnings of the economy-wide upturn. Between 1932-1934 expenditure on the construction of dwellings rose by almost 50%, and housing went from accounting for 3% of GDP in 1932 to accounting for a 17% rise in GDP in 1934. Thus, it was the housing boom which began the recovery. However, after mid 1933, investment in manufacturing and transport really took off, growing at an average of 14% through 1937. New industries making producer durables were providing one third of all new jobs by 1937. Hence, it can be said that new industries helped keep the recovery going, but were not responsible for starting it.
Although the British economic recovery was fuelled by new trades and industries after 1933, it was not started by these. It was in fact, started by the housing boom. The hypothesis that recovery was based upon the expansion of these new industries is therefore incorrect. Recovery was based on the devaluation of the sterling after Britain left the gold standard, and the monetary policies which proceeded this. Both the monetary policy and the devaluation lead to the housing boom which started the recovery, and left conditions favourable domestically for new industries to increase their output and thus continue to lead Britain to economic recovery.