George Trefgarne is the author of Metroboom: Lessons from Britain's recovery in the 1930s, published by the Centre for Policy Studies. Follow George on Twitter.
As George Osborne and his Treasury team finalise the Budget, their ears ringing with the appeals of all and sundry about what to do, they could do worse than consider the last time that Britain was caught up in a global financial crisis, when we led the world to recovery: the 1930s.
Misconceptions about the Thirties abound and it is surprising how many stick their fingers in their ears if you try and explain that actually, the British economy was booming by the middle of that decade, and it is time we asked how it was achieved.
By 1935, the economy was expanding at 7%. New industries like car and aircraft production, manmade fibres and consumer goods took off. Most strikingly, some 2.8m new homes were built, for this was the period when Britain became a home-owning democracy. There was not only amazing technical innovation, it was a culturally buoyant time too, both in modern architecture and for reflective British artists like Ravillious, Bawden, Nicholson and Hepworth.
Perhaps the biggest prejudice one has to discard is that the architect of this recovery was a politician who has since become reviled for his role in appeasement: the then Chancellor, Neville Chamberlain. He bestrode the era like a colossus and his successful political and economic strategy led to two of the biggest ever Conservative landslides, in 1931 and 1935. True, there was a coalition, or National Government, but the Conservatives had a large majority on their own and chose to govern with other parties at the behest of the King and in the national interest.
Whatever his subsequent failings as a Prime Minister, Chamberlain was for six years a great reforming chancellor, perhaps as great as Gladstone or Nigel Lawson. He was also a skilful politician, who invented the Budget broadcast on radio and in the cinema, reduced the length of Budget speeches and even featured on the front page of Time magazine in America.
So what lessons are there for today? Three big ones come to mind.
- Let us start with tax cuts, as the issues of the 50p rate and whether to give some relief to the "squeezed middle" seem to be dominating the pre-Budget discussion in 2012. Chamberlain would certainly have disliked the 50p rate and he ensured the equivalent surtax rose no higher than 37.5% on incomes of over £1.2m in today's money. But his record is clear. He would not have cut the top rate first. He was a sort of proto-Thatcherite, on the side of the strivers. From 1934 onwards he both reduced the basic rate from 25% to 22.5% and hugely increased the personal allowance, especially for families with children.
- The second lesson is to be brave about cuts. The quicker the cuts are implemented and the budget balanced, the quicker the recovery will come. In 1931, Chamberlain and his Labour predecessor Snowden, cut public spending by 10%, including all civil servant salaries and unemployment benefits. But by 1934 the economy was growing fast enough for him to restore them.
- The third lesson is to have an effective cheap money policy. Britain came off the disastrous gold standard (the ERM of its day) and devalued by 25% and this helped exporters. Chamberlain also presided over a conversion of the national debt in 1932, thereby reducing the Government's interest bill. The Bank of England then steadily reduced rates from 6% to 2%. He also benefited from the massive growth of some excellent new entrants in the banking system: building societies. Building societies were trusted and it was the mortgages which they offered to the new, rising middle class which underpinned the housing boom.
By contrast, it is not at all clear that Quantitative Easing, the Bank of England's policy today of printing money and buying Government bonds, is working well. Is it really the best cheap money policy on offer? Inflation remains high, small business lending curtailed and mortgage rates are creeping up once more.
The 1930s are not a perfect decade. Unemployment fell by a million, but remained unacceptably high in the Special Areas which relied on shipbuilding and coal mining. But it is a decade which offers powerful lessons for our own time. Ironically, Vince Cable has realised this and in a little noticed paragraph in his leaked letter earlier this month, alluded to the important lessons of the 1930s. Let us hope the rest of us learn those lessons too.