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Strengths And Weaknesses Of The British Economy

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Published: Fri, 28 Apr 2017

Britains economic position in 1913 was founded on its activities post-1870. The British economy exhibited both strengths and weaknesses in 1913, the reasons for which are still controversially discussed by economic historians. In this paper, I will discuss and evaluate the main strengths and weaknesses of the British economy in 1913 in further detail.

In order to analyse the strengths and weaknesses of the British economy, it is important to examine the changing circumstances in the World market. Britain was the first industrial nation but by the end of the twentieth century had become another ‘Organisation for Economic Cooperation and Development’ (OECD) economy, with an income below that of North America, most of western Europe and parts of East Asia. By 1913, Britain’s comparative economic advantage had diminished as the United States and Germany had developed large-scale industries. Both the United States and Germany emerged as powerful economic rivals with the U.S. having the largest economy, followed by Germany (Floud, Johnson, 2008). However, London was still at the global centre of financial payments and a large creditor nation. At the start of the 20th Century, Britain’s economy was in relative decline.

Some contemporaries thought that Britain’s position in 1913 was weak. In terms of trade, Britain’s percentage share in World manufacturing exports declined from 37.1% in 1883 to 25.4% in 1913, whilst at the same time the U.S. and Germany’s grew. Some economists argued that relative decline was inevitable as other countries were progressing through the industrial revolution phase, whilst others came to the conclusion that it reflected internal weaknesses within the British economy. These weaknesses include failure to adopt the latest machines, inadequate commercial and technical education, over-commitment to older industries such as coal, steel and textiles and the abundance of small-scale firms with inadequate marketing and size. However, this viewpoint has now been dismissed, as more evidence has emerged. It is now believed the main causes of relative decline were external to British firms. This is illustrated by two different theses. The ‘factor supply thesis’ describes Britain as losing ground to countries with more resources and larger markets such as the USA. The ‘early start thesis’ however explains how Britain was the first country to industrialise, propelling its economy forward. I personally believe both these theses are equally valid, however they fail to address the extent to which they contributed to Britain’s relative decline therefore accurate weighting of each thesis and its overall contribution to Britain’s relative decline cannot be determined. Furthermore, other countries benefited from avoiding Britain’s mistakes during this process, therefore were catching up through faster growth, enabling them to reduce the income gap and eventually surpass Britain. Also, due to Britain’s early start, some aspects of the British economy had become outdated and are now difficult to change, such as the Victorian railway system which was not as efficient as it could have been.

In terms of income per head, Britain was a clear leader with an output of 1302 U.S. dollars in 2010 but was overtaken by the USA but still had an income level greater than that of France or Germany. Imports in manufactured goods increased, highlighted by Britain being the World’s largest iron and steel importer pre-1914. However, Britain was falling behind in advanced products, including machinery, electricals and chemicals (Feinstein). I believe this was a major flaw in the structure of the British economy, as foreigners were gaining an increasing share of Britain’s domestic market. Some argue business needs to be more efficient. However, many blame government policy for relative decline, particularly free trade adopted in the 1840s/50s. It was assumed that ‘free trade policy’ was the best way to maintain Britain’s position as the dominant global power. As Britain produces the cheapest manufactured goods, it seems desirable to liberalise World markets as much as possible. Some politicians argued that German and U.S. producers were building up their strength behind domestic tariff walls and then selling in the unprotected markets of the British Empire, causing Britain’s cost of trading to increase. This led to a ‘tariff reform campaign’ in 1903 led by Joseph Chamberlain who wanted domestic protection and Empire trade block. However, tariff reformers were divided on what protection was for and free trade still had a lot of support in business and amongst the public due to a larger share of home market for British firms, secure empire demand for exports therefore higher home investment. However, there is no conclusive evidence on whether free trade was of benefit or detriment to the British economy in 1913 and on its links between international trade and growth.

Britain’s immense capital export for overseas investment was among the most important historical phenomena, which was intensely debated as to whether it was of benefit or a handicap to the British economy in 1913. By 1913, one-third of British wealth was held abroad. Some contemporaries believe that this was due to a combination of factors pushing funds out of Britain, as well as factors abroad attracting funds. At this time, there were poor returns on ‘safe’ investments with Britain and a high risk premium attached. Furthermore, there were limited investor opportunities within Britain. In contrast, overseas governments were eager to attract outside financial capital, in order to fuel their domestic activities. Overseas governments issued bonds to attract this capital, which were low risk with a solid return of 4-5% per annum, compared with 2% from Britain. Capital was necessary to develop infrastructure such as railways, ports and power in the emerging primary product economies in order to develop trade, as well as fuelling the expansion of agriculture, mining and commercial activities. Others have argued that the capital export was a result of weakness in the domestic British economy. Domestic investment demand weakened due to a slowdown in British productivity growth. Another argument is that the distribution of income and wealth within Britain led to tendencies to over-save, with the excess capital being exported abroad (Floud, Johnson, 2008). In contrast to the other arguments, this argument is very superficial as it does not explain the measure used to assess the level of income and savings, with no data to support the argument.

Living standards are also a key measure of the stability of the British economy in 1913. The British economy exhibited relatively high living standards in 1913. Most economic historians agree that real wages increased significantly from 1851 to 1913. However, social surveys revealed high rates of urban poverty. The indicates economic difficulties within the working class, despite improvements in material living standards. The discrepancies in conclusions are based upon the information analysed. Economic historians measure living standards in various ways, including trends in real wage rates or incomes, national income per capita and life expectancy, which can be grouped into economic indicators of living standards. However, these different measures such as the weighting of index wellbeing can lead to inaccurate conclusions, therefore it is very likely the high rates of poverty revealed by the social surveys is unreliable. Overall, on average British workers in 1913 had significantly higher living standards compared to the 19th century, highlighted by an increase in real wages and per capita consumption (Floud, Johnson, 2008).

Despite these problems the British economy was still very advanced in 1913. Britain was the World’s leading trading and lending nation, highlighted by more international trade being invoiced in sterling than any other currency. International trade and services accounted for 30% of GDP, emphasising Britain’s integration with the rest of the World. London was the World’s leading financial centre. Pre-1914, World trade grew faster than World output, reflecting industrialization, falling transport costs and mass emigration. Britain had a small agricultural sector, encompassing 11.5% share of employment, highlighting a more advanced economic structure, in contrast to that of Germany and USA in 1913. However, the British agricultural sector was key to the national economy. Agriculture’s share of national income, share of national capital stock, share of rents as a proportion of total income and proportion of total employment had all fallen below ten percent by 1914 (Floud, Johnson, 2008). But it still supplied one-fifth of home grain consumption and three-fifths of meat, which argues for a relatively productive sector. Britain had large firms in many sectors of the economy including engineering, shipping and banking, in addition to a highly sophisticated service economy.

To summarise, pre-1870 the ‘Mid-Victorian Boom’ propelled the British economy to global dominance. Post-1870, other economies started to industrialise, therefore quickly caught up and even surpassed the British economy. Despite these problems, in 1913 the outlook for the British economy was still good as its output per head was highest in Europe. Britain also maintained a surplus on its balance of payments and was still a key player in the World economy. I believe at this time the British economy was envisaged in being in much worse shape than it actually was, due to other economies performing extraordinarily well, hence Britain was entering the first World war with a comparatively stable economic structure.


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