From the NS archive: The depression

1 January 1921: Why economic depressions happen and how to deal with them.

(Photo By Topical Press Agency/Getty Images)

As the New Year rolled in in 1921, the nation was in the midst of an economic depression with its attendant high unemployment. Clifford Sharp, the New Statesman’s first editor, used the first issue of the year to look at the problem and suggest remedies. Employers should be made to look after their own workforces in both good and bad times and hence end the scourge of casual labour; better understanding of why depressions occur should be applied to industry; the government should employ more workers and use them to strengthen national infrastructure; the exchange rate should be looked at; Britain should trade with revolutionary Russia. . . Sharp’s analysis was not an exercise in government-bashing but a practical essay on alleviating economic hardship and continuing uncertainty.

***

The industrial outlook at this moment seems exceedingly black. Looking forward into the New Year one must be sanguine indeed to discern anywhere in the prospect a clear gleam of hope. The present situation is very bad; it is manifestly getting worse; and it looks like getting much worse still before it can even begin to get better. In the unprecedented economic conditions of Europe today confident pessimism is, of course, as foolish as confident optimism, for there are so many unknown and incalculable elements in the problem, and it is possible that there are factors already at work which may favourably affect the position within a few months. But if any such factors exist they are not yet discernible, and everything points to the conclusion that they will have to be created by deliberate action of the most sweeping and energetic kind. In the meantime, there will inevitably be much suffering.

Some people may derive comfort from the fact that at last there are signs of a real and possibly substantial fall in prices, but most economists will regard that phenomenon with very mixed feelings. For the fall, so far as it has yet occurred, does not indicate any approach to normal conditions; it is not due to greater or cheaper or more efficient production; it is simply a “break” in the market due to a reduction in purchasing power and to the accumulation of stocks, and if it proceeds rapidly and far it must cause a financial crisis which will only intensify the industrial depression.

The urgent need of the moment is for a full and searching investigation of causes and remedies. The most immediate and distressing symptom of the economic situation is the growth of unemployment. No one who understands the elements of the problem of unemployment will pretend to offer any complete solution of it that can be applied at once. For the moment, it is necessary to devise palliatives; but it is equally necessary to recognise that they are only palliatives and that their adoption increases rather than lessens the urgency of attacking the problem at its roots. The palliatives will be very expensive: somehow or other the productive section of the community has got to maintain the non-productive section and every worker who falls out of work counts, as it were, “two on a division”. The burden will be heavy, but it must be shouldered; firstly, because it is not considered tolerable in a civilised state that people should die of hunger and cold, and, secondly, because if the unemployed are not relieved they will certainly seek desperate means of relieving themselves. The only practicable measure at the moment is an extensive system of “doles”; it may be described as “insurance” or “relief works” or by any other polite phrase, but in effect it will be a system of doles.

By its failure to anticipate the crisis the government has created a position in which sheer monetary relief is the only possible policy. So far as can be arranged the recipients of the doles should be employed on useful work, for there can be no dispute as to the generally demoralising effect of unconditional “outdoor relief”. But there are limits to the possibility of organising useful enterprises at a moment’s notice, and where work cannot be found maintenance must nevertheless be provided, and provided on a scale substantially more generous than that laid down in the recent Unemployment Insurance Act – for 15s. a week is not enough to provide the smallest family with even the bare necessaries of life. But that part of the problem is comparatively simple – except for the Chancellor of the Exchequer – as simple as injecting morphia to relieve the pain of a deep-seated disease. What is much more difficult, and vastly more important is to prevent the spread and reduce the actual incidence of the epidemic. A quite exhaustive diagnosis is not possible, but a great deal more is known about the causes and the means of prevention of unemployment than most people are aware.

It is a problem that is both national and international. It is partly due to a lack of organisation which is perfectly remediable. The whole of the important question of “casual labour” comes under this head; there is no reason but public apathy why “casual labour” should be permitted to exist at all. Nor is there any reason why most of our staple industries should not be organised on a basis which would substitute “short time” for complete unemployment – as is actually done in, for instance, the Lancashire cotton industry.

The system being advocated in these columns of “industrial maintenance” – that is, of making each industry responsible for the permanent maintenance in good times and bad of the whole of its normal army of employees, may not practicable to many industries. But in so far as it may be found to be applicable – and that is a question for the employers and workmen rather than the government to decide – it would certainly go far to make “short time” a universal device and to discourage employers from turning men off when there is any possibility of keeping them employed without actual loss. In existing conditions it often pays an employer to cut down both his wages bill and his output by dismissing employees, in circumstances where, if he had to bear or share the burden of maintaining those for employees, it would pay him better to go on producing for stock or for lower prices.

It must be admitted, however, that the present wave of depression and unemployment is far more an international than a national problem. The abolition of “casual labour” and the adoption of a system of “industrial maintenance” would not solve it, would perhaps not appreciably affect it. The international aspect of the question has always been important, but never so overwhelmingly important as it is to-day. We are accustomed to ordinary recurrent world-wide “trade depressions”, and no economist has ventured to propound any measures by which they can be prevented or even fully explained. They appear usually to be due to bad harvests. A famine in India, for example, reacts immediately upon the cotton industry in Lancashire: and “short time” for cotton operatives means a smaller demand for clothes and gramophones and what not, and so the workers in these latter trades are thrown out of work and have less money to spend on boots or sweets or furniture. The results are thus cumulative and seemingly unpreventable.

With such inevitable fluctuations, however, of international trade there would appear to be a fairly simple remedy. European governments, nowadays, are very large employers of labour. government contracts form a substantial part of the “effective demand” for the products of almost every industry, and in general these contracts are not urgent. New post-offices can be built either this year or the year after next. Uniforms can be manufactured for stock at any time. Roads can be built, forests planted, docks enlarged, paper purchased, building repairs put in hand, either in 1921 or in 1924, without anyone being seriously inconvenienced. Even the naval shipbuilding programme is much more elastic than the Admiralty is inclined to admit. And if all this government “demand” were co-ordinated it would probably be possible to counteract most of the effects of any ordinary trade depression. But at present there is no attempt at any such co-ordination, and government work is allowed rather to increase than to decrease the normal fluctuations of demand.

The present great depression, however, is not normal. It is due in the main to the break-down of credit and the demoralisation of the “exchanges” throughout Europe. France cannot buy locomotives in England if she has to pay 60 francs to the pound sterling. Germany, with an exchange of 260 (instead of the prewar 20) marks to the pound, can buy scarcely anything. Russia, for other reasons, cannot buy at all. And even neutral countries like Sweden and Denmark, which made much money out of the war and whose “exchanges” are fairly normal, are financially almost hors de combat, owing presumably to the ruin of Germany. There appears to be no remedy for this position save the economic rehabilitation of Central Europe. As long as German workmen are unable to exercise their full productive capacity English workmen will be unemployed. That, at present, is the root of the problem.

For the last two years we, as an industrial nation, have been cutting off our nose to spite our face. In so far as we ruin Germany we are ruining ourselves; and in so far as we refuse to trade with revolutionary Russia we are increasing the likelihood of violent upheavals in Great Britain. Sooner or later we shall have to scrap every treaty that has been signed and begin again the creation of the New Europe on the basis of universal co-operation and mutual aid. Where we have demanded indemnities we must offer loans. A system of international credit – founded necessarily upon British credit – is as great a necessity for ourselves as it is for Central Europe. We must finance our customers or lose them and share their ruin, sinking deeper every month into the morass of doles and relief works. That is the main lesson of the present crisis.

The case for Mr Henderson’s proposal of a fresh public enquiry into the whole problem of unemployment seems to us to be overwhelming. It has never yet been faced fully and frankly by any government, and the failure to face it lies at the root of half our industrial and social difficulties. The belief held by the average workman that if he increases his output he is “doing another man out of a job” may often – though not always – be a foolish one, but it is quite certain that he will cling to it and act upon it until the fear of unemployment is finally removed.

About the causes of unemployment there is a vast mass of data already available for a commission to work upon; and there are high authorities who believe that, on the basis even of our existing knowledge of the subject, it would be quite possible to devise measures by which recurrent waves of unemployment could be almost entirely prevented. Such an enquiry would be welcomed not only by the trade union world but by leading employers of labour, who have begun to realise how fundamentally their own interests are affected. And this surely is the moment when it should be set on foot.

The results might not have much bearing on the present situation – which can only be dealt with by immediate palliatives. But if the problem of the future is not faced when conditions are bad it certainly is not likely to be faced when conditions have improved. We hope the proposal will be pressed.

Read more from the NS archive here and sign up to the weekly “From the archive” newsletter here. A selection of pieces spanning the New Statesman’s history has recently been published as “Statesmanship ” (Weidenfeld & Nicolson)