Introduction

With a few exceptions most studies treat the interwar years as a well-defined economic period that was structurally different from the pre-1914 era. However, it is also important to place the period in a long-run historical perspective, if only because the initial growth conditions will be an important determinant of the growth path that an economy follows. Structural change is not equivalent to independence from the past.

A useful approach that places the interwar period in a long-run historical perspective is Maddison's theory of epochs in capitalist development. Maddison (1982) argues that economic growth has followed a number of epochs; the period 1913–50 is one such phase. Each epoch is characterised by a number of ‘system characteristics’, defined by:

1. (i) the Government's approach to demand management,

2. (ii) the bargaining power and expectations of labour,

3. (iii) the degree of freedom of trade and international factor movements, and

4. (iv) the character of the international payments mechanism.

During the 1930s the British economy saw a number of major system characteristic changes. The Government reversed the high interest rate policy of 1925–31 and pursued a ‘cheap money’ policy between 1932 and 1939; the protection of the manufacturing sector was extended significantly in 1932 breaking away from a long tradition of free trade; the international payments system changed from a fixed exchange rate between 1925 and 1931 to a managed exchange rate after 1931; and apart from these observable policy changes some of the literature has argued that the period after 1932 witnessed a phase of real wage moderation in the labour market (Beenstock et al., 1984).