Unemployment was the dominant theme in Britain’s economy during the interwar period, as it is in the U.S. today. Britain’s unemployment averaged less than 6% for the 40 years prior to World War I. But it jumped from approximately 2% in 1919 to 12% in 1921 and remained high until 1938. Its mean was more than 10%, with a peak of 17% in 1932.
Britain’s public debt-to-GDP ratio rose from about 30% at the beginning of the century to more than 150% during the war, and it remained high during the interwar period. Its debt-to-GDP ratio is shown below:
The U.S. debt-to-GDP ratio, now about 100%, has become the primary focus of policymakers.
Britain had low interest rates, as does the U.S. today. Its long-term government bond rate was 4.62% in 1919 and remained below 5% throughout the 1920s. It also had low inflation – its CPI was 3.58% in 1919 and remained at or below 3% throughout the 1920s.
To address its debt burden, British policymakers employed tactics similar to those implemented in the U.S. recently. Britain increased tax rates, first implementing a 50% “excess profit duty” on corporations in 1915, which was increased to 60% in 1916 and 80% in 1918. Though that was abolished in 1920, the British were also being faced with higher income tax rates. The highest marginal rate rose from approximately 8% in 1914 to 50% in 1920. Higher taxes forced many families to sell their estates, as was the case with Highclere, the real-life manor where Downton is filmed.
Britain also introduced generous unemployment insurance in 1920. Economists still debate the extent to which that or higher taxes contributed to high unemployment.
Britain also had a parallel to the U.S.-China trade relationship today. France grew exceptionally well in the interwar period by devaluing its currency. France held 60% of sterling reserves and became very vulnerable to British policy.