The new wartime economy in the era of coronavirus

In the canine days of July 1938, amidst German rumblings in the Sudetenland of Czechoslovakia, the British government led by Neville Chamberlain acquired a collection of fields and a sewage treatment plant near Castle Bromwich airfield in the West Midlands.

For a purchase that did not attract attention, it would have a big impact on world events. Over the next year, and with spending of around £ 4 million of public money – a huge amount at the time – this unpretentious site was transformed into a gigantic manufacturing plant under the umbrella of the British “ghost factories” program.

The idea behind this plan was to stimulate rearmament by increasing the country’s capacity to manufacture military aircraft beyond what the private sector was willing or able to finance. Entire factories would be built before demand for their production. Castle Bromwich was one of many such facilities scattered across the country.

Initially under the direction of Wolseley Motors, then of the aircraft manufacturer Vickers-Armstrongs, the factory financed by public funds expands to employ 12,000 people, taking its first orders in the summer of 1939. When production finally stopped in By July 1945, it had manufactured more than half of the country’s 20,000 Spitfire fighter jets alongside hundreds of Lancaster bombers and helped ensure national survival.

The Nazis and the German Economy

Prime Minister Boris Johnson spoke of managing a “war government”, taking action “unprecedented since World War II” © Andrew Parsons / 10 Downing Street

Last week, the same Castle Bromwich factory was back in the news. It is no longer an aircraft manufacturing site, but a production facility for automaker Jaguar Land Rover, its owners have announced that 1,900 workers at the plant, as well as others at its five sites at UK, would cut down tools until at least April 20. JLR said it “minimizes the spread of the coronavirus,” adding that it “will work towards an orderly return to production once conditions permit.”

In recent days, British government ministers have invoked the spirit of war-time mobilization, calling for an unqualified national effort to stem the spread of the coronavirus. Prime Minister Boris Johnson spoke of managing a “war government” taking action “unprecedented since World War II”, while Secretary of Health Matt Hancock called for “a gigantic national effort ”as well as“ when our cities were shelled during the Blitz ”. Similar rhetoric is deployed by ministers from other countries.

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With memories of community sacrifice leading to ultimate triumph, the Second World War occupies an important place in British national consciousness. But as the fate of Castle Bromwich suggests, the “mobilization” necessary to defeat the coronavirus may have a different form and rhythm from these distant events.

“The main economic challenge of the Second World War was how to mobilize and direct resources,” said Duncan Weldon, economic historian. “Our current ones are almost the opposite, being on how to handle the reality of national demobilization in order to stop the spread of the virus.”

In his 1940 book How to pay for wareconomist John Maynard Keynes wrote on the imperative that “British war production [should be] as big as we know how to organize ”, leaving only a“ definite residue available for civilian consumption ”. This meant that the state was requisitioning the lion’s share of the resources for war production and was taking measures such as higher taxes to reduce consumer demand. These measures were necessary because of the sharp increase in household incomes – the product of full wartime employment. It was feared that this would encourage producers to divert the ability to manufacture consumer goods.

More than half of the UK's 20,000 Spitfire fighter jets were produced at Castle Bromwich

More than half of the UK’s 20,000 Spitfire fighter jets have been produced at Castle Bromwich © PNA Rota / Getty

“We cannot allow a simple question of money in the public pocket to have a significant influence on the amount we are allowed to consume,” observed Keynes.

While the government is now ordering most retail businesses to close, and many businesses are voluntarily slowing production due to declining demand for their products or the desire to prevent infections, there are few constraints. ability (short of illness) to prevent ministers from mobilizing the resources they need to fight the virus. Outside of a few areas, such as food, consumer demand is collapsing.

“It took central management during the war to prevent automakers from producing cars and have them build Spitfires,” says Weldon. “But now, if the government wants companies like JCB or Dyson to shift production to medical supplies, that should be possible using standard contracts. After all, JCB is not expected to sell as many excavators in the coming months. “

(Original caption) 12/6/1945-Washington, DC-At a State Department ceremony, the British loan agreement was officially signed. Pictured during the signing, from left to right: Lord John Maynard Keynes, head of the British Loan Mission; Earl of Halifax, British Ambassador to the United States; State Secretary James F. Byrnes and Secretary of the Treasury Fred M. Vinson. The loan agreement of more than $ 4 billion must be ratified by Congress and the Commons.

John Maynard Keynes, left, attends the signing of the British loan agreement in Washington, 1945 © Bettmann / Getty

The biggest challenge for the British government – and for all the other countries currently shocked by the pandemic – it is to ensure that its demobilization strategy is effective. Otherwise, his hopes of containing the virus will be in vain. Rishi Sunak, the chancellor, has announced far-reaching measures to cover the costs of keeping a large part of the workforce idling without causing massive layoffs.

To encourage this form of economic hibernation, the government has committed to pay up to 80% of the wages of the workers concerned for an indefinite period. It is a measure that could have transformative consequences on public finances. It is estimated that this could cost the government around £ 3.5 billion for every million workers for three months. Beyond the program, additional support for people on welfare is expected to cost £ 7 billion. Unlike war, this will happen at a time when tax revenues will plunge.

All told, these and other measures could weigh on Britain’s finances which could approach the period 1939-1945, when budget deficits exceeded 20% of Britain’s gross domestic product between 1941 and 1945 , peaking at 26.7% in 1942.

“It depends on how long the virus has spread, but the consequences for public finances may end up looking fairly familiar to someone who funded the war,” said Weldon.

British government did not intervene to control food distribution, despite evidence of panic buying

British government failed to control food distribution, despite evidence of panic buying © Andy Rain / EPA-EFE / Shutterstock

Another area where there are echoes of past conflicts is in the debate on the balance between voluntary and compulsory measures. Mr. Johnson’s government has been criticized for its initial reluctance to make rules, including ordering the closure of non-essential businesses or schools to prevent the spread of the infection.

He did not intervene to control the distribution of food and essential items, or their prices, despite the signs of panic buying. Supermarkets had to improvise their own responses, despite the competition rules that hinder cooperation between them. These were softened last week to allow them to share data and distribution repositories. Social distancing measures have been lightly applied, although the rules announced on Monday may mark a change, with emergency legislation now in the offing.

Johnson made much of his attachment to British liberties, urging the public to take the initiative and do the right thing.

According to Daniel Todman, author of War of great britain, a social history of the second world war, that recalls the autumn of 1939, when the Chamberlain government wondered if it was necessary to bring a food rationing.

“The argument was about the speed of its introduction and the advisability of moving quickly to a mandatory system,” he said. “Many conservatives were worried, not Chamberlain who was in favor of a great state in wartime, but Churchill was very hostile. He believed that this would be seen as a sign of weakness and a threat to traditional freedoms. “

If World War II is a guide, the constraint will quickly increase if the current lockdown continues. Indeed, according to Mark Harrison, emeritus professor of economics at the University of Warwick, this could benefit from broad public support.

“Societies under stress welcome the clarity of clear rules and sanctions,” he argues, comparing it to a form of moral mobilization.

Ration books were distributed in Tottenham, north London, in 1951

Ration books were distributed in Tottenham, north London, in 1951 © Reg Speller / Getty

The Second World War saw a proliferation of such regulations, with particularly severe sanctions being reserved for offenses such as looting or blackout violations. According to Mr. Harrison, more than one million citizens have been prosecuted for offenses, many of which appear to be minimal. They included an unfortunate man who was arrested in the Blitz attacks on British cities after he handed over a bottle of cognac which he had recovered from the ruins of a pub in which he hunted among corpses for the survivors of the explosion in ‘a bomb.

However, despite their ferocity, these rules were not felt by the public. Keynes compared them to “rules of the road,” which bypassed the problem of collective action by all those who obeyed boring regulations, which were all useless if others failed to comply. He rejected the threat to liberty, describing their prescription as the “perfect” vehicle for “social action, where everyone can be protected by making a certain rule of behavior universal”.

Castle Bromwich: Formerly a manufacturing center for military aircraft during World War II, now a production site for Jaguar Land Rover

Castle Bromwich: formerly a military aircraft manufacturing center during World War II, now a production site for Jaguar Land Rover © Christopher Furlong / Getty

Most comparisons with the current crisis focus on the second world war. But as Mr. Weldon points out, it was a conflict for which Britain was relatively well prepared.

“For several years before 1939, everyone could see that a conflict was likely, so there was time to prepare,” he says. “The officials had spent years learning from the first war, so when the second came, they had bundles of plans they could consult.”

The coronavirus crisis is of a completely different nature. It is not only that Britain did not have detailed contingencies on hand, having largely ignored warnings about the risks posed by pandemics – unlike some Asian countries that have been affected by epidemics such as Sars and swine flu.

A milkman delivers milk amidst the ruins of Holborn, London

A milkman delivers milk amidst the ruins of Holborn, London © Fred MorleyHulton / Getty

What is also striking is the extent of the sudden dislocation, which has caused antagonism between countries, hindered cross-border movements and disrupted world trade. In this sense, it more closely resembles the First World War, which fell on the audience in an apparently clear sky.

As in 1914, the biggest immediate victims were the financial markets. In his first memoirs on the First World War, David Lloyd George, future Prime Minister but Chancellor at the start of the conflict, describes how London’s role as financier of world trade was broken in a few days. Cross-border business has cratered, leaving creditors unable to pay their debts and banks laden with potentially defaulting assets.

The recent shock somewhat resembles this period. Markets have collapsed due to uncertainty about the duration and nature of the disruption. Will it end quickly? Is it a question of liquidity or is the solvency of the participants questioned?

The final answer remains uncertain. The world is troubled by memories of 2008 and the powerful stimuli that were administered to the markets in the form of massive asset purchases by central banks. A number of central banks, including the Bank of England, are repeating these measures. But some believe that the authorities should turn more towards 1914, where Britain focused simply on keeping the markets functioning and not on the precordination at which level they should trade.

“The market focus now for central bankers should be to keep the main markets open rather than trying to keep them by buying just everything,” said Paul Tucker, chairman of the Systemic Risk Council and former deputy governor of the bank. Bank of England. .

He argues that the goal should not be to stimulate an economy, which the government is trying to suppress anyway with its virus removal measures. Rather, it should aim to prevent the economy from falling into a whirlwind and the government ensuring that citizens can live decently and that businesses are not unnecessarily destroyed.

“If the markets cannot function, then the task of the central bank is to ensure that the government is funded. But you shouldn’t start from there. You should try to be a catalyst and not buy something Larry Fink automatically [chief executive of investment group BlackRock] and others could still buy. “

Two earth girls tend to tomatoes at Beckford Worcestershire in 1945

Two Army girls care for tomatoes in Beckford, Worcestershire in 1945 © Maeers / Fox Photos / Getty

No one can know how long the coronavirus crisis will last. But a lesson from war politics is that governments cannot simply demand endless sacrifices. At some point, politicians have to turn to paying for all that blood, sweat and tears.

If the virus persists, Todman suggests that it could imply a sort of generational pact for the benefit of young people on whose shoulders much of this swollen national debt will fall. “The evidence would be a combination of improved lifestyle, more sustainable employment and the prevention of climate disasters,” he said.

It could even be a political opportunity. After all, it was not Churchill but Clement Attlee’s Labor Party that seized the possibilities of the 1942 Beveridge report on social protection, paving the way for the National Health Service.

“It would be nice to see an ambitious post-pandemic settlement,” said Todman. “But I am not optimistic about the ability of our leaders to cope.”

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