The new wartime economy in the era of coronavirus


In the dog days of July 1938, amid German rumblings in Czechoslovakia’s Sudetenland, the British government led by Neville Chamberlain acquired a collection of fields and a sewage works beside Castle Bromwich airfield in the West Midlands.

For a purchase that attracted little notice, it would have a large impact on world events. Over the next year, and with the expenditure of some £4m of public money — a huge amount at the time — this unprepossessing location was transformed into a giant manufacturing plant under the aegis of the UK’s “shadow factories” scheme.

The idea behind the plan was to spur rearmament by expanding the country’s capacity to make military aircraft beyond that which the private sector was willing or able to finance. Whole plants would be built in advance of demand for their output. Castle Bromwich was one of a number of such facilities scattered round the country.

Initially under the management of Wolseley Motors, and later the aircraft maker Vickers-Armstrongs, the publicly funded plant expanded to employ 12,000 people, taking its first orders in the summer of 1939. When production finally ceased in July 1945, it had manufactured more than half the nation’s 20,000 Spitfire fighter aircraft alongside hundreds of Lancaster bombers and helped to secure national survival.

Prime Minister Boris Johnson has talked about running a ‘wartime government’, taking steps that are ‘unprecedented since world war two’
Prime Minister Boris Johnson has talked about running a ‘wartime government’, taking steps that are ‘unprecedented since world war two’ © Andrew Parsons/10 Downing Street

Last week, that same Castle Bromwich plant was back in the news. No longer an aircraft manufacturing site but a production facility for carmaker Jaguar Land Rover, its owners announced that the factory’s 1,900 workers, along with others on its five UK sites, would be downing tools until at least April 20. JLR said it was “minimising the spread of the coronavirus”, adding that it would “work towards an orderly return to production once conditions permit”.

In recent days, UK government ministers have invoked the spirit of wartime mobilisation, calling for a wholehearted national effort to stem the advance of coronavirus. The prime minister, Boris Johnson, has talked about running a “wartime government” taking steps that are “unprecedented since world war two”, while the health secretary, Matt Hancock, has called for “one gigantic national effort” on a par with the time “when our cities were pounded during the Blitz”. Similar rhetoric is being deployed by ministers in other countries.

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With its memories of communal sacrifice leading to ultimate triumph, the second world war looms large in Britain’s national consciousness. But as the fate of Castle Bromwich suggests, the “mobilisation” required to beat coronavirus may have a different shape and rhythm from those distant events. 

“The prime economic challenge of the second world war was how to mobilise and direct resources,” says Duncan Weldon, an economic historian. “Our present ones are almost the opposite, being about how to manage the reality of national demobilisation in order to stop the virus spreading.”

In his 1940 book How to Pay for the War, the economist John Maynard Keynes wrote of the imperative that “Britain’s war output [should be] as large as we know how to organise”, leaving only a “definite residual available for civilian consumption”. It meant the state commandeering the lion’s share of resources for war production, and taking measures such as higher taxes to reduce consumer demand. These steps were needed because of steeply rising household incomes — the product of wartime full employment. This, it was feared, might tempt producers to divert capacity to make consumption goods.

More than half the UK’s 20,000 Spitfire fighter aircraft were produced at Castle Bromwich
More than half the UK’s 20,000 Spitfire fighter aircraft were produced at Castle Bromwich © PNA Rota/Getty

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

With the government now directing most retail businesses to shut, and many companies slowing production voluntarily either because of ebbing demand for their products or a desire to prevent infection, there are few capacity constraints (short of illness) to stop ministers corralling the resources they need to combat the virus. Outside of a few areas, such as food, consumer demand is slumping.

“You needed central direction in the war to stop carmakers producing cars and get them to make Spitfires,” says Mr Weldon. “But now if the government wants companies like JCB or Dyson to turn over production to medical supplies, that ought to be possible using ordinary contracts. After all, JCB isn’t likely to be selling that many diggers over the coming months.”

(Original Caption) 12/6/1945-Washington, DC-In a ceremony at the Department of State, the British Loan Agreement was formally signed. Pictured during the signing are, left to right: Lord John Maynard Keynes, Chief of British Loan Mission; Earl of Halifax, British Ambassador to the U.S.; Secretray of State James F. Byrnes and Secretary of the Treasury Fred M. Vinson. The loan agreement for over 4 billion dollars must be ratified by both Congress and Commons.
John Maynard Keynes, left, attends the signing of the British Loan Agreement in Washington, 1945 © Bettmann/Getty

The bigger challenge for the British government — and for all other countries currently reeling from the pandemic — is to make sure its demobilisation strategy is effective. Without that, its hopes of containing the virus will be in vain. Rishi Sunak, the chancellor, has announced far-reaching measures designed to underwrite the costs of keeping much of the workforce idle without leading to mass lay-offs. 

To encourage this form of economic hibernation, the government has undertaken to pay up to 80 per cent of affected workers’ wages for an open-ended period. It is a measure that could have transformative consequences for the public finances. Estimates suggest it could cost the government roughly £3.5bn for every million workers for three months’ operation. Beyond the scheme, additional support for people on welfare benefits is due to cost £7bn. Unlike wartime, this will happen at a time of plunging tax receipts.

All told, these and other measures could place burdens on Britain’s finances that might approach the 1939-45 period, when budget deficits exceeded 20 per cent of Britain’s gross domestic product between 1941 and 1945, peaking at 26.7 per cent in 1942.

“It depends how long the virus goes on but the consequences for the public finances may end up looking quite familiar to someone who financed the war,” says Mr Weldon.

The UK government has not stepped in to control the distribution of food, despite evidence of panic buying
The UK government has not stepped in to control the distribution of food, despite evidence of panic buying © Andy Rain/EPA-EFE/Shutterstock

Another area where there are echoes of past conflicts is in the debate over the balance between voluntary and compulsory measures. Mr Johnson’s government has faced criticism for its initial reluctanceto lay down rules, most notably in ordering non-essential companies or schools to close to prevent the spread of infection. 

It has not stepped in to control the distribution of food and essential items, or their prices, despite evidence of panic buying. Supermarkets have been left to improvise their own responses, in spite of competition rules that inhibit co-operation between them. These were softened last week to permit them to share data and distribution depots. Social distancing measures have been lightly enforced, although rules announced on Monday may mark a change, with emergency legislation now in prospect. 

Mr Johnson has 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 Britain’s War, a social history of the second world war, this is reminiscent of the autumn of 1939, when the Chamberlain government debated whether to bring in food rationing.

“The argument was over how fast to introduce it and whether to move quickly to a compulsory system,” he says. “Lots of Tories were worried, not admittedly Chamberlain who favoured a big state in wartime, but Churchill was very anti. He felt it would be seen as a sign of weakness and a threat to traditional liberties.”

If the second world war is a guide, compulsion will ramp up quickly if the present lockdown endures. Indeed, according to Mark Harrison, emeritus professor of economics at Warwick university, this might enjoy widespread public support.

“Societies that are under stress welcome the clarity of clear rules and penalties,” he argues, likening it to a form of moral mobilisation.

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

The second world war saw a proliferation of such regulations, with particularly fierce punishments reserved for infractions such as looting or blackout breaches. More than 1m citizens were prosecuted for infringements, many of them seemingly petty, according to Mr Harrison. They included one unfortunate who was arrested during the Blitz attacks on British cities after handing round a bottle of brandy he had retrieved from the ruins of a pub through which he was hunting amid corpses for bomb blast survivors. 

Yet despite their ferocity, these rules were not resented by the public. Keynes likened them to “rules of the road”, which got around the collective action problem of everyone abiding by irksome regulations that were all to no avail if others did not comply. He dismissed 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 behaviour universal”.

Castle Bromwich: once a manufacturing hub for military aircraft in the second world war, now a production facility for Jaguar Land Rover
Castle Bromwich: once a manufacturing hub for military aircraft in the second world war, now a production facility for Jaguar Land Rover © Christopher Furlong/Getty

Most comparisons with the present crisis focus on the second world war. But as Mr Weldon points out, this 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. “Civil servants had spent years working out the lessons of the first war, so when the second came along they had sheaves of plans prepared they could consult.”

The coronavirus crisis is of a different stripe. It is not just that Britain had no detailed contingencies to hand, having largely brushed off warnings about the risks posed by pandemics — unlike some Asian countries that were affected by epidemics such as Sars and swine flu.

A milkman delivers milk amid the ruins in Holborn, London
A milkman delivers milk amid the ruins in Holborn, London © Fred MorleyHulton/Getty

What is also striking is the sheer scale of the sudden dislocation, which has provoked antagonism between countries, impeded movement across borders and disrupted trade around the world. In that sense, it bears more resemblance to the first world war, which fell upon the public out of a seemingly clear sky.

Just as in 1914, the biggest immediate casualties have been the financial markets. In his first world war memoirs David Lloyd George, later prime minister but chancellor at the start of the conflict, describes how London’s role as the financier of global trade was shattered in days. Cross-border business cratered, leaving creditors unable to pay their debts and banks loaded with potentially defaulted assets. 

The recent shock bears some resemblance to that period. Markets have slumped because of uncertainty about the duration and nature of the disturbance. Will it end quickly? Is it a question of liquidity or is the solvency of participants in doubt? 

The ultimate response remains uncertain. The world is transfixed by memories of 2008, and the powerful stimuli that were administered to markets in the form of massive asset purchases by central banks. A number of central banks, including the Bank of England, are repeating those measures. But some think the authorities should look more to 1914, where Britain focused simply on keeping markets functioning and not preordaining at what level they should trade.

“In markets, the aim now for central bankers should be to keep core markets open rather than trying to keep them up by simply buying everything,” says Paul Tucker, chair of the Systemic Risk Council and a former deputy governor of the Bank of England.

He argues that the aim should not be to stimulate an economy, which the government is anyway trying to tamp down with its measures to suppress the virus. It should, instead, be to avoid the economy falling into a vortex and for government to ensure that citizens can live decently and businesses are not unnecessarily destroyed.

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

Two land girls tend tomatoes at Beckford in Worcestershire in 1945
Two Land Army girls tend tomatoes at Beckford in Worcestershire in 1945 © Maeers/Fox Photos/Getty

No one can know how long the coronavirus crisis will last. But one lesson of wartime politics is that governments cannot simply demand endless sacrifice. At some point, politicians must turn their minds towards the pay-off for all that blood, sweat and tears.

If the virus endures, Mr Todman suggests that this might involve some sort of generational compact to benefit the young on whose shoulders much of this inflated national indebtedness will fall. “The obvious thing would be some combination of improved lifestyle, more sustainable employment and the avoidance of climate catastrophe,” he says.

This could even be a political opportunity. It was after all not Churchill but the Labour party under Clement Attlee who seized the possibilities of the 1942 Beveridge Report on social welfare, paving the way for the National Health Service.

“It would be nice to see some ambitious post-pandemic settlement,” Mr Todman says. “But I am not optimistic about any of our leaders being able to pull that off.”


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