Inflation then and now: Britain’s century of boom and bust

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Protesters urge the government to help elderly people with their energy bills at Downing Street in 2022

Energy prices are rocketing. Other costs of living are soaring too. For the first time in decades, inflation is a pressing political issue. This has prompted suggestions that Britain is “going back to the 1970s”.

But is it? What does that dread phrase actually signify? To find out, we need to look further back, to trace the political impact of inflation – and the fear of inflation – since the advent of British mass democracy.

Just over 100 years ago, industrial workers came home from the First World War, expecting their sacrifices to be rewarded. For the first time, all working men now had the vote. The prime minister, David Lloyd George, maintained high taxes into peacetime, promising “homes fit for heroes”.

Meanwhile, as pent-up demand for long-unavailable goods was suddenly unleashed, the economy boomed. Prices in 1920 were up 250 per cent on those in 1913. Newly powerful trade unions led successful strikes to ensure workers’ pay was kept abreast with inflation. Even the Liverpool police went on strike – and Lloyd George intervened to secure their raise.

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Rubbish lies uncollected on the streets of London in 1979. Prime Minister James Callaghan’s efforts to drive down inflation triggered a wave of strikes that helped eject him from power (Photo by Alamy)

The thriller-writer E Phillips Oppenheim was aghast. In October 1919, he complained in the Daily Mail that “Labour today has only to open its mouth and it receives practically what it asks for.” Meanwhile, professionals such as himself, groaning under high taxes and rising prices, could not recover their prewar lifestyles. He complained: “My chauffeur, content with 30s a week before the war, now demands a weekly wage of £3 16s.”

This grievance triggered a flood of readers’ letters. Clerks, civil servants, vicars and pensioners were scraping and saving to keep up appearances, living in dread of the unpayable bill. The Mail dubbed this “vast, silent and increasing section of the community” the “New Poor”, who could only watch as small businesses hiked their prices to ride high customer demand. Butchers (butchers!) were “buying motor-cars – not chiefly for business but for jaunting”, while impoverished doctors resorted to push-bikes. One housewife, going “shabby in order to keep the children nice”, wailed: “What is the way out?”

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Part of the problem, the Mail argued, was an extravagant government borrowing too much. The manufacture of paper money was “one of our most active industries”.

In March 1919, a Middle Classes Union had been founded to fight back. Then, in 1921, the joint owner of the Mail, Lord Rothermere, backed the creation of an Anti-Waste League, which soon started winning by-elections.

This was not a backlash confined to the right. Labour’s economics expert, Philip Snowden, warned his working-class followers that inflation “works in a vicious circle”. The more money there was in circulation, the less it was worth; as prices and wages rose, yet more money was needed. Government borrowing threatened “national bankruptcy”.

This nightmare had to be stopped before it was too late. The 1920 budget hiked interest rates to 7 per cent. This encouraged people to save rather than spend – reducing demand and so reducing the drive to inflate prices. The chancellor went on to cut income tax and set about slashing government expenditure. Dodging one nightmare, however, led straight to another: mass unemployment. Squeezing demand out of the economy may lower demand for goods, but it also lowers demand for workers to make those goods.

By June 1921, 2 million were out of work. On armistice day, jobless veterans laid a wreath bearing a pointed dedication: “From the living victims – the unemployed – to our dead comrades who died in vain.” But unemployment was seen as a price worth paying, not least by those who didn’t pay it.

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In 1923, this decision seemed vindicated by events in Germany, where Snowden’s vicious circle was whirring. On 19 June, the Telegraph yelled: “MARK’S RECORD PLUNGE – 660,000 FOR £1 – GERMANS’ DESPERATION.” By August, it was reporting political strikes, food riots and “convulsive turning off and turning on of trams, water, gas, electricity, potatoes, butter, newspapers, money”, while the ordinary Berliner “reels in stupefaction and feels that the foundations of the world are crumbling away under his feet”. Hyperinflation divided one section of society from another, erasing savings and undermining faith in democracy.

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Yet when the Great Depression struck, British politicians’ certainty that inflation was the overriding nightmare was sorely tested. In 1931, unemployment rose towards 3 million. The Labour government had to borrow more and more to fund the dole. To do that, Snowden – by then chancellor of the Exchequer – had to win bankers’ confidence, which meant cutting unemployment benefit, hurting the poorest of Labour’s own supporters. But Snowden believed that if he did not balance the books it would destroy confidence in the pound and trigger a German-style whirlpool of inflation.

In desperation, Snowden and prime minister Ramsay MacDonald broke from Labour and formed a coalition with the Conservatives and Liberals to push through the cuts. During the hyperinflation of 1923, MacDonald had witnessed German factory workers being paid in heaps of almost-worthless banknotes. Now, to justify his cuts and their impact on already-hungry families, he took to waving a 50,000,000,000 mark note – which, he told audiences, had been worth just tuppence.

War economy

Meanwhile in Germany, unemployment hit 6 million and Adolf Hitler took power, promising to get rid of the problem. It was the threat of Nazi attack, and the desperate need to rearm, that finally overrode the British government’s inflation nightmare. As borrowing and spending rose, so did inflation – but, following the outbreak of the Second World War, it was simply a problem for the state to manage under wartime powers.

To many, this about-face came terrifyingly late. In June 1940, in the wake of the near-disaster at Dunkirk, the fiery young journalist Michael Foot co-wrote a book called Guilty Men in four days flat, lambasting the Conservative-dominated governments of the 1930s for rearming too slowly. Why, he demanded, had those old taboos not been smashed before? And if the state could now borrow to fight the Nazis, why had it not borrowed to fight unemployment?

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Eventually, as victory drew near, Mass Observation asked what the public expected to happen afterwards – and found that many feared a repeat of what had followed the last war. Older people remembered the years after 1918 “only too well, with its high hopes and broken promises, its enormous unemployment figures and its ‘war heroes’ selling matches or singing in the streets”. A 35-year-old draughtsman from Sheffield spoke for many when he warned: “I don’t think people will stand for it this time.”

Once again, peace brought surging demand and inflation. But there was to be no return to the interwar years. This time, instead of letting mass unemployment drive down wages, the Labour government cajoled the unions to agree an “incomes policy”, holding pay rises below inflation. In return, the government asked companies to hold down prices. By October 1948, chancellor Stafford Cripps could boast: “Quite a lot of wise folk thought it was pretty hopeless to ask people to do those sorts of things voluntarily – well, they were wrong!”

The unions had emerged from the war stronger than ever but broadly accepted this approach for two decades, helped by an astonishingly long period of postwar growth. Only in the mid-1960s did it start to come apart, as productivity stalled and younger, less-deferential trade unionists turned against incomes policy.

Policy-busting rise

In 1970, Conservative leader Edward Heath won power with promises to make inflation his government’s top priority. But when unemployment hit a million, he U-turned and launched a dash for growth. Then in October 1973, with inflation cresting 9 per cent, Arab petroleum-producing countries imposed an oil embargo, and prices rocketed. The miners saw their chance, and struck for an incomes policy-busting pay rise. Heath called an election – and lost. Labour gave the miners their raise, but found annual inflation heading for 25 per cent.

For the first time since 1919, the pressure of rising prices started to transform British politics. The cost of bread was an urgent election issue, and Shirley Williams became secretary of state for “Prices and Consumer Protection”. But politicians seemed unable to control the unions and ease inflation.

As in 1919, an angry, frightened middle class began to organise. When a retired general called for public action to face down the unions, he received a torrent of letters from volunteers. The journalist Patrick Hutber wrote a book called The Decline and Fall of the Middle Class – and How it Can Fight Back, insisting that “if inflation continues unchecked”, the middle class “will be destroyed”.

On 5 September 1974, leading Conservative Sir Keith Joseph argued that it was time to abandon fears of returning to the mass unemployment of the 1930s. Inflation was the more pressing nightmare, “threatening to destroy our society”. The British should not assume they were “immune to the processes of despair and disintegration which ultimately invite dictatorship”.

Rubbish lies uncollected on the streets of London in 1979. Prime Minister James Callaghan’s efforts to drive down inflation triggered a wave of strikes that helped eject him from power (Photo by Alamy)

To press this case, he invoked interwar German hyperinflation. In the years after 1945, the likes of Michael Foot had blamed the advent of Nazi rule on Germany’s early 1930s mass unemployment. But now, Hitler’s rise was pinned on the events of 1923, with frightening implications for high-inflation mid-1970s Britain. When a book appeared called When Money Dies: The Nightmare of the Weimar Hyperinflation, The Times suggested that prime minister Harold Wilson should put copies “beside every bed at Chequers”.

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For several years Labour managed to hold all this at bay with yet another anti-inflation incomes policy. And for many unionised workers, the mid-1970s meant rising real wages: they could buy their first colour TV and holiday in Spain. But with unemployment rising as well as prices, prime minister James Callaghan became increasingly focused on driving down inflation. Finally, in the “Winter of Discontent” of 1978–79, patience with years of incomes policy wore out. Car workers, lorry drivers and, finally, low-paid hospital staff and grave-diggers went on strike for higher pay. Labour lost power to Margaret Thatcher and Keith Joseph.

Unions disempowered

In one sense, the events of 1978–79 brought the unions what they wanted: the new government rejected incomes policy. But alongside new laws restricting unions’ ability to strike effectively, inflation was brought under control by letting unemployment climb to heights not seen since the 1930s. The time to which Britain must never return was no longer the 1930s, but the 1970s.

Supermarket shelves lie empty during a strike by lorry workers in the “Winter of Discontent” (Photo by Popperfoto via Getty Images/Getty Images)

So – are we now doing exactly that? Today’s energy supply shortages are in some ways similar to the 1973 oil shock. And, as in the 1970s, there’s a lot of money sloshing through the economy.

One huge difference today, though, is that most private-sector workers are not in trade unions, and there is far less organised pressure to push up wages than in the 1970s. Since the 2008 financial crash, pay has largely flatlined; wages are rising, but more slowly than prices. The idea that we are “going back to the 1970s” seems less a useful parallel, more an invocation of the nightmare that has long shaped our politics.

Yet history does suggest that the pressure of inflation breaks old taboos. Today, those most affected are not the middle class but struggling, precariously employed workers.

It may be that, once again, something will have to give. Perhaps we’re watching a new nightmare emerge: of parents having to choose between heating and eating.


Inflation: a rollercoaster ride

Inflation rates since 1920, shown as yearly averages

1920: 15.4%

Amid a postwar boom, inflation soars. But within a year, after deep government cuts and a sharp rise in interest rates, prices shrink by 8.6 per cent. Inflation doesn’t return for years, while unemployment remains above a million until 1940.

1931: –4.3%

The National Government cuts unemployment benefit to restore confidence in the pound and keep it pegged to gold. When the cuts themselves provoke a new panic, the pound is forced off the gold standard after all. Mild inflation returns – and aids economic recovery.

1939: 2.8%

The cost of rearmament helps push inflation to 2.8 per cent, but the government keeps borrowing and spending. By 1940, the rate is 16.8 per cent.

1948: 7.7%

With peacetime inflation reaching 7 per cent, the Labour government introduces incomes policy. These help Conservative and Labour governments keep inflation down without
mass unemployment.

1969: 5.4%

Inflation passes 5 per cent – and doesn’t fall below that level again until 1983. Many blame high pay claims and low productivity.

1975: 24.2%

In August, in the wake of the Heath government’s reflation and the 1973 “oil shock”, inflation pushes towards 25 per cent.

1978: 8.3%

With inflation still over 8 per cent, after years of incomes policy, the government imposes a new 5 per cent pay limit – triggering the “Winter of Discontent”.

1990: 9.5%

In August, following Conservative chancellor Nigel Lawson’s tax-cutting boom, inflation touches double figures. But when recession bites, it falls below 5 per cent again.

2009: –0.5%

After the financial crash, prices fall to -0.5 per cent. Instead of mass unemployment, the crisis is absorbed by workers taking pay cuts, or moving to precarious “gig economy” jobs.

October 2021*: 6%

In October, as energy prices soar, inflation reaches 6 per cent for the first time since April 1991.

*Note: this is the RPI figure for the 12 months to October 2021


Phil Tinline is a writer and leading producer of historical documentaries for BBC Radio 4, and the author of The Death of Consensus: 100 Years of British Political Nightmares (Hurst, 2022). Catch up on Phil Tinline’s BBC Radio 4 series Pay Freezes on BBC Sounds

This content first appeared in the August 2022 issue of BBC History Magazine


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