After the First World War Britain signed the Washington Treaty of 1921 to prevent a further arms race. This limited the size and number of ships a nation could have. This had a devastating effect on the shipbuilding industries and Royal Dockyards, with few new ships ordered. The direct impact on the Royal Dockyards was to close Pembroke Royal Dockyard in 1926. Rosyth Royal Dockyard was reduced to a care and maintenance role, whilst Portsmouth Royal Dockyard was involved with rebuilding and refitting war torn battleships.
Men returning from the services and discharges from the Dockyard led to unemployment and brought much suffering to the townspeople of Portsmouth. Only 8000 men remained in work by the mid 1920s. However, by reducing the working week by seven hours in 1921 about 1000 men who had been discharged were re-employed.
The global depression of the early 1930s worsened the situation. The Depression caused a collapse in demand for ships. The Admiralty moved contracts from commercial shipyards to the Dockyards to try to maintain a workflow. During the Depression it was usual for children to wait outside the gates at lunchtime begging for food from the dockyard men "any lunch mister?".
A major rebuilding project in the Dockyard went ahead during this period, this helped to increase the workload for Dockyard workers. A fire had destroyed Semaphore Tower before the First World War. On Sunday 20 December 1913 a fire broke out in the Sail Loft, this spread to engulf the building, which included Semaphore Tower. Semaphore Tower was used as a communication post, it was part of a network of Semaphore Towers that spread from the South to Whitehall. It took until 1928 to start rebuilding the nearby building which was to house the Rangefinder Test house, the Rigging House and Semaphore Tower itself. The Dockyard moved the Sail Loft to another building in the Dockyard and opened the new Semaphore Tower building on 4 July 1930.
From 1936 onwards the British Government followed a policy of mass rearmament because of the threat from Nazi Germany. By September 1939 Britain was once again at war with Germany.