Britain: The Crisis of 1929

The Labour Government

The Labour government did not anticipate the great economic crisis of 1929. They inherited a country on the peak of boom, despite unemployment of over a million. There were some proposals to tackle unemployment put forward by J.H. Thomas, with the assistance of Oswald Mosley and Tom Johnston as junior ministers, but the Chancellor of the Exchequer, Snowden, mostly vetoed these, and very little was done to remedy the unemployment problem by the time the economic crisis broke.

The onset of the Great Depression

The cause of the Great Depression lay in the world dependence on American capital and American demand. On 24th October 1929 the Wall Street Crash heralded the end of the bubble, and with it American capital ceased to flow. This caused a further depression in the primary producer nations, and hence a further collapse of world-wide demand. In Britain, the export industries were severely affected, and unemployment rose sharply to 2 million by July 1930, 2.5 million by December 1930, but not quite reaching 3 million in 1931. But the depression affected Germany more than Britain.

In fact, the Depression improved Britain's terms of trade still further. The price of imports fell, but export prices did not; consequently, Britain's volume of imports was not affected by the Depression. Exports were halved between 1929 and 1931, but the additional cost to Britain was only £25 million. As prices fell, and nominal wages remained steady, real wages rose, so for those who remained in employment the period was one of increasing prosperity. Additionally, the regions worst affected were at some distance from the political centre of Britain: London.

Financial Restraint — The May Committee

Financial restraint rather than public expenditure was the policy of the Labour government at this time. The budget was not properly balanced under Churchill, and Snowden sought to bring it in line. His 1930 budget increased income tax to 4s 6d (22.5%) in the pound. The onset of the Depression reduced the yield from this tax. In February 1931 the Liberals proposed, and Snowden accepted, the establishment of a committee, under May, to review expenditure. He expected the committee's report to assist him in forcing Labour into accepting financial restraint and the Conservatives into accepting an increase in taxation. During the summer of 1931 there were reports from this and another committee, the Macmillan committee on Finance and Industry. The Macmillan report demonstrated that Britain was developing a worsening balance of payments situation owing to the decline of invisible exports. A worsening situation was predicted. The report helped to create panic and confusion. The report of the May committee, published on 31st July, and called by Keynes, "the most foolish document I ever had the misfortune to read" predicted a budget deficit of £170 million in the coming year, and recommended modest increases in taxes and swinging cuts in benefits — particularly in relief to the unemployed, which would be cut by 20%.

The Run on the Pound

The crisis came to a head when on 11th August MacDonald was forced to return to London to be told by leading bankers that there was a run on the pound. There had been a collapse of the banking system in central Europe. An Austrian bank collapsed, and when German banks tried to intervene on its behalf, they also went under. This also sucked in London banks, which admitted to having £250 million frozen in Germany, but the real figure was probably closer to £600 or £700 million. Meanwhile, French were withdrawing money from the London capital markets because they did not want their money being used to help Germany. The central gold reserves were being run down, and the banks were insisting on an international conference to restore confidence in the pound, a pre-requisite to which would be a balanced budget. The panic was founded on confused economic thinking. The budget deficit was small, and was largely funded internally by credit balances in certain government departments, such as the post office. In other words, there was little effective printing of money. It was a deflationary, not inflationary period, and the remedy for the panic lay simply in a suspension of the gold standard, which had been used in 1847 and 1866, but no one thought of it. Whilst Keynes, Bevin and some Labour ministers realised that there was no cause for alarm over the balanced budget, they mistakenly thought there was a problem with Britain's balance of payments. This was also mistaken since the run on the pound was caused, not by a trade deficit, but by capital movements. However, the belief persisted that the budget would have to be balanced, and that "waste" would have to be reduced, especially on unemployment benefit. Businessmen also wanted relief to be cut as a preliminary to reducing wages.

Crisis in the Labour Government: Formation of the National Government

None of the Labour ministers advocated suspension of the gold standard as a remedy. [There was a very general ideological commitment to maintaining the gold standard that spanned all sections of the community.] There were other possible solutions, such as leaving the budget unbalanced or introducing a revenue tariff, but Snowden threatened to resign over these. However, two opposed camps within the cabinet started to develop. The TUC communicated through Bevin that they would not accept cuts in benefits. On August 23rd the cabinet reached a state of stalemate, with nine members threatening to resign should cuts be imposed, and eleven willing to follow McDonald's lead. The government could not last, especially as among the nine were some of the party's heavyweights — the deputy leader Clynes and Henderson. The alternative of a National government emerged when the leader of Liberal faction, Herbert Samuel, having taken over owing to Lloyd George being ill, proposed it at a meeting between McDonald, Baldwin and Samuel to secure the opposition parties' consent to the cuts. Baldwin supported the idea, as did the king, who regarded the situation as one of national crisis, and therefore favoured a coalition government.

MacDonald was drawn to the idea out of some notion of it being the right thing for the country, and he did not expect that he would be cut off from the Labour party as a result. He did not seek Labour party approval of the plan before going ahead with it. He failed to judge the situation within the party.

The National government was formed on 24th August. The cabinet comprised 4 Labour, 4 Conservative and 2 Liberal ministers. MacDonald remained as Prime Minister and Snowden as Chancellor. The Liberal party gave its formal support to the government on 28th August, as did the Conservatives. However, only four ministers and eight backbenchers from the Labour party supported the government. The TUC declared itself against it on 26th August; on August 28th the parliamentary Labour party met and voted Henderson as leader, thus signalling that they had gone into opposition. Within the Labour movement a myth developed that MacDonald had betrayed them; the agreement of many Labour ministers to the cuts was conveniently forgotten, and a spirit of class war returned.

Snowden's budget

Snowden's budget removed the deficit of £170 million by reducing payments to the sinking fund by £20 million, raising taxes to 25% bringing in a further £76 million; and introducing cuts to the tune of £70 million. All state salaries were cut. Police pay fell the least, by 5%; teachers lost 15%. The budget was supported by all Conservatives and Liberals; from the Labour side there were 12 in favour and 5 abstentions; the government had a majority of 50. Bankers in Paris and New York responded enthusiastically — giving credit of £80 million. None of this solved any real problem, which lay outside Britain, and had nothing to do with a balanced budget, since foreigners still wished to withdraw their capital, and Germany was still likely to default on payments on loans. The run on the pound continued. Foreign credits were exhausted on 19th September, and within two days an act suspending the gold standard passed through parliament; the pound fell in value by 25%, but otherwise there were no dire consequences.

Oswald Mosley

The only Labour minister to rise to the challenge of unemployment was Oswald Mosley, and as a junior minister responsible to J.H. Thomas he advocated state intervention in industry and the use of credit to promote expansions. Thomas did not take up these ideas, and they offended Snowden and those within the Labour movement who still supported Free Trade. They were rejected by the cabinet in May 1930, and Mosley resigned as a consequence. Mosley sought the support of the parliamentary party, but they rejected his ideas by 202 to 29. Mosley then made an appeal to the party conference during autumn 1930, and was again defeated. He published his own manifesto in December 1930, and, having obtained only limited party support, he decided to found the New Party in February 1931. His resignation from the Labour party was followed by just four MPs, one of whom was his wife. Mosley's proposals were simply not adapted to British attitudes.