The Labour Government of 1929—1931

A summary of Robert Skidelsky's Politicians and the Slump, The Labour Government of 1929 — 31, first published by Macmillan, 1967, London and subsequently by Penguin, 1970.

1: The Economic Background

There was the problem of continuing post-war unemployment. During 1919-20 there was a boom assisted by the decision of the government not to restore the gold standard. However, the inflation on the Continent caused the government to adopt deflationary policies — for example, the base rate was raised from 6% in November 1919 to 7% in April. By 1921 unemployment in Britain had risen to 19%, and it was only by 1927 that the 1913 level of production was reached. From 1922 to 1929 unemployment remained at 10%.

The British believed that the high level of unemployment was due to the disruption to the international monetary system caused by the First World War, and the objective of successive British Governments was to restore the post-war system as quickly as possible. However, as the decade wore on it became apparent that there was a structural decline in the pre-war British export industries — coal, textiles and heavy engineering. In fact, the return to the gold standard in 1925 prevented new industries from developing and slowed down the rationalization of the old ones.

There was a widespread belief that the gold standard was a device for preventing rampant inflation, which seemed to be endorsed by the European crisis of 1920 to 1923. The pre-war parity was a symbol of normality and hence the desire to restore the pound at that level in 1925. However, at this time Britain lacked the financial strength that it had in the pre-war days, and its gold reserves were insufficient. Once on the gold standard other countries could keep reserves in sterling, and Britain was forced to finance its operations with short-term loans at high interest rates. In view of the decline of the export industries, sterling was overvalued at the pre-war rate.

America and France built up large reserves of gold, but neither country was willing to lend abroad to the extent required to finance international growth and development. America did to an extent until their financial crisis in 1928. France became a creditor nation following the stabilization of the franc in 1927 at a rate much lower than its pre-war level. But the French adopted the policy of increasing their gold reserves and discouraging foreign investment; thus, only Britain was willing to make the gold standard work.

The operation of the gold standard required free trade, since the introduction of a protective tariff would prevent the necessary price adjustments following changes in the balance of payments. However, Britain made tentative forays into the domain of tariffs, firstly by introducing the McKenna duties in 1915, and then in 1921 with the introduction of the Safeguarding of Industries Act. However, by 1929 the overall level of tariffs was only 5%, so free trade was still effective. Britain sought internationally for a restoration of free trade. Tariffs were also regarded as a barrier to international peace, and free trade was the central policy tenet of the Liberal party.

Structural unemployment in the old industries was concentrated in those areas of the country connected with the old export industries — that is, the north and the Celtic fringe. Thus, the problems of unemployment were not very visible to those in London and the central region. Unemployment was heaviest in the coal, cotton, shipbuilding and iron and steel industries.

The decline of value of exports may be illustrated as follows. In 1913 textiles and coal formed 55% of the total value of Britain's physical exports; in 1913 Britain exported 73m tons of coal. This decreased to 25m tons in 1925, and whilst there was some recovery between 1925 and 1929 coal exports averaged at 50m tons. Coal production fell from 287m tons in 1913 to 258m tons in 1929. The main cause of the decline was the increase of competition from Germany and Poland; also the dislocation of the Eastern and Central European markets, particularly the Russian market, removed valuable trading opportunities. Regarding textiles, production in India increased threefold between 1913 and 1929. Japan became a major competitor gaining 19% of the world market by 1929, whereas in 1913 they had nothing. Japanese workers earned only 1/5th of the wage of a British textile employee, and British equipment was out of date. Shipbuilding contracted after the war as did steel.

Nonetheless, there was a general belief that prosperity and full employment could only be established by a revival of the old export industries. This revival would require either reduction in wage costs or rationalization or both. The method of reducing wages was applied twice by coal owners between 1920 and 1926, and in 1926 they were also able to impose a longer working day. The General Strike of 1926 did not succeed in preventing wage reductions for the miners; however, its longer term effect was to make industrialists wary of further industrial conflict. As a result, unemployment was accepted as an alternative to wage reductions.

Employers were not prepared to countenance rationalization of their industries, and in any case they had difficulty accessing the necessary finance. There was very little rationalization of the heavy industries during the 1920s.

During the 1920s there developed a conflict of interest between industry and the City. The prosperity of the City was linked to the volume of world trade that was credited and financed in London.

There was also a failure to appreciate the dynamics of a modern economy. Workers were regarded as producers not consumers; taxation was looked upon as a burden, and as a means by which credit was denied to industry. There was a general belief that governments should balance their budget, this being an application of the business principle that when a company is in trouble it has to reduce its costs. Businessmen were opposed to government intervention on behalf of the workers.

The Bank of England regarded the government as its client, and sought to apply the same principles to government as might apply to a business; in other words, they put pressure on the government to balance the budget and not live beyond its means. The Bank of England was also reluctant to understand the relationship between monetary policy and investment.

The Treasury did not regard itself as a ministry of economic affairs and took a view similar to the Bank of England in regard to government finance, so its main policy was that of the annually balanced budget. The principle private secretary to five successive Chancellors was Sir James Grigg; he wrote in his autobiography that “I distrust utterly those economists who have with great but deplorable ingenuity taught that it is not only possible but praiseworthy for a whole country to live beyond its means” [P.J. Grigg, Prejudice and Judgement, p. 36.] The Treasury took the view that all government expenditure was essentially non-productive, and this classical theory contrasted with the evolution of the provision of social services such as education, housing, pensions and insurance.

During the 1920s the largest item in the budget was interest and sinking fund payments on the national debt. This was about £400m per annum. To service the war loan required a high level of taxation. There was a general desire to pay off the war loan as fast as possible, and to this effect there was a provision of about £60m per annum to reduce it. A balanced budget was expected to include it.

The government became increasingly involved with the economy. For example, export credits were started by two Overseas Trade (Credit and Insurance) Acts between 1919 and 1921. These gave the Board of Trade the power to guarantee loans made to exporters. In 1921 Trade Facilities were introduced with the purpose of overcoming the problems created by over-high interest rates. However, government intervention in the form of a public works programme was not accepted as normal. Public works were regarded as the responsibility of local authorities or of bodies such as the Central Electricity Board, and not directly of government itself.

Whilst the 1911 Unemployment Insurance Act had established a system of compulsory insurance against unemployment, only a small number of trades had been included in this scheme, amounting to 2.5m workers. The insurance scheme was extended to other industries during the war, so by 1920 about 12m workers were insured. The benefit rate was doubled; women were given less. In 1919 Lloyd George added onto the scheme an 'out of work' element that provided benefits without contributions; in other words, it was a 'dole'; however, there was a requirement that the claimant should be 'genuinely seeking work'.

However, by including a non-contributory element, the scheme ran into heavy debt, and by 1921 it had a deficit of £15m.

During the 1920s it became apparent that the unemployment problem was 'permanent'. Thus, two solutions to the problem were mooted. Firstly, there was the conservative view that it would be solved by revival of the export industries, by the devices of rationalization and/or wage-reductions. However, secondly, there was the view that the export industries could not be revived, and new industries had to be developed. This view was associated with Keynes, who was also opposed to the restoration of the gold standard at the pre-war parity.

The 'treasury view' ignored the existence of mass unemployment, and maintained that all capital and labour were being fully utilized, and hence that any increase in investment would result in inflation. Every leading economist, not just Keynes, rejected this view. For example, Pigou rejected it in a detailed analysis in 1927, as did Henry Clay in 1929 and Hawtrey in 1928, who wrote “If the Government comes forward with an attractive gilt-edged loan, it may raise money, not merely by taking the place of other possible capital issues, but by securing money that would have otherwise remained in idle balances”. [R. G. Hawtrey, Trade and Credit, 1927, p. 110.]

2: Socialists and Unemployment

It was part of socialist belief at this time that unemployment was a manifestation of the evils of capitalism, that unemployment was an expression of permanent working-class poverty and that no cure for poverty existed within the capitalist framework. Socialists believed that capitalists exploited the working class, and that the functions of capital could be taken over by the State.

Socialists divided into 'revolutionary' or 'democratic' socialists, with the revolutionary end of the spectrum looking to Marx for inspiration. This branch took the view that capitalists would resist the evolution of socialism, and hence socialism could only be introduced by revolution. However, Marxism had little appeal for the majority of English socialists, who associated the idea of revolution with continental excesses. Furthermore, in England the Church did not ally itself with capitalism or the power of the elites to the extent that it did on the content, so anti-clericalism was not added to socialist sentiment. English socialists tended to believe that the transition to socialism could be achieved by argument and persuasion.

However, this predisposition required the development of a theory of transition from capitalism to socialism — an absolute requirement in the eventuality of a socialist party coming to power but without a full mandate to implement socialism. Generally, English socialists ducked this problem, though solutions were offered by John Hobson and Beatrice Webb.

Hobson was originally a Liberal economist who departed from classical orthodoxy in 1887 with his book Physiology of Industry, co-written with A. F. Mummery, in which he analysed income maldistribution in a way that has many parallels with Marx's notion of 'surplus value'. He claimed that the bourgeosie have a superior bargaining position that enables them to produce a surplus that disrupts the balance in the distribution of income. They save this surplus, thus also disrupting the correct saving to spending ratio. The savings are invested abnormally to produce excess capacity, and this in turn produces surplus goods, which in turn leads to a depression. This is effectively an analysis of the trade-cycle, and his proposed remedies were directed towards solving the problems of the trade-cycle. He proposed taxation of the 'surplus' with the proceeds redistributed to the workers. By this means, progressive taxation could be used during a period of prosperity, but this did not provide an intellectual justification for its use during a depression. This illustrates the problem that socialist economic theory was not adapted to coping with a depression.

Beatrice and Sidney Webb were intellectuals that had a considerable influence on the thinking of the Labour Party. Beatrice Webb came to believe around 1905 that only collective ownership of the means of production could solve the problem of 'social and industrial disorganisation' that was inherent in capitalism. In effect she advocated a counter-cycle solution to the trade cycle — that is, when unemployment rose, government sponsored public works should increase. She advocated a broad notion of a balanced budget, namely that the budget should be balanced over a ten-year cycle, but not necessarily in any one year. It was possible to raise loans in a depression according to this theory, so in this respect Beatrice Webb was drawing on the theory of 'idle balances'.

The Labour Party's Unemployed Bill of 1907 was based on the argument that every man had the right to work, and that if work was not available then it was the responsibility of society to maintain the unemployed. The bill sought to replace the Poor Law by local councils charged with responsibility for maintaining the unemployed in their area. The finance for the proposals was to come mainly from local rates, but a parliamentary grant for national schemes was also to be made available.

In the context of the post-war experience the ideas of taxation of surplus (Hobson) and counter-cycle policy (Webb) were inappropriate since there was no surplus and no cycle. There was no mandate either for nationalisation. The movement had few new ideas, and such new ideas as there were belonged to fringes of the party, the Independent Labour Party, dominated by Clydesiders, and a group centred around Oswald Mosley. The Labour Party in fact followed the dominant analysis of the experience of high unemployment in its 1921 pamphlet Unemployment, the Peace and the Indemnity by attributing unemployment to the dislocation of the European economy following the war. They proposed cancelling war-debts, granting long-term credits to Russia and international control of raw materials. However, these ideas committed the party to supporting the 'conservative' analysis of the problem — namely in terms of the decline of the major export industries. This is confirmed by the party's pamphlet, Work for the Workless (1924) in which it is stated that “So far as these eight months in office are concerned, it is on its International policy, that factor which lies at the very root of the present Unemployment problem, that it [the Labour Government] confidently asks for the continued support of the nation.” Whilst at this time being in principle in favour of a public works programme, the Labour Government found it difficult to start one. The Labour Party was reluctant to transfer responsibility for unemployment from local authorities to central Government. They flirted with the idea of a capital levy to pay off the war debt around 1921 but nothing came of it. They expressed no interest in the progressive economics of Keynes or any other economist.

Labour party economic thinking was heavily influenced by Snowden, whose main priority was curbing inflation. He wrote in 1920, “Government borrowing in this country has reached a point which threatens national bankruptcy”. [Snowden, Wages and Prices,pp112-13.] He was a firm believer that any public works scheme should be appraised on strict grounds of economic return. He was against the notion of expanding credit. He wrote to the General Council of the TUC in 1927 that “An expansion of the currency issue must respond to a genuine demand arising out of real purchasing power and not be used to create demand.” Labour's other expert was Graham, who agreed with Snowden. Thus, Labour was in agreement with the Conservative analysis of the causes of mass unemployment.

Labour and Conservatives were divided over the issue of maintenance of the unemployed; Conservatives and Liberals did not accept the extension of the insurance scheme to the provision of a 'dole'; Labour wanted the State to accept full responsibility for the unemployed. Labour policy in this respect was dictated by the Trades Unions. The Party pamphlet, Unemployment: A Labour Policy (1921) maintained the principle of the right to work. It advocated extending the insurance scheme to incorporate all workers, that is, including agricultural workers, railwaymen and domestic servants. However, the minority Labour government of 1924, whilst it did raise benefits marginally was not prepared to extend the insurance scheme; furthermore, they applied the 'not genuinely seeking work clause' to all claimants for benefit, not just those who were originally on the dole. This increased the problems of the unemployed and resulted in demands for the clause to be withdrawn.

Thus, the Labour leadership was intellectually bankrupt.

Some new ideas came from the Independent Labour Party. In 1926 one of their group, Clifford Allen, published The Living Wage (1926) which advocated the increase of purchasing power as a remedy to depression, by introducing family allowances to be financed by taxation. It also advocated the introduction of a statutory minimum wage, and nationalisation of the Bank of England. MacDonald condemned The Living Wage as a collection of 'flashy futilities'.

Another source of new ideas was Mosley's Revolution by Reason (1925), written in collaboration with John Strachey and Allen Young, which advocated nationalisation of the banks with the resulting nationalised banks providing an expansion of credit to industry. There would be an Economic Council to direct economic planning. He was prepared to accept Britain coming off the gold standard.

3: Labour Takes Office

The 1929 Election

The chief issue of the 1929 election was unemployment. The debate was focused on Lloyd George's claim, made on 1st March 1929, to be able to reduce unemployment within one year to a normal level. The Liberal Party offered an “impressive” collection of policies, “intellectually the most distinguished that have ever been placed before a British electorate” (p.67). However, the electorate did not interpret it this way. They saw the election in class terms as a conflict between the Labour Party and the Conservatives, and both these parties sought to preserve this illusion, and both attacked the Liberals for irrelevancy.

The Liberal Polices were initiated in 1925 by the Liberal Industrial Inquiry. In February 1928 they published their first 'Yellow Book', Britain's Industrial Future, which proposed government planning. A Liberal committee headed by Lloyd George, Lord Lothian and Seebolm Rowntree developed these ideas and published We Can Conquer Unemployment in March 1929. In this the case for state intervention was made: “At the moment, individual enterprise alone cannot restore the situation within a time for which we can wait. The state must therefore lend its aid and, by a deliberate policy of national development, help to set going at full speed the great machinery of industry.” There was a substantial plan for extensive road building, trunk roads at the cost of £42m with a view to employing 100,000 men. Further plans would bring the road construction programme to a total of £145m and employ 350,000 men for 2 years. There would also be stimulus to housing — a plan to build 200,000 low-rent houses per annum, employing 60,000 men. Telephone installation and the standardisation of electricity, drainage, and the development of the London passenger transport system were also proposed. The finance was to come from loans. The concept of the increase of purchasing power was also described: “If instead of an allowance of one pound or twenty-five shillings a week a man brings home three pounds a week from his job, you double and treble his purchasing power.” Keynes and Hubert Henderson [Hubert Henderson, Liberal Economist, 1890-1952] supported Lloyd George's argument with their pamphlet, Can Lloyd George Do It? arguing that “the forces of prosperity, like those of trade depression, work with cumulative effect.” The Liberals used the concept of idle balances and claimed that the ratio of 'time deposits' to 'demand deposits' had increased from 28.6% to 44.7% between 1919 and 1928. The time deposits represented 'idle balances'. The Liberals undertook also to demonstrate that the works undertaken would repay the cost of the loan. There would be a saving of £30m a year on the unemployment fund, and receipts from tax would increase by £8m to £10m a year. There would also be an increase in “receipts from motor vehicle taxation year by year.”[ We Can Conquer Unemployment, p.60.]

The Economist came out in support of Lloyd George on 18th May, 1929, and one hundred businessmen and industrialists also produced a manifesto supporting We Can Conquer Unemployment. Keynes was accused of being inconsistent, replied, “The difference between me and some other people is that I oppose Lloyd George when he is wrong and support him when he is right.”

Baldwin, as Conservative Prime Minister, required civil servants and treasury officials to make a reply, which appeared in May 1929 entitled Memoranda on Certain Proposals Relating to Unemployment. This document argued that the road programme suggested by Lloyd George would require “dictatorship”. There were equally dampening comments from the Ministry of Health, Ministry of Labour and the Post Office. The Treasury maintained that there were no 'idle balances', and that money on time deposit was not idle. Keynes was scathing about the arguments put forward in the White Paper. Baldwin in his election addresses emphasised the Conservative government's achievements, citing safeguarding and the De-Rating Act of 1929 as notable government initiatives protecting employment.

The Labour party response is perhaps best summed up by Lloyd George's attack when addressing a rally at the Free Trade Hall in Manchester: “The Labour Party could not make up its mind whether to treat the Liberal plan as a freak or to claim its paternity. (Laughter). Mr. Thomas said it was an absurd abortion, but Mr. Henderson said it was the child of the Labour Party. (Laughter). Mr. MacDonald, as usual, tried to have it both ways. He said — often in the same speech — 'This is a stunted thing.' Then looking at it fondly, he said, 'This is my child.' (Laughter.)” [Reported in The Times, 13th April 1929.]

The Labour Party produced its reply in the form of a pamphlet, How to Conquer Unemployment: Labour's Reply to Lloyd George which was written by G.D.H Cole. This claimed that none of the Liberal Party proposals would reconstruct industry on “a sound and permanent basis”. It criticise the road building programme and accused the Liberals of “madcap finance”.

However, the election held on 30th May 1929 was disappointing for the Liberals. Labour won 287 seats, the Conservatives 260 and the Liberals 59. Although the Conservatives won most votes, the electorate had clearly rejected their government, and Baldwin decided to resign immediately rather than face a vote of no-confidence.

The New Government

Ramsay MacDonald
The Character of Ramsay MacDonald: one interpretation of him sees him as a fraud, the other sees him as a man of integrity who was undermined by his preference for aristocratic connections. He had a 'star' quality rather like an actor. He adopted a pacifist stance during the First World War, at which time he was maintained by the Independent Labour Party, to which he owed his rise to leadership of the Party in 1922. He had charisma and a “baritone voice of rare beauty” [Hamilton, J. Ramsay MacDonald, 1929, p.102] to boot. Whilst MacDonald was a socialist, he was aware that Utopia was not to be easily grasped, and hence also had a deep respect for conservativism. In his writings he describes socialism as an evolutionary process. In other words, he was by no means a revolutionary socialist. He succeeded during the 1920s in keeping the left wing of the Labour Party within the movement, thus preventing the emergence of a party of revolutionary socialism. He was shy and reserved, and acknowledged that the death of his wife in 1911 destroyed the extrovert in him. He was inclined to be secretive and aloof and was not popular among the inner elite of the Labour Party. Some accused him of vanity. He was an illegitimate child. He liked to socialise with landed aristocrats, including the Marquis and Marchioness of Londonderry and the Duke and Duchess of Sutherland. Actually, this was an expression of his interest in things not connected with politics; he was also a patron of the arts. He did not like delegating responsibility, which is probably why he combined the offices of Prime Minister and Foreign Secretary during the 1924 Labour administration.

Arthur Henderson
Arthur Henderson became foreign secretary in 1929. He was a Scotsman, though his family moved to Newcastle upon Tyne when he was ten. He had considerable skill in forming political relationships and was intimate with Party affairs. He had a gradualist theory of socialism, and never wrote anything.

Philip Snowden
Philip Snowden was appointed Chancellor of the Exchequer. Snowden's family was working-class Yorkshire. In 1891 he had a cycling accident that crippled him for life owing to inflammation of the spinal cord. He was more influenced by the Liberal tradition than by the socialist, and admired Gladstone and also detested alcohol and gambling. He was an adherent of free trade. His wife, Ethel, was a social climber. He was good with figures but as an economist he was lacking in inspiration. He believed in economy, free trade and gold and was an advocate of deflation.

'Jimmy' Thomas (J.H.)
J. H. Thomas was appointed Lord Privy Seal with responsibility for unemployment. Lansbury, Mosley and Johnston were appointed to assist him in this task. “Totally devoid of constructive ideas, intimate with the City and big business, the boon companion of half the House of Commons, the jingoistic upholder of imperial and national unity, his appointment gladdened the conservatives and dismayed the radicals.” [Robert Skidlelsky Politicians and the Slump, p.87.]

George Lansbury
George Lansbury was already over seventy. He was appointed First Commissioner of Works. Oswald Mosley was Chancellor of the Duchy of Lancaster, just thirty-two years old. Thomas Johnston was Under-Secretary of State for Scotland, one of the Clydeside members of the Independent Labour Party.

Others
Herbert Morrison became Minister of Transport. Miss Margaret Bondfield became Minister for Labour, described by Skidelsky as “a humourless and somewhat priggish person, with long black skirts.” Her job as Minister for Labour would be to manage unemployment insurance. J.R. Clynes became Home Secretary. Willie Graham became President of the Board of Trade. Arthur Greenwood became Minister for Health. Sidney Webb, made Lord Passfield, was appointed the Colonial and Dominions Secretary.

Conclusion

In conclusion, it was “a government likely to acquit itself reasonably well in normal times, but fail before the sternest challenge.”

Additionally, the origin of the Labour Party as an alliance between trade unionists and socialists was a hindrance to it as a party of government, since the trade union element predominated. Labour Party members at this time tended to be rather old, which is another reason for its lack of vigour.

The Independent Labour Party comprised 142 M.P.s in theory, but in practice was confined to about a dozen members who were lead by John Wheatley and James Maxton. Wheatley had been successful in the 1924 Labour government as Minister of Health, but was excluded from the government of 1929 probably on account of a lawsuit in 1927 which marred his reputation.

4: The Choice

Things seemed to be going well in 1929; exports increased during the first five months and unemployment was failing. The speculative boom on the New York Stock Exchange could be a problem, but the Federal Reserve Bank was expected to bring it to an end. It seemed that the economy did not require interference. Leading industrialists also advised the government to leave the economy alone. The City also wanted the minimum of interference, since this was regarded as good for maintaining confidence in the pound. Additionally, “Snowden's personal ascendancy in matters of finance was also of paramount importance. To him socialism was a luxury that had to be financed out of revenue — like roads and other public utilities. If the revenue were not available there could be no socialism.”

Thus, on the other hand, there were arguments in favour of intervention as well. The free market of classical economics no longer existed, and this meant that the objections to government interference also no longer existed. Thus, the Labour Government did have a choice at this time. They decided to follow what was essentially a Conservative policy. There was, however, a greater emphasis on 'internationalism' — that is, on efforts to secure tariff reductions and disarmament. Additionally, there was some increase in the public works programme. Nonetheless, in conclusion, there was no coherent policy at all.

The King's Speech was delivered on 3rd July 1929 promised a general review of everything, whilst the Government would in the meantime maintain benefits at a decent level. J. H. Thomas's speech promised to “look at schemes ... that will not only give work to the unemployed, but will also stimulate trade at home and abroad and add, in the end, to the economic equipment of the country.” So the intention of the Government becoming more active in economic affairs was announced; however, it was clear that the Government would not initiate any work directly but would rather aim to facilitate local authorities in theirs. There would be up to £37.5m spent on a five-year trunk road programme and a further loan of £25m for public utilities. Thomas told the House in July that the only solution to unemployment lay in increasing trade.

Regarding benefits the Government again promised a “general survey”. Miss Bondfield as Minister for Labour requested a “stop-gap” measure to increase the funding of the insurance scheme in July 1929, when the Treasury's contribution to the fund was raised by £3.5m bringing its income from £43m to £46.5m.

MacDonald's speech on the debate on the King's Speech effectively told the House of Commons that his government was going to think about unemployment. He made the following statement: “I wonder how far it is possible, without in any way abandoning any of our party positions, without in any way surrendering any item of our party principles, to consider ourselves more as a Council of State and less as arrayed regiments facing each other in battle ... so that by putting our ideas into a common pool we can bring out from that common pool legislation and administration that will be of substantial benefit for the nation as a whole.”

It is generally agreed that he was not at this time plotting the formation of a National Government, and that he was sincere in his offer to the other parties to develop concerted action over the issue of unemployment. However, his words betray yet again the lack of policy on behalf of the Government and are certainly weak. In fact, the Liberals and Labour parties together had a majority, so there was a majority in the House in favour of progressive policies, so there was no need to offer this 'olive branch' to the Conservatives. It was the Labour Party that rejected alliance with the Liberals, not the Liberals with Labour. Lloyd George stated at the National Liberal Club on 13th June that “If the [government] tackle the [unemployment] problem promptly, boldly, energetically and wisely they will have no more hearty and steady supporters than the Liberal party.” [From the Daily Telegraph, 14th June, 1929..]

The government did not take this offer up because (a) Snowden had already branded Liberal policies as 'madcap finance'; (b) they were not prepared to concede electoral reform as the price for Liberal support; (c) the Labour Party did not personally trust Lloyd George; (d) it was not guaranteed that Lloyd George could command the loyalty of all the Liberal Party which was still split; (e) from a tactical point of view, the Liberals could not afford an early election, so the Government could count on their support in the House anyway.

This, however, confirms that the reasons why the Labour Party did not institute a radical programme to tackle unemployment were that they had no policy and were too nervous to implement one, not because they lacked a majority in the House. Churchill's reply to Thomas's speech reveals just how close to the Conservative policy the Labour policy was — Churchill praised Thomas for adopting sensible, attractive and moderate proposals that were hardly distinguishable from Conservative policy! Lloyd George was not so complimentary. The majority of the Labour Party accepted the speech as the first instalment of something better, and were prepared to wait. Criticism did come from the Independent Labour Party, and particularly from John Wheatley,

This is the day of the Government's power. Today the Government could do anything. Today the Government are not showing the courage that their supporters on these benches expect. If they displayed that courage and went on with their own policy, the parties opposite would not dare to wound them, however willing they might be to strike; but, after the government have disappointed their friends, by twelve months of this halting, half-way legislation, as one of my friends described it, and have been discredited in the country, then, twelve months from now, there will be no party in this House poor enough to do them honour.

In this speech Wheatley was specifically objecting to the Government's refusal not to restore the housing subsidy of 1924 that Neville Chamberlain had axed in 1927. However, Wheatley's words shall prove to be prophetic.

5: Failure of Imagination

MacDonald concentrated on foreign policy for the first summer. He discussed naval disarmament with General Dawes, addressed the League of Nations at Geneva in early September, and announced a visit to America on 12th September in order to discuss naval disarmament with President Hoover, leaving for America on 28th September.

In the meantime, Snowden attended a conference at The Hague on reparations, in which he argued for a bigger share of the payments to Britain. His manners upset Anglo-French relations, but he was applauded as a hero by the British press.

Regarding unemployment, there was very little of the 'thinking' promised in the King's Speech. The Retirement Pensions Committee under Thomas did meet, but that was all. Criticisms of the inaction from the left of the Labour Party increased. Maxton said, “Has any human being benefited by the fact that there has been a Labour Government in office in the last two months? I can think of nobody except two murderers who were reprieved.” [Reported in the Morning Post, 5th August, 1929.]

The T.U.C. conference at Belfast expressed enthusiastic support for Snowden's stand at The Hague and there was little mention of unemployment.

The Unemployment Committee comprised Thomas, Lansbury, Mosley and Johnson, but it is typical of the vagueness of the terms of reference of this committee that no one, not even Johnson, knew whether Johnson should attend it. Thomas in fact had no executive authority, so even if the committee did produce recommendations, he would not have been able to implement them. In addition to this committee there was also an inter-departmental committee on unemployment which comprised the heads of various civil service departments meeting under his chairmanship; the objective was to improve communication. In practice Thomas had a number of informal meetings with whomever he liked, and nothing was done. His junior ministers on the Unemployment Committee began to become fractious. Beatrice Webb reports in her diaries that Lord Arnold, the Paymaster-General “is in a great state of discontent with J. H. Thomas's incapacity as organizer of Employment. Oswald Mosley and Lansbury, his lieutenants, report that Thomas does not see them; but he is in the hands of that arch reactionary, Horace Wilson ... whom he calls 'Orace' and obeys implicitly.” [B. Webb Diaries, 28th July 1929. Sir Horace Wilson, a civil servant, was chief of Thomas's secretariat.]

Thomas decided to visit Canada over the summer, which the junior ministers regarded as a joy ride. Thomas took no interest in the work of the Retirement Pensions Committee and hardly ever saw advisory ministers. He frequently did not read memoranda or reply to them.

The foreign secretary, Arthur Henderson, told Beatrice Webb that “he is most concerned about Thomas, who is completely rattled and in such a state of panic, that he is bordering on lunacy... The P.M. fears suicidal mania.” [Beatrice Webb, Diaries, 2nd December, 1929.]

The Labour Party election pamphlet, Women and the General Election, suggested that unemployment could be reduced by “raising the school leaving age ... providing maintenance allowances and by giving more amply old-age pensions to men and women of sixty-five and if necessary sixty.” [Women and the General Election (Election pamphlet), p. 51..]

This provided the motivation for the establishment of a sub-committee of the Retirement Pensions Committee on 29th June to look at retirement pensions for industrial workers and the raising of the school leaving age. However, a Cabinet decision of 17th July resulted in removing the consideration of the school leaving age from the brief. During July Bevin became a strong advocate of increasing old age pensions, but the Committee was told by C.R.V. Coutts, an actuary that they commissioned to advise them, that raising the pension from 10s to 30s a week would cost the Exchequer a prohibitive £60m a year. Furthermore, Coutts advised them that the retirement of workers would not create demand for labour where the younger workers were available. So it was concluded that any scheme to alter pensions or the retirement age would be too expensive. Nonetheless, the Ministers did want retirement pensions, whereas the civil servants were reluctant to recommend them. In the end the Committee decided to present two reports — one drawn up by the civil servants that would give details of four alternative schemes, and another presented by the Ministers that recommended one of them. The reports were ready by the end of October. The scheme recommended (Scheme 'C') by the ministers advocated a pension of £1 a week and ten shillings for the wife for all workers covered by the National Insurance scheme from the age of sixty onwards. It was estimated that 390,000 of the 677,000 eligible would accept the offer at a cost of £21.6m to the Exchequer; however, there would be savings from the unemployment insurance fund, so the net cost to the Exchequer would be about £12.5m. It was estimated that the scheme would produce between 220,000 and 310,000 vacancies. The scheme was recommended as a cheap way of reducing the unemployment figures, since it was a quarter of the cost of public works.

Of course, this is really only tinkering with unemployment, since it produces a reduction in the unemployed registered but no new jobs. Furthermore, those not covered by the insurance scheme, agricultural workers, domestic servants, small shopkeepers, the self-employed, were left out, so the proposal was open to the charge of unfairness. Additionally, there was no provision to bring into line the older class of pensioner, who under the 1925 Act received only 10 shillings. They would continue to receive 10 shillings, whereas the new pensioner would get £1!

Thomas did not support the proposals and the Cabinet rejected them in December.

Thomas's trip to Canada was ostensibly to discuss emigration, but this purpose could easily have been handled by a junior minister. Thomas also said before his departure that he hoped “to improve trade relations between Great Britain and Canada and to investigate the subject of emigration.” The idea of improving trade relations was an error of judgement in view of the fact that Britain did only 5% of its trade at that time with all the Dominions as a whole. Regarding emigration Thomas succeeded in arranging for 3,000 single men to emigrate to Canada, but that was all. This was the result of his discussions in Quebec, and by the time he left for Montreal he had abandoned further discussion of emigration. He had plenty of dinners in Toronto and in early September he headed further west. In Winnipeg, Elmer Davis, vice-president of the Canadian Manufacturers Association, told him that “You have got to supply the goods wanted in the form wanted ... the goods sent out here are not what we require.” [Toronto Globe, 2nd September, 1929.] On returning to Britain Thomas was invited to become an Honorary Associate Member of the National Union of Commercial Travellers. He bluffed about the value of his visit to the British press say that “Definite negotiations on prices, both for steel and coal” had taken place, but he was unable to supply the representatives of the coal, steel and motor-car industries with any details, and when Parliament reassembled in November, the only concrete result of his visit that he was able to announce was “a contract for five 7,000 ton ships to deal with the coal next year alone is being negotiated”. In other words, the whole visit was an abject waste of time.

As already noted, the Government refused to interfere with the principle that all public works had to be initiated by local authorities. In order to facilitate grants to local authorities for public works, the Unemployment Grants Committee was revitalised when Labour took office. In addition the Ministry of Transport had responsibility for administering grants to local authorities. The Government hoped that the scale of public works would increase, but the rate of subsidy was scarcely increased (from 35% of total cost in June 1929 to 38% by July 1930) and there was hardly any expansion of public works as a result. The Government did make it easier for local authorities to obtain the grants by relaxing certain stipulations on how 'non-transfer' grants could be obtained. [Transfer grants are those that involve importing labour from other areas. .] The Government had promised a £37.5m road building programme over five years, but by 30th November only £25m of this had been sanctioned, and in fact only 4,000 men were employed on road building. Mosley tried to galvanise local authorities into making more requests, but without success, and Lansbury found that the London authorities were very reluctant to import labour from depressed areas. It would only be possible to overcome these obstacles if central government took over the Public Works programme. Various objections were made to such a proposal, and they were not welcomed by Morrison who was Minister for Transport.

Labour continued to believe that the solution to unemployment was dependent on a revival of the export industries. This ran up against the obvious problem that whilst this could only happen if there was a rationalisation of these industries, in the short-run rationalisation would lead to more unemployment not less. During the 1920s the other alternative of reducing wage costs had been tried under successive Conservative administrations. The miners were forced to accept an increase in the working day as a result of their defeat following the General Strike of 1926. However, on coming to office Labour had pledged to restore the working day to seven hours. The earlier Samuel Report had recommended closure of inefficient pits and reorganisation of the industry and its transport arrangements. There was also the possibility of giving legal confirmation of the quota systems that coal mine owners were adopting. No policy could be adopted without facing the likelihood of industrial conflict. The mine owners would resist compulsory closures; the miners would resist redundancies.

Nonetheless, a Coal Bill was promised and a Cabinet Committee under Graham, President of the Board of Trade, was established to deal with it. On the Committee were Herbert Smith and A.J. Cook for the miners (the Miners Federation), and Evan Williams, Adam Nimmo and W.A. Lee for the mine owners (the Mining Association). However, these representatives refused to meet together, and there was almost no progress whatsoever over the summer and autumn. By October there was still no agreement. On 29th October, the Government did circulate a draft bill proposing to reduce hours to 7.5 from 6th April, to introduce national and district quota schemes and to provide a national levy to subsidize exports. The Bill did not make any proposals for rationalisation or amalgamations, which it would need in order to obtain Liberal support.

The Labour government was also committed to abolishing the 'not genuinely seeking work' clause applied to claimants of benefits — a clause that they had themselves introduced in 1925. From 1928 onwards any applicant had to demonstrate that he was genuinely seeking work by showing on his claim form the “steps he had taken to find work”. Miss Bondfield appointed the Morris Committee to examine the legal position, and in the interim sought to make application of the condition easier. In the committee Arthur Hayday, who was M.P. for Nottingham West (and later to be president of the T.U.C.) rejected the 'not genuinely seeking work' clause on behalf of the unions, proposing the 'Hayday' formula instead, that a claimant was “definitely offered suitable employment and had refused it.” The Morris Committee was sympathetic to the Union case, but did not wish to adopt the Hayday formula as it stood as it was too lax in their view. Their alternative formula continued to receive opposition from the Unions.

6: First Faltering Steps

During the summer of 1929, and with the benefit of hindsight, we can see that there were some indications of the impending financial disaster of the Wall Street Crash. There was the New York stock exchange boom; France engineered a run on the mark in order to bring pressure on the Germans at the reparations conference at the Hague; during July and October there were large withdrawals by the French from London causing a threat to sterling; gold moved to New York and Paris; London's exchange position was weak; there was a financial scandal involving insider dealing in London (the Hatry scandal); the British base rate was raised to 6.5%.

The New York stock market crashed on 23rd October, 1929. In Britain, in response, Snowden set up the Macmillan Committee on Finance and Industry to inquiry into financial practices. Parliament reassembled in November. Thomas described the fruits of his trip to Canada, which were in fact paltry, and he also announced a total of £42m to be provided on unemployment schemes. However, these would be spread out over five years, and would employ no more than 30,000 men per annum. His scheme was attacked by both Liberals and Conservatives, and most bitterly by members of the Independent Labour Party.

Miss Bondfield presented the Unemployment Insurance (No. 2) Bill. This bill was opposed by the Trade Union Congress who wanted basic benefits to be raised from 17s to 20s and increases in the allowances of dependents as well. They also wanted agricultural workers and domestic servants included in the scheme, and the repeal of the “not genuinely seeking work” clause. The General Secretary of the T.U.C. asked to be allowed to assist in drafting the Bill, which Miss Bondfield refused, but she subsequently agreed to the formation of a joint consultative committee to discuss the progress of the Bill through the House of Commons. The bill was published on 15th November 1929. Benefits in certain categories were increased, but Snowden refused to produce more than £2m in extra funding. The Bill replaced the “not genuinely seeking work clause” with a formula proposed by the Morris Committee that looked rather similar. The Government estimated the change would cost the Treasury £3.25m. The Government wanted to retain the power to tighten administration of benefits if they wished, but the Trade Unions were opposed to this. The total additional charge of £5.25m was to come from the unemployment fund, which was in turn relieved to the obligation to pay benefit to those who no longer qualified, that is, no longer contributed an income to it. The payment of 'transitional' benefit, as it was called, was to come from the Exchequer, costing the Exchequer £8.5m in the year 1930-31. The Treasury was already paying £12m to the unemployment fund, so this brought the charge on the Treasury to a total of £24.5m.

However, the Bill did not satisfy backbench members of the Independent Labour Party, nor did the Trade Unions accept it, so there was the threat of a backbench revolt over it. Thirteen Labour MPs voted against it at the second reading on 21st November 1929. Miss Bondfield's defence was, “I am not ashamed of having done too much. I only regret that, called upon to administer a bankrupt estate, I have only been able to do so little.”

The Conservatives attacked the bill but made little constructive criticism, except to say that it reduced labour mobility by making it more acceptable for workers to remain in depressed regions. The Liberals welcomed the Bill, but argued that the money would be better spent on getting people into work. Most opposition came from within the Labour movement itself, led by Maxton, arguing for abolition of the “not genuinely seeking work” clause and implementation of higher benefits. The parliamentary trade union group responded by writing directly to the Prime Minister in a letter of 3rd December, in a letter signed by Will Thorne pleading that the Government accept the Hayday formula in place of Clause 4 (The “Not genuinely seeking work” clause) and reducing the waiting period for benefits to apply from 6 to 3 days. The letter must have had some effect, since Miss Bondfield announced that the Hayday formula would be accepted on 5th December, 1929. However, the group led by Maxton was still not satisfied, and opposition to the Bill continued from within the Labour Party, and not just confined to the Maxtonite group. The Government actuary reported on 10th December that 150,000 more claimants would come onto the register as a result of the abolition of clause 4. This embarrassed the Government.

The Coal Mines Bill was published on 12th December 1929. It proposed to reduce miners hours from 8 to 7.5 per day, to introduce a National Industrial Board to protect wages, and national and district levies. The Conservatives opposed the Bill on the grounds that the miner owners rejected the reduction in hours. There were no measures in the Bill for the rationalisation of the industry. The Liberals sought to harass the Government into making a concession in the direction of rationalisation of the industry, and Lloyd George employed “clever tactics” to goad the Government into making concessions. However, the Liberal tactics of partly voting for, partly abstaining and partly voting against the Bill on the second reading simply revived the Government distrust of Lloyd George, making fundamental compromise between the two parties more difficult to obtain and giving the Government an excuse for inaction. In November, H.B. Butler, the British representative of the International Labour Organisation, sent a memo that was passed to Ramsay MacDonald proposing the establishment of effective machinery for assembling all the information appertaining to unemployment. MacDonald was attracted to these ideas, and on 22nd January 1930 he announced the creation of an Economic Advisory Council in the House of Commons. The fifteen full members included Bevin, Citrine, Cole, Keynes, Stamp and Tawney. However, the status of this advisory council was not clearly defined, and it was likely to become a talking shop dealing with issues of marginal importance.

Nonetheless, the Labour Government appeared to be popular with the electorate and they experienced a swing towards them averaging 1.4% in the four by-elections that took place between August and December 1929. The country approved of MacDonald's performance in his visit to America; Snowden was popular for his tough stand at the Hague conference; Arthur Henderson as Foreign Secretary was also respected for dismissing Lord Lloyd, the High Commissioner of Egypt over the issue of interference in Egypt's domestic affairs. MacDonald and Snowden were granted the freedom of the City of London at the Mansion House dinner on 20th December 1929. Whilst Thomas's failure to tackle unemployment was a black spot in the Government's record, the Government still appeared to be riding high.

7: The Impact of the Slump

In April 1930 MacDonald used the term “economic blizzard” to describe the wave of world depression that followed from December 1929 onwards. The American recession of 1929 started the economic downturn whose underlying causes were (a) the malfunctioning of the international gold standard, (b) the failure of Britain, France and the USA to cooperate over the international debt problem; (c) the world-wide depression in agricultural prices; (d) the consequent collapse of world commodity prices in 1929 causing (e) a world wide collapse of exports.

The Government sought the advice of the new Economic Advisory Council. Classical economists were at a loss to explain the crisis, since by classical economic theory a depression should create conditions that lead to growth, for example, by lowering interest rates. What was not fully acknowledged was that the assumptions of the classical model, for example, that all countries pursue monetarist policies, did not apply and that an “abnormal” situation existed, that called for radically different solutions. Within the Advisory Committee there developed a split between the economists and the “practical” men such as Balfour, a Sheffield steelmaster, and Cadman, Chairman of the Anglo-Persian Oil Company, who were both opposed to State intervention. The economists were beginning to turn away from the Free Trade ideology, but the industrialists clung to the theory that only a revival of export trade could solve the problem. Snowden inclined towards the views of the businessmen. During the spring of 1930 the numbers on the unemployment register rose alarmingly from 1,204,00 in March 1929 to 1,700,000 in March 1930. Miss Bondfield was forced to increase the borrowing powers of the unemployment insurance fund from £50m in March 1930 to £60m in July. This decision to fund the insurance scheme out of borrowing rather than taxation effectively made end of the existence of the scheme as an insurance scheme inevitable, though this was not seen at the time. The Conservatives were able to attribute the increase in the claimant numbers to the removal of clause 4 (“not genuinely seeking work”) as a result of the Unemployed Insurance (No. 2) Act. The steady increase in the claimant numbers forced Miss Bondfield to request further increases in the borrowing powers of the fund. The Liberals wanted work schemes and the Conservatives wanted the fund placed on sound actuarial principles. The Government continued to reject the notion of a completely non-contributory scheme financed by taxation.

Despite the increasing unemployment figures Thomas could only offer vacuous statements of confidence, saying on 12th February that “I think the bottom has been reached,” and on 12th March that “things could only improve”. He stated on 1st March that “quick remedies are quack remedies” and on 18th March he advised people “not to make the mistake of looking for short cuts .. in the history of the world short cuts had proved disastrous.” The Government continued to take the view that only the revival of the export trade could improve the situation. In pursuance of this aim, the President of the Board of Trade, Willie Graham, proposed at Geneva on 9th September, 1929, that all nations should agree to a tariff truce for two years. A conference was convened for 17th February 1930, to which none of the Dominions sent representatives! The conference discussed the proposal for a tariff truce, but this was eventually ratified on 14th September, 1930 by only Britain, Belgium, Denmark, Finland, Latvia, Norway, Sweden and Switzerland. America introduced the Hawley-Smoot tariff in July.

Whilst domestically the government sought to get the export industries to rationalise, these industries were extremely unwilling to consider the proposal. Inquiries into the iron, steel and cotton industries were promised. Thomas sought to promote the process, announcing on 10th January that the City was able to give “financial advice to sound schemes of financial reconstruction”, and to this end he and the Governor of the Bank of England, Montagu Norman, created a Bankers' Industrial Development Company on 15th April 1930 for the purpose of rationalization. Since this body could only vet schemes it proved useless.

The commissions of inquiry into the cotton and the iron and steel industries reported — the cotton commission strongly stressing the need for rationalisation. Lansbury stated in his memoranda that the report on the iron and steel industry was “too damaging ... to publish in this country.” So the Government decided to do nothing!

Morrison as Minister for Transport strove to increase the funding of the road building programme, and proposed an increase in expenditure from £37.5m to £54m. Most of this expenditure was vetoed by Snowden at the Treasury, and in the end Morrison was only able to get an increase of £4m in the trunk road building programme, this sum actually to be deducted from the rest of the programme.

So, in conclusion, the government did very little in the first six months of the onset of the world depression.

Meanwhile, Snowden had to prepare for his April 1930 budget. The books were not balanced by £47m; in order to do so, he increased taxation — increasing income tax by 6d., increasing surtax and death duties, and increasing tax on beer. The Liberals voted with the Government, so the Budget was passed by the House of Commons.

The Government was becoming less popular with the electorate. Meanwhile, the Maxton lead faction of the Independent Labour Party took further steps towards final secession from it. A resolution passed at the annual conference of the Independent Labour Party on 20th April, 1930 effectively posed Labour M.P.s with a choice of either accepting Maxton's leadership or not; in fact, only eighteen accepted Maxton as leader. MacDonald resigned as a member of the I.L.P. on 17th February; Henderson also worked to isolate the I.L.P. rebels from the rest of the Party; thus a split between that faction of the I.L.P. lead by Maxton and the rest of the Party was becoming more and more certain.

The Government sought to create the myth that Liberal tactics were responsible for their lack of action; however, close analysis of Parliamentary votes shows that the Liberals strongly supported the Government at almost all times, and there are good explanations for any exceptions, which were mainly on the occasion of Liberal amendments to the Coal Bill. In all unemployment debates since the beginning of 1930 the Liberals in fact voted with the Government, and Lloyd George made a speech on 20th January asking the Government to cooperate and consult with the Liberals over unemployment policy.

There were divisions in the Conservative camp as well. On 18th February Lord Beaverbrook formed the “United Empire Party”. The Liberals were also wrangling over the issue of the Lloyd George fund, which Viscount Grey attacked in a speech on 14th January. The widow of Asquith, Lady Oxford, attacked Lloyd George's leadership in a letter to The Times, also in January.

8: Mosley Revolts

Mosley was young when he entered Parliament in 1918, he did not come from a family with political experience, he was an idealist who wanted to make Britain “a land fit for heroes” and he believed the State should intervene to ensure optimum economic efficiency. He appreciated that rationalisation would lead to further unemployment, and so supported the idea that only expansion of trade could solve Britain's problems, hence came to advocate empire free trade. According to Strachey Mosley joined the Labour Party with “a genuine, unsophisticated desire to do something for the unemployed.” He was frustrated by the lack of action of the Government.

Mosley began writing a “memorandum” on unemployment some time around December 1929. He sent a copy of this to Keynes during January, and Keynes and Henderson approved of it. On 23rd January he sent a copy to MacDonald. He also showed it to Lansbury and Johnston who supported it. It is probably not true that he did not intend to show Thomas a copy of the memorandum before sending it to MacDonald. A Cabinet meeting at the end of January agreed to establish a subcommittee of Snowden, Greenwood, Miss Bondfield and Shaw to consider the proposals in the memorandum. Thomas offered to resign on 19th February, but MacDonald persuaded him to stay on.

Mosley's proposals were for an all-out concerted Government attack on unemployment, to be lead by the Prime Minister. He advocated the establishment of an executive committee that would meet weekly, and also the creation of other standing committees to coordinate policy in specific areas. He rejected rationalisation of the export industries as a short-term solution to the unemployment problem, but did not reject rationalisation altogether. He wanted the Government to take a more active part in promoting it by setting up a development company in which it would have a controlling interest. He thought that exports would always be vulnerable to international competition and advocated a policy of development of the domestic economy.

He wanted a retirement pensions plan, which he claimed would reduce unemployment by 280,000 at a cost of £2.5m per annum; he also suggested a rise in the school-leaving age to 15 to reduce unemployment by 150,000 at a cost of £4.5m per annum.

He proposed a £100m road building programme over three years and a £100m programme of Unemployment Grants that together would reduce unemployment by a further 300,000 per annum. The total cost to the Exchequer has been estimated to be £19.5m per annum, but Snowden rejected the proposals, writing in his Autobiography that “the finances of these schemes would not stand a moment's consideration”. Keynes offered practical advice on how the £200m could be raised. Curtailment of foreign lending was a necessary practical measure.

The Cabinet sub-committee reported unfavourably and the proposals were rejected by the full Cabinet in May 1930. The proposals were debated in the House of Commons on 28th May, 1930 when Thomas said that “to talk about providing employment for 800,000 people at a cost of £10m a year is grotesque and absurd” and defended the policy of leaving rationalisation to the banks. The proposal to spend £100m on roads in three years would require a form of dictatorship to overrule the vested interests of local authorities.

On 6th May Labour lost an important by-election in Fulham when a Labour majority of 2,211 was converted to a Conservative majority of 240. The three advisory Ministers met with the Prime Minister, Thomas, Greenwood and Herbert Morrison on 20th May. Mosley resigned on 21st May, whilst Lansbury and Johnson stayed on. Mosley made a direct appeal to the Parliamentary Labour Party for support during that day, indicating a motion of censure on the Government's economic policy. Arthur Henderson proposed a 24 hour postponement of this vote, that was carried by eighty votes to sixty-nine. It seemed likely that Mosley's censure motion would be carried. Supporters of the Government organised the 'Thurtle amendment' that called for “intensified efforts on the lines of Labour Party policy to reduce unemployment”. At the meeting Mosley was outmanoeuvred by Henderson, who successfully had the Thurtle amendment withdrawn, and made an appeal to party loyalty. Mosley got the backing of only 29 MPs, though there were up to 45 abstentions.

On 5th June, Thomas was moved to Secretary of State for the Dominions. Unemployment policy would be directed henceforth by MacDonald, who subsequently announced an all-Party conference on unemployment.

9: The Prime Minister takes charge

In the June shuffle Thomas's unemployment committee was replaced by a panel of Ministers served by a new secretariat. The position of Lord Privy Seal was replaced by Vernon Hartshorn, who had a full-time responsibility for unemployment. The secretariat was headed by Sir John Anderson, the permanent under-secretary at the Home Office; Hubert Henderson of the Economic Advisory Council was also attached to this secretariat. Thus, ironically, Mosley's proposals for a new executive machinery to deal with unemployment were adopted after all.

The Government responded to pressure to increase the public works programme. By the end of June there were road-building schemes totalling £44.4m per annum in operation. Transport Minister, Morrison, wanted an additional funding for trunk roads, and on 5th June Snowden conceded this, bringing the trunk road programme to £21m, this owing to the backing of MacDonald for his proposals.

MacDonald invited representatives of local authorities to a conference in London, which opened on 17th June 1930 with MacDonald presiding. Local authorities replied to criticisms of being “slow and cumbrous” by arguing for 75% of the cost of loans rather than the current 50%. After damaging remarks, the Government decided to opt for private round table conferences, the result of which was the abolition of transfer conditions and a 63% rate of grant. Powers to allocate £0.5m at a 100% rate were also to be created. A Public Works Facilities Bill was introduced to the House of Commons on 7th July 1930 which would facilitate compulsory purchases by local authorities. All in all, the effect of these measures was small although they were heading in the right direction.

The Government's position in the House of Commons was weakening, and they needed to establish a rapprochement with one or both of the opposition parties. The Liberals would demand electoral reform as their price, and there remained distrust of Lloyd George. MacDonald sought simultaneous rapprochement with both Parties, writing to Lloyd George and Baldwin on 19th May 1930 inviting both to consult with the Government over the problem of agricultural unemployment. Lloyd George accepted the invitation, but Baldwin declined. The first two-party meeting was held at 10 Downing Street on 26th June.

10: The Parties and the Slump

MacDonald now turned his attention to the problem of unemployment. A committee of the economists sitting on the Economic Advisory Committee set up on 1st August “to review the present economic condition of Great Britain, to examine the causes which are responsible for it and to indicate the conditions of recovery.” Keynes was made chairman and he was assisted by Pigou, Hubert Henderson, Lionel Robbins and Sir Josiah Stamp. The two chief members of this group were Keynes and Pigou, both Fellows of King's College, Cambridge. Pigou was a devoted advocate of the neo-classical school. Hubert Henderson was the editor of The Nation and Athenaeum and a supporter of Keynes's progressive economics and the idea of expansion of credit. Lionel Robbins was Professor of Economics at the London School of Economics and a believer in non-government interference in the economy. Josiah Stamp was president of the London, Midland and Scottish Railway and a director of the Bank of England. Pigou in response to Keynes's request for an analysis of the economic maladjustment acknowledged that the classical assumptions that would restore the economy to full employment had broken down owing to rigidities in the labour market. The other committee members all in effect agreed that times were not normal and that in this context alternative economic measures could apply — and tariffs, stimulation of domestic demand, the use of inflation to reduce real wages were all considered. Whist Pigou blamed the problems on the rigidity of the labour market, Keynes attributed the problem to rigidities in interest rates, which he blamed on the operation of the gold standard. At this time a secretary to the committee, the statistician R. F. Kahn, had worked out the mathematical principle of the multiplier, and Keynes made full use of this concept in these committee meetings. Thus Keynes proposed a £200m loan to be raised from “idle” balances and the use of tariffs to product the home market.

The official report made three main recommendations: (a) that unemployment benefits should be reduced in some way; (b) that there should be a programme of investment in the domestic economy; (c) there should be a tariff providing revenue and also protection. Despite strong differences of opinion between the committee members they nonetheless all agreed on this radical programme.

Meanwhile, MacDonald sent Sir John Anderson a note asking him to examine the Mosley memorandum. Anderson has the remarkable distinction of being one of the most outstanding civil servants of his day, with the exception of very mediocre attainment in economics! However, he returned MacDonald a reply that the memorandum in effect made no sense. MacDonald asked the Treasury for its view on the feasibility of raising a large loan for home investment and was told that loans could only be raised if the works undertaken yielded a financial return. For the Ministry of Transport Sir Henry Maybury replied that no further expansion of the trunk road programme was feasible. Hartshorn, who had taken over as Lord Privy Seal from Thomas, also reported that no further expansion of the public works policy was possible, and advised that the Government concentrate on expanding agriculture instead.

The Liberals commissioned their own report on the economy from Sir Arthur Salter, Britain's representative on the economic commission of the League of Nations, which was handed to Lord Lothian at the end of June. The report highlighted rigidities in Britain's economic situation and advocated a more vigorous capitalism to deal with it rather than public works.

The two-party conference between Labour and Liberals produced nothing. The Liberals continued to press for an expansion of the road-building programme, to which the Ministry of Transport replied on 25th August indicating the legal and practical difficulties of such a scheme. In fact, the Liberals felt the pressure of these criticisms, and their pamphlet How to Tackle Unemployment, published in October 1930 gave a reduced significance to the public works programme. In this document there was continued emphasis on emergency works, but economies in expenditure were also recommended and a new policy of agricultural development was advanced.

Meanwhile the free trade orthodoxy of Britain was being questioned. It was beginning to be realised that the assumptions behind free trade as a policy such as free competition and absence of friction did not apply at this time. More and more people were at least willing to question the assumptions behind free trade; only the twenty-five Liberal MPs that followed Samuel were prepared to dogmatically defend it. Additionally, Snowden was a dogmatic free trader.

The shift in emphasis made it possible in October 1930 for the Conservatives to come out in favour of an “emergency tariff” on manufactured goods. The trade unions began to put pressure on the Labour party for tariffs; for example a report from the TUC on 26th June, 1930 called for the development of links with the British Commonwealth — in other words, for Empire Free Trade. However, the trade unions did not decide definitely for protectionism.

With the rise in the level of borrowing to finance the Insurance Fund, public opinion began to turn against benefits. Stories were circulated in abundance in the national press of abuses of the benefits system. The report of the Government's Actuary that the number of claimants would rise with the abolition of the “not genuinely seeking work” clause simply increased the pressure on the Government. The number of married women on the register rose from 86,000 in October 1929 to 240,000 in October 1930. A Royal Commission reported in June 1931 that the increase was in fact due to a 1927 Act passed by the Conservatives that repealed the “one in six” rule — that is, the rule that six contributions had to be paid for every one week's benefit.

Liberal and Conservatives began to press for reform of the insurance fund based on two separate schemes — one a properly balanced 'insurance' fund and the other a separate system of relief for those who had fallen out of benefit.

In July the Government established a sub-committee of the Economic Advisory Council to examine allegations of abuse of the benefits system. It was chaired by G.D.H. Cole. The committee examined cases of abuse and concluded that there should be a “complete re-casting of the unemployment insurance scheme”, and MacDonald started to have deep anxieties about abuses. The Labour Government was beginning to face the difficulty of having to reform the benefits system without having anything to offer their own supporters in return.

Miss Bondfield invited opposition parties to enter into consultation over the benefits system in a speech to the House of Commons on 23rd July, 1930. The aim was to “obtain some measure of agreement on the next Unemployment Insurance Bill”. Both Conservatives and Liberals agreed to the consultation and nominated representatives. The result was proposals for severe cuts in benefits, and the panel of Ministers to whom they were presented rejected them. MacDonald ordered all copies of the proposals to be returned, and the opposition representatives were told their services were no longer required.

MacDonald sought to scapegoat the capitalist system itself for the problems, telling the delegates at the annual Labour Party conference at Llandudno on 7th October that “my friends, we are not on trial; it is the system under which we live. It has broken down, not only in this little island; it has broken down in Europe, in Asia, in America; it has broken down everywhere as it was bound to break down.” Skidelsky calls this “the confusion of democratic socialism itself — the confusion that allowed a socialist party to take part in the ordinary political process, and yet sought to absolve it from responsibility for framing radical policies to meet concrete problems.” [Robert Skidelsky, Politicians and the Slump, p 271.]

11: Failure of Nerve

The summer recess was over and on 28th October 1930 Parliament reconvened. During the summer unemployment had risen a further 200,000 to 2,200,000. The Imperial Conference opened on 1st October, at which the Canadian Premier, Bennett, had proposed an empire tariff of 10%. The King's Speech failed to propose any radical measures. The only new initiatives were to be the introduction of agricultural legislation and a Royal Commission to examine Unemployment insurance. There was also a promise of some form of electoral reform. The press attacked the Government for failing to give the nation a lead, and Lloyd George described the speech as “Puny, pale and rickety”. There was very little support for the Government from its own backbenches. Mosley was highly critical.

Baldwin proposed the acceptance of Canadian Premier, Bennett's, offer of a 10% empire tariff, but this was rejected by the J.H. Thomas on behalf of the Government as “humbug”. The policy of the Government was still free trade and they were working for a tariff truce, a policy that was defended by Graham in the House. During the summer trade delegations had been sent all over the world — South America, South Africa, Scandinavia, China, Japan, Egypt and so forth. A sub-committee of the Economic Advisory Committee was appointed to investigate the Chinese market, with the idea especially of looking at the expansion of the railways, but China was still fighting a civil war, and Chinese railway companies already owed the international consortium £10m. The Chinese themselves rejected the proposals as a form of foreign control.

The Conservatives moved further in the direction of Empire Free Trade. Neville Chamberlain advanced the idea of Imperial Preference and an Imperial free trade zone in a speech in the House of Commons on 3rd November. Skidelsky comments, “Was this not the classic nineteenth-century free trade case, shorn of its altruism and universality? Was not the whole concept of empire free trade a device to shelter obsolescence by removing successful competitors who would otherwise have forced adaptation or bankruptcy?” Thus, empire free trade would not save the British export industries; exports to the Dominions declined by 9% during 1913 and 1927 (and by 30% to other countries; whilst during this period world exports actually rose by 18%). Some form of deal with the Dominions could have been struck, but it would have involved a tax on wheat, which was politically impossible at the time.

Nonetheless, whilst the Government was not inclined to adopt Conservative ideas regarding imperial preference, they were prepared to examine Liberal proposals over agriculture. There was a movement of population from land to town at a rate of 10,000 workers per year. By 1929 both Labour and Liberal parties had developed proposals to restore agricultural profits and prosperity, both advocating public ownership — nationalisation, the development of state credit facilities and cooperative marketing. The Liberals had proposals to develop those parts of British agriculture which enjoyed a 'natural advantage' such as dairy products, poultry, vegetables, meat and fruit, the production of which they claimed could be increased by £200m. This would require the nationalisation of 3m acres of land and the creation of 100,000 smallholdings, that is, farms of up to 50 acres, resulting in an increase in the agricultural population of up to 2 million, all to be financed by a national development loan of £100m. The Government did respond by introducing into the House a Land Utilization Bill, which proposed to grant the Minister of Agriculture the power to buy up to £6m worth of land for experimental farming, and also granting him the power to provide small holdings and allotments, this power previously residing with county councils. The Conservatives vehemently opposed the Bill on the grounds of “creeping nationalisation”, and introduced wrecking amendments into the House of Lords, so that by the time the Bill became law in August 1931any measures it contained were insignificant.

The Agricultural Marketing Bill introduced on 9th February 1931 has faired better. It arose out of the report of the Linlithgow Committee of 1925 that far too large a percentage of agricultural profits were absorbed by middlemen. The Bill enabled producers of certain agricultural profits to create their own marketing boards, thus effectively creating a producers' monopoly, excepting that the lack of tariff barriers meant that British production would be regulated by competition from abroad. Thus, British farmers could not expect the government to offer them protective tariffs. However, there was evidence that some foreign countries were dumping produce on the British home market, which could have been regulated by import controls. However, the Government rejected this as contrary to their policy of international cooperation over trade and the aim of reducing not increasing international tariffs.

The trade unions were highly suspicious of the Government's plan for a Royal Commission to examine unemployment benefits. The Government was again gambling in this respect on a revival of international trade, and the Royal Commission was probably a delaying measure by the Government. However, the Government came under pressure as the Insurance fund would be requiring a further extension of its borrowing powers. The Liberals made it clear that they would only support this if the terms of reference of the Commission were fixed before the Bill requesting extension of borrowing powers was introduced. There followed a period of confused consultation between the Government and the Trade Union Congress. Trade Union leaders (Citrine and Hayday) were invited by Miss Bondfield to discuss unemployment insurance over the weekend, when they were away, and eventually the terms of reference of the Commission were set without consultation with the Trade Unions, and these were set along lines that would concord with Liberal and Conservative proposals. The concept of a non-contributory principle, which was actually Labour party policy, was excluded. Further discussions with the Trade Union leaders also failed to break the ice and in the end there were no representatives of either employers or employees on the Royal Commission. Skidelsky comments, “Miss Bondfield's ignorance of General Council procedure was amazing for one who had for six years been a member of it. In sending no written invitation or agenda, she committed a bad error of judgement which was largely responsible for the bitterness of the subsequent meetings.” However, he also concludes that the Trade Union Council behaved “stuffily” in response. Both sides were responsible for the breakdown of relations.

12: Point of No Return

During 1931 world commodity prices continued to fall causing a further decline in world export prices, a further decline in international trade and rising unemployment. Countries were being forced off the gold standard, there were revolutions in South American countries, many countries erected protective tariffs, such as the United States in 1930 with their Hawley-Smoot tariff, followed by Canada, Cuba, Mexico, France, Italy, Spain, Australia and New Zealand.

Nonetheless, Britain continued to pursue a policy of internationalism. On the 25th January, 1931 the Council of the League of Nations called for a World Disarmament Conference to commence on 2nd February, 1932; Arthur Henderson, the British Foreign Secretary, was elected president. Graham continued to press other countries to reduce tariffs; but a conference between British and French officials in April produced no results.

British foreign policy favoured liquidation of war debts and cancelling of reparations. The Governor of the Bank of England, Montague Norman, was rabidly anti-French and had declared that it was wrong to throw “Germany and Central Europe to the mercy of French vindictive policy”. Norman refused to grant the French credits during the French financial crisis of 1926. The French were hording gold, which made maintenance of the British sterling parity difficult. MacDonald was hostile to the terms of the Treaty of Versailles, which he regarded as unjust. The French were also prejudiced against the British. A work by André Siegfried called England's Crisis, published in 1930, was very popular in France; it portrayed England as an inferior country with obsolescent attitudes. In 1931 Paris was the centre of financial strength in Europe. Between July and December 1930 gold and foreign exchange moved from London to Paris.

Meanwhile, Brüning, the German Chancellor, sought for an Austro-German customs union, which was vehemently opposed by the French. The drain of gold and currency reserves from London to Paris hampered British foreign policy, making London dependent on Paris. The British believed that international revival depended on the pursuit of monetary polices throughout the world; however, since America and France had the gold reserves such a policy would require them to lead the way in making international credit more available.

The ideology of the gold standard, accepted by all except perhaps some trade union leaders, made it impossible to abandon it. Thus, unless international trade revived, for Britain one of two crises was inevitable — either a balance of payments crisis or a budgetary crisis. After the failure of Graham's campaign for a tariff truce, the Labour Government had no policies to avert one or other of these impending crises.

The pressure in favour of deflationary measures increased. The Times published articles by Sir Josiah Stamp on 11th and 12th June which were based on the ideas of French economist Jacques Rueff, who argued, using statistical evidence, that rigidities in the British labour market, making real wages too high, were the cause of unemployment in Britain. Furthermore, real wages could not fall because of the poverty trap created by over high unemployment benefits. Rueff's conclusion was “Therefore we may assume that the dole is the underlying cause of the unemployment which has been so cruelly inflicted on England since 1920.” He also wrote, “Instead of allowing economic forces to operate freely, the tendency since the War, has everywhere been in the opposite direction. The dole policy, the activities of the trade unions, and the employers' associations, and the various hindrances to migration have all interfered with the freedom of the labour markets.” Whilst no one contemplated policies that would reduce the wages of those in employment, this argument gave extra weight to the pressure on Government to reduce benefits.

On 7th March, 1931 Keynes came out in favour of protective tariffs in an article in the New Statesman entitled “Proposals for a Revenue Tariff”. This met with passionate denouncements by free traders. Keynes sent a copy of his article to Snowden, the Chancellor, but this was returned to him by Snowden's wife, Ethel, who commented that Snowden was “really too ill to give his mind to anything”.

The MacMillallan Report, published on 13th July 1931, came out in favour of maintaining the sterling rate, arguing that “International trade, commerce and finance are based on confidence. One of the foundation stones on which that confidence reposes is the general belief that all countries will seek to maintain so far as lies in their power the value of their national currency as it has been fixed by law, and will only give legal recognition to its deprecation when that depreciation has already come about de facto.”

Arguments from January 1931 onwards in the House of Commons called on the Government to balance the budget. There was an all-party campaign for economy headed by Grey, Sir Robert Horne and Benn initiated on 22nd January, and Sir John Simon said on 3rd March that “the limits of direct taxation have been reached.” Snowden, who believed in a balanced budget, felt the pressure acutely, writing in his Autobiography that “I was appalled at the prospect of having to make another large addition to taxation, and yet I felt that the country could not afford a Budget which was not balanced. There were already signs that our national finances, and especially the continuously increasing load of debt upon the Unemployment Insurance Fund, were being watched and criticized abroad.” On 11th February, the Conservatives put down a motion of censure of the Government accusing it of “continuous additions to the public expenditure at a time when the avoidance of all new charges and strict economy in the existing services are necessary to restore confidence and to promote employment.” The Liberals made a proposal for an 'economy committee', which Snowden on behalf of the Government accepted. However, it is also clear that Snowden by this time was already committed to accepting that a reduction in benefits would be necessary.

The Budget was presented on 27th April 1931, and has been described as a “stop-gap” Budget. He was facing a prospective budget deficit of £37.4m, although this did include £60m for the sinking fund. In order to balance the books he adopted a number of temporary measures, such as raiding the dollar exchange account, making income tax payable in January rather than June, and so forth. He was gambling on a revival of international trade, and said in the House, “A revival of trade, when it comes, will be followed by an expansion of revenue and by a reduction on the expenditure side of the account in respect of unemployment.” His budget made no attempt to cover the borrowing for unemployment, already at £50m per annum, thus creating a budget deficit in excess of £80m. He overestimated the tax yield as well, and hence a budget deficit of £100m was more likely to represent the true picture. However, Conservatives and Liberals welcomed the fact that no further taxation had been introduced, and Labour members were relieved that the political crisis that would follow an attempt to reduce benefits had been postponed.

The Royal Commission on Unemployment Insurance started taking evidence on 19th December 1930. It discovered that the cost of unemployment to the Treasury had risen from £11.75m in 1928 to an estimated £50-55m in 1931; borrowing for the fund had increased from £11.43m in 1928 to an estimated £40-50m in 1931; the cumulative debt having risen from £24.53m in 1928 to £72-75m in 1931. The Government actuary, Sir Alexander Watson, stated that only a reduction of 50% in the benefits and an additional 6d in contributions could restore the fund to a sound actuarial basis. The argument that the increase in the numbers of women registering for benefits was due to depression in the textile industry was refuted by statistical analysis of the variation of unemployment rates between different regions. The Commission produced an Interim Report on 4th June — in fact, two reports, a majority report and a minority report (this being signed by the two Labour representatives). The majority report advocated reduction in benefits and the introduction of a means test.

On 10th June about one hundred Labour MPs representing the trade union group decided that the proposals of the Commission were “wholly unacceptable”. [Reported in The Times, 11th June, 1931] The Government did not intend to implement the proposals, though within the Cabinet there was a faction lead by Snowden that was in favour of implementing them immediately. The Government proposed to deal with certain “anomalies” in benefits and introduced an Anomalies Bill. The opposition parties, actually anxious not to be associated with cuts in benefits, gave the bill an easy passage through the House, but the Independent Labour Party, led by Maxton, were very critical.

Around the March, with Snowden being operated on for a prostrate problem, there was the prospect that Snowden would move to the House of Lords and a new Chancellor of the Exchequer would be appointed. MacDonald wanted to appoint Thomas, but Snowden was not prepared to resign in favour of Thomas who favoured protection; there was talk of a coalition with the Liberals and Lloyd George taking over as Chancellor. Both Labour and Liberal parties fared very badly in by-elections, with the average swing to Conservatives in 1931 of 7.5%. The Conservative disunity came to an end and Baldwin recovered ascendancy in the party.

The split in the Liberal Party became official. On 26th June, Sir John Simon lead the right wing of the Liberal Party into the Conservative camp.

13: The Fall of the Labour Government

Skidelsky comments on the ideology of the gold standard as follows: “it had brought too many real benefits in the past, and had too powerful a hold over men's minds and emotions to be surrendered without a struggle. English politicians, especially the older generation, sought the cause of its malfunctioning in the War; hence their efforts were devoted to restoring post-war conditions.”

Meanwhile, the financial crisis in Europe gathered pace. Austria's largest bank, the Credit-Anstalt, declared bankruptcy; this was in the context of negotiations over the proposed Austro-German customs union. With the threat of bankruptcy looming, the Austrian Government asked Paris for a loan; the French made the loan conditional upon the Austrians renouncing the proposed customs union. The Austrians would have conceded but Montague Norman, the Governor of the Bank of England, then announced an unconditional seven-day credit of £4.5m to the Austrians on 16th June, thus antagonising the French. However, the failure of Credit-Anstalt started the chain reaction of crisis throughout the European banking system as bank after bank sought to improve its liquidity by encashing foreign balances. French financial withdrawals from Germany and the announcement in May 1931 of a forthcoming huge budget deficit created a crisis of confidence in the German market. There were large withdrawals of American short-term loans during May and June totalling RM760m (£35m); the raising of the Bank Rate to 7% only increased the flight. The threat to the German financial institutions caused serious alarm in America; General Dawes reporting to President Hoover that American loans to Germany were in the region of $500bn. Hoover in response announced on 20th June a one-year moratorium on war loans including reparations, which created a surge of confidence — lasting one week. The French objected to the American plan, announced without consulting them; the French Foreign Minister, Briand, reported to the German Ambassador that “no French Cabinet could have survived if it had simply accepted the Hoover memorandum as proposed.” There was a renewed crisis in Germany, and on 3rd July Nordwolle, a giant German industrial combine, failed, and this brought on the failure of the big banks. On 15th July the Reichsbank declared exchange controls.

Until 15th July the Bank of England benefited from the German crisis, and gained gold, but in the next two weeks it lost £33m of gold and £33m of foreign exchange. In fact between 15th July and 20th September, when England was forced off the gold standard, the Bank lost a total of £33m in gold and £180m in foreign exchange. The flight from the pound was greatest in the last two weeks of July. The withdrawals at this time were not due to a crisis of confidence in the pound, which came later. Some attribute the withdrawals to the publication of the Macmillan Report on 13th July, but this report was not mentioned in the American and French press. The most likely explanation is that foreign investors were attempting to restore liquidity following the collapse of their investments in Germany. The British finance houses had £90m in deposit in Germany and £50m in deposit in Central Europe, so withdrawals from London would expose the London market at a time when London could not encash its deposits in Germany.

The Hoover initiative was too late. After a fortnight of negotiations with the French the Hoover moratorium was agreed upon, but it was too late to prevent the collapse of the German banking system. MacDonald invited the Americans, Germans and French to a conference in London on 20th July; but the French were unwilling to cooperate with this initiative unless the Germans abandoned the proposed customs union with Austria. The British successfully arranged credits of £25m with both the Bank of France and the American Federal Reserve Bank, announcing these on 1st August 1931.

The publication of the May Report created a crisis of confidence in Britain, and a crisis of confidence in sterling. To counteract this crisis, the Government was forced to take immediate action to balance the Budget, since the maintenance of the exchange rate was sacrosanct. The Government failed to anticipate the negative impact of the May Report, and at the least publish alongside it a commentary or statement of policy. It sought delaying tactics and MacDonald announced the formation of a Cabinet economy committee on 31st July. The Budget Deficit for 1932-33 was reported by the May Committee to be about £120m, and the minority report did not challenge this figure, which included £55m as a provision for the Sinking Fund and £50m for unemployment; omitting these two items would reduce the deficit to a mere £15m. The majority report proposed economies of £97m with cuts in employment benefit and social services; there would also be additional taxation. The majority report, under the influence of Sir George May and other industrialists, reflected the attitude that all social expenditure was wasteful; the minority report blamed the deficit on the size of the fixed debt. Keynes was one of the few economists brave enough to challenge the implications of the May Report, advocating that the Sinking Fund be suspended, borrowing continue for unemployment insurance and the imposition of a revenue tariff.

No one contemplated that Britain should withdraw from the gold standard, and Skidelsky agrees that in the context this was not possible. “Britain as the 'largest creditor nation' was particularly vulnerable to the nationalisation of her foreign property and assets if ever the gold standard collapsed. The frequent use of moral concepts in discussing the gold standard is particularly important, for moral behaviour has traditionally been held to require a non-human sanction and this is exactly what the gold standard was supposed to provide. Its greatest virtue was that it was that it was automatic, fixed, beyond the control of politicians: a moral censor which expressed, in Sir Robert Kindersley's words, 'the results of the sins or virtues, as the case may be, of all inhabitants of a country.'” [Robert Skidelsky, Politicians and the Slump, p.384.] Thus, it appears that no one in the Government, nor any of its advisors, and not even Keynes, proposed that Britain should simply abandon the gold standard.

Meanwhile, the Tory press started to campaign against the Government calling for cuts in expenditure. The Government continued for twelve days to pass no comment on the May Report. The reaction of foreigners may be gauged from comment in the French Le Temps on 12th August, “It is truly disquieting, in view of the gravity of the financial situation in England, to see responsible organs of opinion insisting on throwing onto other countries the responsibility for a crisis, the fundamental cause of which, as the May Report has established, is the bad administration of the finances..”

Toynbee has commented in Survey of International Affairs,1931-32 that “in the historical drama of 1931 ... the psychological forces were the real actors on the stages, and ... nations and states and governments, bankers and politicians, commodities and currencies were their creatures, which moved under their impulsion like manipulated marionettes or like shadows thrown on a screen.”

The Government went on holiday without stating what they would do about the May Report. Short-term funds continued to leave the country. On the 6th August leading bankers sent a memorandum to the Chancellor stating that the crisis required immediate action to balance the Budget. Snowden requested a meeting of the Cabinet economy committee. MacDonald returned to London arriving on 11th August. At a meeting of the Cabinet Committee on Wednesday 12th August, Snowden stated that the Budget deficit had been underestimated by £50m. Snowden proposed a series of cuts, but reduced the cut in unemployment benefit from 20% to 10%, and made up the difference with cuts in defence expenditure. There was probably agreement to the principle of 'equality of sacrifice' — that is, all classes would have to share in making a sacrifice, and Snowden may have been thinking of taxing all fixed-interest-bearing securities. Meanwhile, there was general talk of a cross party responsibility for the cuts and the principle of 'equality of sacrifice'. The Liberal leader in the Lords, the Marquis of Reading was reported in the Manchester Guardian on 15th August as saying, “The economic position is sufficiently serious to require that party interests should be subordinated to the emergencies of the national situation... A national Government would have many advantages but there are difficulties, and if political exigencies make this impossible then the only other course is by cooperation with the existing Government.” Yet the Cabinet economy committee continued to debate the cuts, meeting all day on Tuesday 18th August they decided to propose a set of economies for the full Cabinet meeting the next day, probably along the lines of a detailed list of economies amounting to a saving of £78.5m and further taxation amounting to £89m. No proposal for a reduction in unemployment benefit or for the introduction of a tariff was included, and these controversial issues were left for the full Cabinet meeting to decide.

At that meeting the general economies were decided upon quite quickly. The Budget was still unbalanced by £20m; it was proposed to cut the standard rate of benefit by 10%; Henderson proposed a 10% revenue tariff on manufactured goods instead, which was supported by 15 to 5 votes; however, Snowden opposed it and it was shelved, and a sub-committee was established to consider transitional benefit. Apparently, the meeting closed when MacDonald said something about a National Government, though what precisely is not known. It is likely that MacDonald would have been prepared to introduce a revenue tariff as a comprise measure that would hold the Cabinet together; however, Snowden's refusal to accept this made cuts in unemployment benefit the only other option.

On Tuesday 21st August, MacDonald and Snowden put the provisional economy plan to Conservative and Liberal leaders who rejected it, and also to Trade Union leaders, who also rejected it.

Around this time Henderson was beginning to swing towards opposing the cuts. The Union movement was interpreting the crisis as an expression of “manipulation of finance by the City, borrowing money from abroad on ... ' short-term' ... and lending it on long-term ... As is usual, the financiers have rushed to the Government ... attributing the blame for the trouble to the social policy of the country and to the fact that the budget is not balanced.” — this comes from a Report to the Executive of the Transport and General Worker Union and is likely to reflect the thinking of Ernest Bevin, the most influential leader of the Trade Union movement. Thus, the Daily Herald reported on 20th August that “In no circumstances will the Trade Union Movement agree to a reduction of unemployment benefit...” Bevin proposed a form of Empire Free Trade as a solution, including raising a revenue tariff, suspending the sinking fund and taxing fixed-interest-bearing securities. However, none of this would have been passed by the Commons, so his proposals could not have saved the Labour government.

Late on Thursday, 20th August MacDonald, Snowden, Henderson and other Cabinet members met representatives of the Trades Unions. At the conclusion of the meeting, General Secretary, Citrine stated that the General Council “must record their opposition to the proposals relating to the worsening of unemployment benefit”. Snowden in reply stated that if sterling came off the gold standard “there would be no comparison between the present depression and the chaos and ruin that would face us in that event. There would be millions more unemployed and complete industrial collapse.” Throughout the meeting Henderson said nothing. MacDonald left the meeting apparently in despair, but by the morning had revived and was resolved not to allow the T.U.C. to dictate policy to an elected government. Cabinet discussions on 22nd August included a 10% cut in unemployment benefit, bringing the economies to £68.5m. Meanwhile the financial crisis became more pressing, and the Bank of England was seeking a loan from the New York Federal Reserve Bank, but this would not be forthcoming until the Budget was balanced and Parliament approved it. MacDonald saw leaders of the Opposition parties who tentatively agreed that the £68.5m cuts would be sufficient, and a Cabinet meeting was called for Saturday 22nd August. This meeting again failed to agree on the cuts, with Henderson and Graham probably leading the opposition to it. There was some talk of a National Government, but no support for the idea in the Cabinet generally. On Sunday 23rd August MacDonald saw the King, who also summoned the other party leaders. Samuel and Baldwin both stated that they would serve under MacDonald in a National Government. On Sunday evening the Cabinet met again, and at a vote it split twelve to nine in favour of economies, with MacDonald, Snowden, Thomas, Sankey, Passfield, Miss Bondfield, Morrison, Parmoor, Wedgwood Benn, Shaw, Amultree and Lees-Smith voting for and Henderson, Clynes, Graham, Greenwood, Alexander, Lansbury, Johnston, Adamson and Addison voting against. MacDonald went to the King and on Monday morning 22nd August and statement was issued by the palace stating, “His Majesty the King invited the Prime Minister, Mr. Stanley Baldwin and Sir Herbert Samuel to Buckingham Palace this morning, and the formation of a National Government is under construction. A further announcement will be made later.” MacDonald returned to announce the decision to the Cabinet, which the Cabinet “accepted silently [as] the accomplished fact.” [Letter from Lord Passfield to Beatrice Webbe, 24th August, 1931.] MacDonald was joined in the National Government by Snowden, Thomas, Sankey and later by Lord Amulree (Secretary of State for Air).

14: Conclusion

On 16th September, 1931 there was a mutiny by sailors at Invergordon, and this wrecked the temporary confidence in the economy measures and there was a further flight from the pound; on 21st September, sterling was forced off the gold standard. Subsequently, another eighteen countries were forced off the gold standard, and forty countries introduced tariffs or import controls; ten countries declared a moratorium. There was an increase in world unemployment by five to ten million rising to over thirty million. Thus, the Government's attempt to defend the gold standard may be seen in retrospect to have been the correct thing to do.

MacDonald was expelled from the Labour Party on 28th September; on 6th October Parliament was dissolved; and on 27th October the National Government was elected on an overwhelming mandate, winning 556 seats to Labour's 52. MacDonald retired in June 1935, when Baldwin became Prime Minister. Those members of the Liberal Party that followed Simon eventually became Tories; Snowden was made a viscount in October 1931 but resigned from the Government in September 1932 along with those Liberals that followed Samuel over the issue of free trade. The Labour Party was led by Lansbury for a time, whilst Henderson continued to strive unsuccessfully for world disarmament at the League of Nations.

Skidelsky takes the view that in the crisis of 1931 the Labour Party had no choice but to defend the gold standard, but up to 1931 they had many choices. Thus, “The more we examine the alternatives the more we are forced to conclude that the Labour Government's defeatism was largely self-imposed.” [Robert Skidelsky, Politicians and the Slump, p. 430.] He attacks MacDonald's uninspiring leadership, Snowden's rigidity, and the inexperience of the Ministers that made them “slaves to departmental views”, and the “intellectual paralysis” of the Labour Government. In conclusion, “the Labour Party simply did not know what to do.”