Britain: Economic Affairs, 1931 to 1933

September 1931 Election — Protectionism

On the 8th September 1931 Winston Churchill made an appeal for an election in order to endorse the introduction of protectionist measures. The government responded by calling an election, in which they presented themselves as the saviours of the economy. Churchill defended of protectionism although he had always been a Free Trader; and Free Trade was defended by Lloyd George, who had never defended it before. The national executive of the Labour party decided on 28th September that members of the National government would be expelled from the Labour party. This forced MacDonald to accept the role as leader of a Nationalist government. The Liberal party was split over the issue of Protectionism. Twenty members, led by Sir John Simon, were in favour of the National government even if this involved Protectionism, but Lloyd George led a faction that was equally vehemently against it. On 5th October it was decided that each party in the National government would fight the election on their own programme; but would remain in coalition under a formula of words that would be supplied by MacDonald. MacDonald, therefore, effectively appealed to the country by asking for 'a doctor's mandate' to take whatever action he, the doctor, deemed necessary. The dissolution of parliament came on 7th October. There was no direct manifesto statement by the Conservatives to the effect that tariffs would be introduced; instead, there was a vague statement that there would be an impartial enquiry into the issue. The Liberals accepted this. Since the Liberal party was not willing to back the cause of Free Trade, Lloyd George was not willing to fund their campaign, and with no money from the Lloyd George fund, they were able to contest only 122 seats. The election was held on 27th October, and the National government, which was deemed to have bravely faced the crisis by the public, was victorious, whilst the Labour party, which appeared to have run away, were not. Labour polled just under 2 million votes less than in 1929. However, most of these votes were simply not cast, so workers who had lost faith in Labour did not transfer it elsewhere. The Conservatives, National Labour (under MacDonald) and Liberal Nationals (under Simon) polled just over 60%. The 'pure' Liberals (under Lloyd George) polled 7%. Conservatives won 473 seats, National Labour 13, Liberal Nationals 35, Labour 52, Liberals under Lloyd George 4, Mosley's New Party 0, Communists 0.

Post Election Measures

The emergency cabinet was replaced by one of normal size — and of the 20 members, 11 were conservative. Snowden entered the House of Lords to act as lord privy seal, and Neville Chamberlain became Chancellor of the Exchequer; Simon became foreign secretary. Lloyd George was excluded; Austin Chamberlain was in decline and also left out; Churchill would not join because of his opposition to the policy of conciliation in India. Amery, was also left out.

The National government had the mandate to do whatever they wanted. An act on Abnormal Importations was passed immediately during November 1931 to put a stop to the influx of imports that were due to the expectation that tariffs would be introduced. A cabinet committee to enquire into tariffs was convened under the chairmanship of Neville Chamberlain. An Imports Duties bill was introduced on 4th February; the Liberals felt obliged to oppose it, but it was carried by a huge majority on 1st March. By this means an immediate tariff of 10% was introduced, but Empire goods, raw materials and most foodstuffs were exempt for the time being. The introduction of tariffs created no great political storm.

The budget of 19th April 1932 was heralded by Chamberlain as one of extreme rigour. In practice, there was little scope for economy. Police pay was cut by 5% to bring it into line with other public employees; and armaments expenditure was cut to its lowest level. However, the exchequer ended the year with a deficit of £32 million, so not even he was able to balance the books at this time. However, he reversed the trend towards direct taxation by raising more revenue from protective duties. Direct taxation in 1917-18 produced 82% of government revenue; by 1932 this had fallen to 67%; Chamberlain brought it down to 55%. Chamberlain also succeeded in converting the £2 bn War Loan debt from 5% to 3.5%; this was accepted by investors, since the “safe” 3.5% was much better than returns available otherwise at the height of the depression. This adjustment to the War Loan was saving the exchequer £86 million per annum by 1936, which was by far the largest contribution to the reduction in public expenditure.

There was a conference to discuss Empire Free Trade at Ottawa from 21st July to 20th August 1932. It was attended by Baldwin, Chamberlain, J.H. Thomas, Runciman and other cabinet ministers, whilst MacDonald remained in England, but it did produce agreement. The Dominions were also gripped by the Depression and wanted to protect their own farmers and domestic markets. The British did not impose food taxes, and the only thing the Dominions did for British industry was to raise tariffs further against other foreign imports. Ottawa was only a “symbolic” gesture, and produced no substantial agreement; however, the Liberal ministers, the 30 Liberal MPs and Snowden all found the further increase in protectionism unacceptable, and progressed from opposition over tariffs into general opposition by November 1933. The Liberal party was crippled by its lack of organisation, its lack of money and its constant disunity.

MacDonald became isolated. His effort to break out of this was the inauguration of a World Economic Conference on 12th June 1933, which met at the Geological Museum in South Kensington. Whilst all representatives were in theory opposed to tariffs, restrictions on exchange and unstable currencies, all their countries practised these measures, and Roosevelt refused to stabilise the dollar, which had previously come off the gold standard, the upshot of which was that the conference was permanently adjourned.

Reparations and War Loans

Payments of reparations and war loans entered a new phase. In 1931 British payments were suspended for the year with the agreement of the Americans, under President Hoover. In 1932 Germany virtually ended payments of reparations, and France would not pay British debts as a consequence. Hence, Britain was in the situation of having to pay America whilst no one was paying her. The British paid in full in December 1932, and made a token payment in June 1933. However, whilst they sought to renegotiate the payments with the Americans, they had, in effect, broken an international agreement.

National Government economic policies

Unemployment reached its peak in January 1933, and thereafter fell by half a million during the course of the year. There was a recovery of world trade during 1933. Germany and the United States started to recover during this year as well.

The policy of the National government was (1) to devalue and manage the currency; (2) to hold interest rates low; (3) to impose tariffs. (1) Devaluation helped British exports, and the bank of England was able to accumulate gold reserves. However, the Americans devalued in April 1933, and the dollar fell in value to 59% of its pre-devaluation parity. France and gold block countries devalued in 1936. Thereafter, the British, the United States and France made a Tripartite Agreement to stabilise currencies. (2) The bank rate of interest was lowered to 2% in June 1932, where it remained until 1951. The low interest rates did little to stimulate the economy. Although the budget did not exactly balance, there was a general belief in the doctrine of financial purity and a psychology of economy ensued. The government were adverse to large-scale public works. They followed policies that contradict modern economic theory. (3) Protective duties did not assist British exports. They served only to increase competition in export markets, since imports to the British markets were restricted. The tariffs caused losses of valuable export markets, and the loss of British exports was greater than the savings made on imports. Trade with the Commonwealth and Empire was decreasing as a proportion of British trade in general, and the protectionist policies further increased the move of the Dominions towards autarky.

There was a policy of reducing excess capacity in the traditional industries. In the shipbuilding industry berths of over 1 million tons were destroyed; in the cotton industry six million spindles were destroyed. However, exports markets declined still more rapidly than supply, and there was still excess capacity at the end of the 1930s. There was some attempt to reduce excess supply in the coal industry, but this was less successful as the smaller pit-owners refused to be bought out. There was some genuine rationalisation of production in iron and steel, where some plants were closed and others opened, and the industry did become more efficient during this period.

Subsidies were offered to agriculture, and by 1936 these cost over £40 million. This was counter-productive to the recovery of the world economy, which was oversupplied with food at the time. The subsidies to agriculture were motivated by politics, and were part of the Conservative attempt to woo the agricultural vote. However, agricultural output rose by only 1/6th, and the increased output came from the introduction of machinery, with the result that agricultural employment fell between 1920 and 1938 by 1/4 million. Thus, rural communities were not preserved by the subsidy to agriculture.

Recovery

Despite the inadequate government economic policy, there was a recovery in England, and by 1937 production and employment reached an all-time peak. The recovery was largely due to the continuing improvement in the terms of trade for England. Taking 1914 as a base of 100, the value of imports for the same exports was 114 in 1929, 140 during the mid 1930s, slipping to 130 by 1938. There was less investment abroad, which served to increase the depression among the primary producers. This was only rational, since so many of the foreign investments failed to materialise.

The main cause of English recovery was revival of domestic consumer demand. The automobile industry catered principally for the domestic market, and as a consequence increased output in every year except 1932. Nylon and plastics became increasingly important. Private housebuilding boomed, and 3 million private houses were built during this period without government aid. Approximately 1/4 of all new investment during this period went into building. There was a 30% increase of employment in this sector between 1932 and 1935. Increased demand for radio sets, electrical equipment and new furniture, reflected the general increase in the standard of living.

There was very little decline in structural unemployment. In the late 1920s 800,000 of the unemployed (approximately 50%) were due to the decline of the export industries; by the late 1930s there was still 500,000 unemployed (33%) due to this cause. Unemployment hit the older workers harder — an unemployed man over 45 would be highly likely to remain so.

The Labour Party

Although class conflict increased during this period, the unions did not contribute to this antagonism. The Labour party became more socialist. A resolution was passed in 1932 requiring the next Labour government to introduce a 'definite Socialist legislation immediately'. Left-wing intellectuals became influential within the Labour party, to whom communism seemed to be the only way out of the evils of the Depression caused by the breakdown of capitalism. The alternative socialist programmes, represented by Keynes's theories and by the New Deal in the United States, were not yet formulated; and it seemed that communism in Soviet Russia with its Five Year Plans was delivering increased output. John Strachey wrote The Coming Struggle for Power in 1932 advocating Marxism. Another intellectual, Laski, developed the theory that the Labour government had been removed from power during the crisis of 1931 by unconstitutional means. In 1932 the Independent Labour Party seceded from the Labour Party, and formed the Socialist League, which was ineffectual since it lacked general support. The National Unemployed Workers' Movement was taken over by the Communists, when their nominee, Wal Hannington, was elected leader. He thought of the idea of hunger marches, which were effective in making middle-class people feel guilty about unemployment.

The Economy by 1934

By 1934 it appeared that Britain had emerged from the worst of the economic crisis. Chamberlain's budget of 1934 cut income tax to 22.5%, restored the cut in unemployment benefit and restored pay levels to government and local officials by 50% of the original reduction. National output was 10% greater than in 1929, and, whilst wage rates had fallen only 3%, the cost of living had fallen 13%. The main problem remained the high levels of mass unemployment. In November 1934 Scotland, South Wales, West Cumberland and Tyneside were declared to be “Special Areas”, and two commissioners were appointed to oversee revival in these areas with an initial grant of £2 million. However, the old industries could not be revived. By 1927 the commission was given special powers to attract new industries to these areas, and industrial estates were started in South Wales and Gateshead. Nonetheless, they provided work for only 12,000 men. Unemployment figures in these areas improved mainly because workers migrated to other more prosperous regions.

Means tested benefits were introduced for the long-term unemployed who had exhausted their claim under the National Insurance scheme. However, the Ministry of Labour lacked the resources to administer the test. In the Unemployment Act of 1934 Neville Chamberlain transferred the administration of the test and benefit from the Ministry of Labour to public assistance committees. A committee was appointed to run unemployment insurance as a Fund designed to break even at an unemployment rate of 16.75%, which was the 1934 level. Benefit was renamed as assistance, and was administered overall by an Unemployment Assistance Board, staffed by six members not directly involved in politics. Following the introduction of new national rates for the assistance, some of which were lower than local rates, on 7th January, 1935, there were renewed demonstrations and hunger marches. In response, rates were not cut, and the Assistance Board took on new duties for other categories of unemployed people. The board was renamed the Assistance Board (i.e without the “Unemployment”), and this signalled the end of the Poor Law. Dispute over unemployment rates and the administration of these contributed considerably to social and political tension.

There was some conflict between the parties over the issue of planning, which Labour tended to regard as the direction of the workforce. The proposal of Keynes to reflate the economy with public expenditure would not have worked in Britain. It was suitable for the United States, but Britain's problem was simply the decline of the old industries. Public expenditure did stimulate demand in those industries that were already buoyant, but did nothing to alleviate the problems of the older industries.