When Ramsay MacDonald became PM for the second time in 1929, the prospects for his Labour government seemed very favourable. Although Labour was once again dependent on Liberal support for its overall majority in parliament, MacDonald was the electoral success of 1929 and the opportunity for the Labour Party to put its long-cherished beliefs and ideas into action.
Some important reforms were pushed through in 1929-30. Arthur Greenwood’s Housing Act increased subsidies for house-building and introduced new slum clearance schemes. The Land Utilisation Act and Agricultural Marketing Act established a series of marketing boards to help producers. The Coal Mines Act reduced the miners’ day from 8 to 7.5 hours. Unemployment benefits were increased. On the other hand, several attempts at reform failed through the lack of Liberal support. These included an education bill aimed at raising the school leaving age to 15, a bill to create a maximum working week of 48 hours, and plans to repeal the 1927 Trade Union Act.
Much worse than these disappointments, however, was the pressure of outside events. At the very time MacDonald was devising policies to bring about the reduction of unemployment, he and his government found themselves facing a situation that was entirely beyond their control.
In October 1929, the Wall Street Crash hit the American stock market. The Wall Street Crash did not lead instantly to the Great Depression, which did not reach its worst until 1931, but Britain soon felt the effects of the loss of American markets and the reduction in European trade as other nations also suffered. Between the end of 1929 and 1931, the value of British exports fell by half. Unemployment, already over a million due to the long-term structural decline of the staple industries, rose until it was around 2.5 million by the end of 1931 and almost 3 million by the end of 1932. Industries like coal and shipbuilding were especially affected.
The escalating unemployment figures posted a serious dilemma to the new government. MacDonald was no economist and really had little idea of how to tackle unemployment. In 1930, he set up the Economic Advisory Council of industrialists and economists to provide advice, but he remained wary of ‘new’ ideas. More unemployment meant more unemployment benefits to be paid out and this put a great strain on government finances. Since the Labour Party stood for the welfare of the working man, the provision of benefits was integral to its beliefs. Yet, allowing huge sums of money to disappear in benefits not only undermined MacDonald’s traditional belief in a ‘balanced budget’, it also appeared irresponsible at a time when the party desperately wanted to be viewed as capable and trustworthy.
The Labour Party was divided over how to deal with the economic crisis. The Chancellor of the Exchequer, Philip Snowdon, accepted that a balanced budget and maintaining the Gold Standard were fundamental principles. However, balancing the budget at such a time would involve public spending cuts which would mean reducing expenditure on welfare. Oswald Mosley, a junior minister, on the other hand, called for an expansionary government spending policy, financing public works schemes and social reforms through government loads. Mosley claimed this was the only way a Labour government should behave – putting the working men’s needs first.
MacDonald was not convinced that Mosley’s ideas would work (even though they were also the views of the brilliant Cambridge economist, Keynes) – Macdonald was fearful that such radical measures would undermine confidence in the British economy overseas and create even more unemployment. To be fair to MacDonald, even the economists were divided about what should be done. Mosley resigned in May 1930, when his ‘Mosley Memorandum’ was rejected but, even then, the cabinet could not agree on the size of the cuts needed to balance the budget – and the situation was not helped by the need to win over the opposition party leaders too, whose support was essential for any measure to get passed through the Commons.
The Wall Street Crash sparked a major European banking crisis in May 1931, which had spread to Britain by July. There was a run on the Bank of England as depositors hurried to withdraw their pounds. As Britain was on the Gold Standard, they withdrew their money in gold, threatening the bank’s reserves. The Liberals proposed a committee to consider how government might curb its expenditure and so restore confidence and MacDonald duly appointed the May Committee, chaired by Sir. George May the secretary of Prudential Insurers, to make recommendations.
The May Committee’s report was published on 31 July 1931. It came as an unwelcome bombshell to the troubled government. It predicted a massive budget deficit of £120 million by 1932 unless severe cuts were made in government spending. It recommended cuts amounting to £96.5 million with pay cuts for public sector employees, such as teachers, policemen and civil servants and a 20 per cent cut in unemployment benefit and heavier taxation. Interestingly, the two Labour members of the Committee did not agree with these proposals and produced their own ‘minority report’, but their views were ignored. The report deepened the financial crisis still further by drawing attention to Britain’s alleged problems. Nearly a quarter of Britain’s gold reserves disappeared and in mid-August ministers, who had left for their holidays after the report’s publication, were recalled for emergency meetings to try to resolve the crisis!