The election result proved that voters had accepted Labour as a credible parliamentary party, with enough experience and middle-class MPs to be entrusted with power. MacDonald also reaped the benefits of the failure of the General Strike. He had achieved his two great aims – replacing the Liberals as England’s progressive party and making Labour ‘electable’. Did he now possess the vision to articulate and advance bolder objectives?
Baldwin and Chamberlain thought it would be ‘unsporting’ not to offer Labour the chance to form a minority government, but their ‘sporting’ gesture concealed a pragmatic motive. Baldwin wanted to nip in the bud Churchill’s plans for a coalition between the Tories and his old ally Lloyd George, while Chamberlain believed a minority Labour government would soon disappoint Labour supporters. King George was more than happy to send for his friend MacDonald; the Labour leader accepted the king’s commission, having warned his backbenchers that he would ‘stand no “monkeying”’ from them as prime minister. He assembled a cabinet of moderate politicians, including five men with titles – there would be no question of a Labour government introducing a radical socialist programme. Yet there was something genuinely radical about one of MacDonald’s appointments. Margaret Bondfield, a veteran suffragist, was selected as the new labour minister and became the first ever female cabinet minister. It was, as she declared, ‘part of the great revolution in the position of women’.
21
Crash
At the end of the decade, an economic crisis enveloped the Western world. After the 1921 recession, the value of American stocks had increased by 500 per cent, largely because of unregulated investor speculation. But when the bubble burst in the autumn of 1929, with the value of stocks plummeting by 40 per cent, the majority of ordinary citizens paid the long-term price – in lost jobs, increased taxes and severely reduced public spending.
The Wall Street Crash was the prelude to the largest and longest economic depression of the twentieth century, which would reduce worldwide gross domestic product by 15 per cent and diminish international trade by half. American loans had buoyed up trade in the West, giving other countries the cash to buy goods from the United States; now the loans and the demand for American products dried up. After the autumn of 1929, international prices, income, profits, employment and tax revenues all collapsed. With fewer jobs and less money in circulation, aggregate domestic demand was too low to stimulate weakened Western economies. To compound the problem, sharp deflation encouraged those who had money to hold on to it.
England was ill-prepared for the economic maelstrom that came across the Atlantic. Sterling was chained both to the gold standard and to an unrealistically high exchange rate with the dollar, and the country’s antiquated industries were in terminal decline. As England’s exports had decreased by a quarter over the past two decades, its imports had increased by approximately the same amount, leaving it reliant on international trade. Little had been done by politicians to improve the situation since the last crash, either by modernizing England’s declining industries or by rebalancing the economy through the creation of new ones. MPs expected market forces to provide a solution, but none was forthcoming. Over the next three years industrial production in England decreased by 23 per cent, export prices fell by 50 per cent and foreign trade plummeted by 60 per cent. As a result of the collapse in production and trade, unemployment rose by over 120 per cent during the same period. The picture was even darker in the regions dependent on the old industries. In the northwest, unemployment trebled in the early Thirties, while in the north-east over 70 per cent of adult men found themselves without work. The ‘unemployment problem’ now dominated politics and public debate.
Having been precipitated by one financial crisis, England’s industrial depression was followed by another. Sterling was sold off rapidly on the international markets, and vast amounts of money were withdrawn from the City of London. Much of this had been invested for short-term profit, but the City had accepted it with the risks it entailed. English banks had themselves indulged in speculation for short-term profit, borrowing from French investors at a rate of 2 per cent and lending to Germans at four or five times that amount. While the party lasted City banks did extremely well, but how long could it continue? In 1931 foreign investors suddenly withdrew their money from London, and City banks found themselves owing over £700 million. The Bank of England permitted them to withdraw gold from its reserves while French and American banks lent them £50 million, yet neither move was enough to shore up confidence in the City or in sterling. Foreign governments continued to withdraw around two and a half million pounds’ worth of gold deposits from the Bank of England every day.
The extent and impact of the ‘Great Depression’ was unprecedented; its causes and possible cures were a mystery to virtually all economists and politicians. Like the First World War, there appeared to be an inevitability about its unfolding. Nineteenth-century economic orthodoxy had held that markets would always expand and purchasing power would increase, but the events of the twentieth century had proved that to be false. Yet since no one had anticipated a restriction of demand, governments had no idea how to adapt to it. On the left, prophets of doom were predicting the imminent collapse of capitalism and Western society. Even the pragmatic MacDonald took the quasi-Marxist view that ‘the system under which we live has broken down … as it was bound to’.
Labour’s record during its early months in government did not inspire confidence in its ability to resolve complex problems. Its Coal Mines Act (1930) reduced working hours by just thirty minutes per day, and the miners felt betrayed. If Labour were merely a lesser evil to the Tories, how could the party claim to represent the workers? Labour’s education bill, which tried to raise the school leaving age to fifteen, was voted down, as was its proposal for electoral reform. This act would have replaced first-past-the-post with the alternative vote system, as well as abolishing plural voting and the university constituencies, but the minority government lacked the seats in the Commons to pass the legislation. The party’s one significant domestic achievement was its 1930 Housing Act, which initiated slum clearances and subsidized housebuilding.
As the industrial depression and financial crisis deepened in 1930 and 1931, a plethora of policies was advocated in parliament. Protectionism was once again espoused from the Tory benches, but this time under the euphemistic banner of ‘Empire Free Trade’. The idea was that the colonies and dominions should be ‘encouraged’ to offer preferential tariffs on British goods, though it was not clear how they would be so persuaded. Some on the left meanwhile proposed a reduction of the retirement age to sixty, thus freeing up jobs for younger people; others, such as Ernest Bevin, advocated the devaluation of the currency.
Lloyd George argued that the depression made his public works programme even more urgent. He was right, but it would take Keynes another few years fully to explain the reasons. According to the economist’s argument, published in 1936 under the title of The General Theory of Unemployment, Interest and Money, public works and the reduction of interest rates were the only means to keep people employed and the economy functioning when investment from the private sector was unavailable. ‘Keynesian theory’ would become economic orthodoxy in the late Thirties, but few politicians apart from Lloyd George entertained such ideas at the beginning of the decade.