Yet one young Labour MP was thinking along Keynesian lines at that time. A member of the Economic Advisory Council created by MacDonald in 1930, Oswald Mosley advised the government to adopt an ambitious programme. Two hundred million pounds should be spent on extensive public works, the availability of credit ought to be increased, tariffs should be introduced and early retirement should be encouraged. Much of the banking and industrial sectors would have to be brought under state control, while a government body would ‘rationalize’ manufacturing, offer advice and oversee research. The crisis, Mosley said, had presented Labour with a unique opportunity to remodel the economy along centralized lines.
This was all too radical for Philip Snowden. The Labour chancellor was too attached to free trade and balanced budgets to approve such plans, while MacDonald did not have the imagination or the desire to overrule him. Despite styling themselves as ‘socialists’, neither Snowden nor MacDonald believed there was an effective alternative to the capitalist system; at most that ideology might be adjusted in the interest of workers, though even modest improvements would have to wait for more propitious economic circumstances. Besides, the pair were politicians, not economists, and it was their overriding aim to demonstrate Labour’s credibility to the electorate; the promotion of extravagant economic schemes that were unlikely to pass through parliament would not further that. It was far better to err on the side of safety and try to consolidate the electoral gains Labour had made under their leadership.
The rejection of Mosley’s proposal deprived Labour of his ideas and dynamism; he resigned before he could be expelled from the party for challenging the leadership. It also left the administration with no alternative but to fall back on the old economic orthodoxies, and on the idea of cross-party cooperation. After consulting the other party leaders and financial experts in the City and the Treasury, Snowden decided against significantly raising taxes or borrowing money, instead resolving to reduce government spending. The chancellor then created two committees to advise him on where the cuts should come. Expenditure on unemployment insurance made up a substantial segment of public spending and had risen from £12 million in 1928 to £125 million in 1932. It was inevitable that Snowden’s committees would recommend that unemployment relief be cut. In the event, they suggested total cuts of £96 million, in order to ‘save’ the country from a £120 million deficit, with most of the savings coming from a 20 per cent reduction in unemployment benefit.
The alarmist nature of the committee reports encouraged the further flight of investment from the City. The Treasury told the government that its inability to balance the budget was the problem, and urged it to implement the recommended cuts. The national debt was, they claimed, undermining international confidence in England’s ability to maintain its currency at its high valuation. If there were a run on the pound, the Bank of England’s reserves would not be sufficient to maintain the all-important gold standard. ‘To go off the gold standard,’ one banker said, ‘for a nation that depends so much on its credit would be a major disaster.’ Like the navy or the empire, the gold standard was a symbol of the country’s robustness; leaving it would be to renounce its status as a great power.
Over the ensuing days City experts and Treasury officials attempted to frighten the Labour government – sterling might, they warned, go under any day. After a few meetings, Snowden and MacDonald were thoroughly alarmed. Both were persuaded that anarchy would result if foreign confidence in sterling were not restored quickly and the gold standard maintained; both were convinced that reducing government expenditure on unemployment was the key to resolving the financial crisis. In accepting these arguments, Snowden and MacDonald also accepted Labour’s responsibility not just for solving the crisis but also for provoking it.
MacDonald told his cabinet he was ‘absolutely satisfied’ that economies on unemployment insurance payments were the only way to shore up confidence. Yet how could Labour ministers implement a policy that was, as MacDonald himself admitted, a ‘negation of everything that the party stood for’? After an intense debate, half of the cabinet ministers declared themselves against any reduction in unemployment benefit. The bankers, however, said that the Labour government’s inaction ‘would not do’, and Neville Chamberlain – an influential go-between for the City and the government – agreed. A stalemate ensued, and the cabinet increasingly felt it would have to resign.
When MacDonald explained the situation to King George, the monarch decided to consult the other party leaders. He and Herbert Samuel (standing in as Liberal leader for the sick Lloyd George) reached the conclusion that, since MacDonald had failed to secure support for the required cuts, the best alternative would be a ‘National Government’ composed of the three parties. MacDonald should remain as prime minister, because swingeing cuts would seem more palatable to the people if made by a Labour prime minister, and also to elicit Labour’s support for the coalition. The king persuaded Baldwin of the efficacy of the idea, before asking his old friend MacDonald to lead a coalition in order to resolve the national emergency. After some deliberation, MacDonald assented, before calling a meeting of his cabinet. Rather than announcing the government’s resignation, the policy which had been agreed upon, MacDonald informed them he would instead be forming a new emergency coalition to which only three of them were invited.
The motives of the protagonists in this episode have been scrutinized over the years. The king undoubtedly exercised extraordinary power by effectively nominating a prime minister and a government without consulting either parliament or the country, but there is no evidence to suggest that he did so in order to end Labour’s tenure in office. MacDonald has been accused of putting himself before a party that he no longer loved, and it is true that he had become increasingly alienated from the revolutionary and trade unionist elements in his party. Even so, the Labour leader appears to have convinced himself that he was making a genuine renunciation by sacrificing his government, and perhaps his own political career. It should also be remembered that everyone involved saw the National Government as temporary and established for the single purpose of averting a national emergency. ‘When that purpose is achieved,’ the king explained, after ‘about five weeks, the political parties will resume their respective positions’, and an election would follow. This assurance enabled Baldwin to persuade Tory MPs to participate in the National Government for which they felt little enthusiasm.
But how could MacDonald bring his outraged party with him? Apart from three Labour ministers who would enter the new ten-man coalition cabinet, and eight backbenchers, all of the Labour MPs vehemently opposed the National Government. ‘They choose the easy path of irresponsibility,’ remarked MacDonald, ‘and leave the burdens to others.’ Within the wider Labour movement, he and Snowden were vilified as ‘traitors’ – they had betrayed their colleagues, their party and democracy itself by making an unconstitutional deal behind closed doors with an unelected monarch. The pair were also derided as the dupes of the bankers, who had, it was said, exaggerated the financial crisis in order to pass anti-working-class legislation and bring down the Labour government. Long-standing suspicions about MacDonald were now openly expressed. The man who had wanted Labour to replace the Liberals had become a Liberal himself; ‘Gentleman Mac’ had sold his comrades for praise in the right-wing press and access to high society.