3 Economic Crisis and the Labour government 1929-1931

In May 1929 a minority Labour government headed by Ramsay MacDonald came to office with Liberal support. This was only the second time a Labour government had been in office (they had briefly been in office in 1924), and few of the government's members had any deep knowledge of economics or experience of running the economy. MacDonald's Labour Party was not radical in economic thinking, and was wedded to the orthodoxy of Victorian classical economics, with its emphasis on maintaining a balanced budget at any cost.

In October 1929 the Wall Street Crash in New York heralded the Great Depression. The ensuing US economic collapse caused a ripple effect across the world. World trade contracted, prices fell and governments faced financial crisis as the supply of American credit dried up. Many countries adopted an emergency response to the crisis by erecting trade barriers and tariffs, which worsened the crisis by further hindering global trade.

The effects on the industrial areas of Britain were immediate and devastating, as demand for British products collapsed. By the end of 1930 unemployment had more than doubled from 1 million to 2.5 million (20% of the insured workforce), and exports had fallen in value by 50%. Government revenues contracted as national income fell, while the cost of assisting the jobless rose.

Under pressure from its Liberal allies as well as the Conservative opposition, the Labour government appointed a committee to review the state of public finances. The May Report of July 1931 urged public-sector wage cuts and large cuts in public spending (notably in payments to the unemployed) to avoid incurring a budget deficit.

This proposal proved deeply unpopular within the Labour Party and among its main supporters, the trade unions, which along with several government ministers refused to support any such measures. The Chancellor of the Exchequer, Philip Snowden, insisted that the Report's recommendations must be adopted to avoid incurring a budget deficit.

In a memorandum in January 1930, one junior government minister, Oswald Mosley, proposed that the government should take control of banking and exports, as well as increase pensions to boost purchasing power. When his ideas were turned down, he resigned. He soon left Labour to form the New Party, and later the British Union of Fascists.

The approach of the British Labour Party to the economic crisis was in stark contrast to that adopted in Sweden by the Swedish Social Democratic Party, which took a Keynesian approach to the crisis, and initiated government-funded public works programmes to ease unemployment and boost the economy.

4 The National Government

The dispute over spending and wage cuts split the Labour government: as it turned out, fatally. And the resulting political deadlock caused investors to take fright, and a flight of capital and gold further de-stabilised the economy. In response MacDonald, who on the urging of King George V, decided to form a "National Government" with the Conservatives and the Liberals.

On August 24 MacDonald submitted the resignation of his ministers and led his senior colleagues in forming a " National Government", with the other parties. MacDonald and his supporters were expelled from the Labour Party and adopted the label "National Labour". The Labour Party and some Liberals, led by David Lloyd George, went into opposition. The Labour Party denounced MacDonald as a "traitor" and a "rat" for what they saw as his betrayal.

Soon after this, a General Election was called. The election resulted in a Conservative landslide victory, with the now leaderless Labour Party winning only 46 seats in Parliament. Although MacDonald continued as Prime Minister until 1935, after the 1931 election the national government was Conservative dominated.

4.1 Emergency measures

The new national government, with the Conservative Neville Chamberlain as Chancellor, immediately instituted a draconian round of public spending and wage cuts. Public sector wages and unemployment pay were cut by 10%, and income tax was raised from 22.5 pence to 25 pence in the pound. But these measures merely reduced purchasing power in the economy, and worsened the situation, and by the end of 1931 unemployment had reached 3 million.

Because of the gold standard there was nothing to stop a flight of gold. At first the government tried to stop the flight by introducing punitive interest rates. But in late 1931 the government was finally forced to abandon the gold standard, and immediately the exchange rate of the pound fell by 25%, from $4.86 to $3.40. This eased the pressure on exporters, and laid the ground for a gradual economic recovery. Also in 1932 Chamberlain introduced tariffs on imports at a rate of 10% on all imports except those from the countries of the British Empire.

5 Britain in the 1930s: a nation divided

Although the overall picture for the British economy in the 1930s was bleak, the effects of the depression were uneven. Some parts of the country, and some industries, fared better than others. Some parts of the country, such as south Wales, experienced mass unemployment and poverty, while some areas in the south did not.

5.1 The South and the Midlands

Although in London and the south east of England unemployment was initially as high as 15%, the later 1930s were a prosperous time in these areas, as a house building boom was fuelled by the low interest rates which followed the abolition of the gold standard, and as London's growing population buoyed up the economy of the south east.

The south was also the home of new developing industries such as the electrical industry, which prospered from the large-scale electrification of housing and industry. Mass production methods brought new products such as electrical cookers, washing machines and radios into the reach of the middle classes, and the industries which produced these prospered.

Another industry which prospered during the 1930s was the motor industry. For cities which had a developed motor industry such as Birmingham, Coventry and Oxford, the 1930s were a boom time. Manufacturers such as Austin, Morris and Ford dominated the motor industry during the 1930s, and the number of cars on British roads doubled within the decade. Agriculture also flourished in the 1930s.

5.2 The north and other industrial areas

The north of England however was a quite different matter. The north of England was the home of most of the Britain's traditional industries such as coalmining, shipbuilding, steel and textiles. The north bore the brunt of the depression, and the '30s were the most difficult time in living memory for people in these areas.

In the north east (the areas around Newcastle-upon-Tyne) this was especially so. The north east was traditionally a major centre of the shipbuilding industry. The Depression caused a collapse in demand for ships. Between 1929 and 1932 ship production declined by 90%, and this in turn affected all the supply industries such as steel and coal. In some towns and cities in the north east, unemployment reached as high as 70%. Among the worst affected towns was Jarrow, where unemployment led to the famous Jarrow March, in which unemployed workers marched 300 miles to London to protest against unemployment.

The north west, a traditional centre of the textile industries, was also hard hit, with places such as Manchester and Lancashire suffering a slump. South Wales, a centre of the coalmining and steel industries, was also devastated by the depression. Towns such as Merthyr Tydfil and Swansea had unemployment rates reaching above 25% at certain times. The industrial belt of central Scotland also a major shipbuilding centre was also hard hit by the slump.

In these areas millions of unemployed and their families were left destitute, and queueing at soup kitchens became a way of life. A government report in the mid 1930s estimated that around 25% of the UK's population existed on a subsistence diet. In his book The Road to Wigan Pier, George Orwell described life for the unemployed in northern England during the depression: "Several hundred men risk their lives and several hundred women scrabble in the mud for hours... searching eagerly for tiny chips of coal in slagheaps so they could heat their homes. For them, this arduously-gained 'free' coal was more important almost than food."

6 The welfare state during the 1930s

In the 1930s Britain had a relatively advanced welfare system compared to many of the industrialised countries. In 1911 a compulsory national unemployment and health insurance scheme had been put in place by the Liberal government of David Lloyd George. This scheme had been funded through equal contributions from the government, the employers and the workers. At first the scheme only applied to certain trades but it was gradually expanded in the 1920s.

But the scheme only paid out according to the level of contributions rather than according to need, and was only payable for 26 weeks. Anyone unemployed for longer than that had to rely on relief paid by their local authority. In effect, millions of workers who had been too poorly paid to make contributions, or who had been unemployed, were left destitute by the scheme. With the mass unemployment of the 1930s, contributions to the insurance scheme dried up, which resulted in a funding crisis.

In 1934 the 1911 scheme was replaced by a fully government-funded unemployment benefit system. This system for the first time paid out according to need rather than the level of contributions. But the unemployment pay was subject to a strict means test, and anyone applying for unemployment pay had to endure an inspection by a government official to make sure that they had no hidden earnings or savings. For many poor people this was a humiliating experience and was much resented.

7 Slow recovery

Following Britain's withdrawal from the gold standard and the devaluation of the pound, interest rates were reduced from 6% to 2%. As a result British exports became more competitive on world markets than those of countries which remained on the gold standard. This led to a modest economic recovery, and a fall in unemployment from 1933 onwards. Although exports were still a fraction of their pre-depression levels, they staged a modest recovery.

Unemployment began a modest fall in 1934 and fell further in 1935 and 1936. But the rise in employment levels occurred mostly in the south, where lower interest rates had spurred a house building boom, which in turn spurred a recovery in domestic industry. The north remained severely depressed for most of the decade.

In severely depressed parts of the country the government enacted a number of policies to stimulate growth and reduce unemployment, including road building, loans to shipyards and tariffs on steel imports. These policies helped but were not however on a sufficiently large scale to make a huge impact on the unemployment levels.

8 Rearmament and recovery

From 1936 onwards the government followed a policy of mass rearmament to counter the threat from Nazi Germany. This "accidental Keynesianism" provided the economic stimulus which finally ended the depression. By 1937 unemployment had fallen to 1.5 million, from where it fell even further. The mobilisation of manpower following the outbreak of war in 1939 finally ended unemployment.

9 Consequences of the great depression

Following the end of World War II, the majority of the British people, and particularly the working class, did not want a return to pre-war Conservative economic policies, which they blamed for the hardship of the 1930s, and there was a mood for widespread social change. At the 1945 general election, to the surprise of many observers, Winston Churchill was defeated by the Labour Party, headed by Clement Attlee.

The Labour government presided over the foundation of a comprehensive cradle-to-grave welfare state, and founded a universal, tax funded National Health Service, which gave treatment according to need rather than ability to pay. The Labour government also enacted Keynesian economic policies, to stimulate the economy to create full employment. These policies became known as the "post-war consensus," and were accepted by all major political parties. This post-war consensus lasted until the late 1970s when it came under attack from the Conservatives, led by Margaret Thatcher.

10 See also

• UK topics

Great Depression

<Hide>