On July 24th 1931, as seen above, the Labour prime minister Ramsay MacDonald went to the palace to resign (above), after his government had become irrevocably split over a plan to impose spending cuts, notably in unemployment benefit, in the face of a sterling crisis. A minority Labour government found itself at the mercy of events largely beyond its control, in the form of the Great Depression and a banking collapse in Austria and Germany. Instead of resigning, though, MacDonald ended up becoming the leader of a national government.
It seems germane, given current events, to look back at one or two periods of profound political change, and crisis.
Some would see the economic and financial crisis of 1931 as symptomatic of the coming of the long term relative decline that is often seen as the hallmark of 20th century Britain (though as others might point out, it was decline that saw the economy grow rapidly and made most people far, far better off). It was certainly a function of the long term decline in the market value of sterling, as we see below:
It was just the first in a succession of sterling crises that afflicted Labour governments (1931, 1947 and 1949, 1967 and 1976, click the links to find the entries on the relevant chancellors) to the entries of the and then the Conservatives in 1992 (link to come) and 2016. It was also a profound moment in our political history, but that’s for the second part of these musings.
For Labour at the time, the creation of the national government was simply explained: facing a ‘banker’s ramp’, MacDonald betrayed his party for the sake of keeping power. In Labour history, MacDonald was the traitor: the man who had got into bed with the Tories and betrayed his party for the sake of keeping power. This narrative suited Labour, largely because it enabled them to avoid a genuinely self-critical examination of their failures in 1931 and before. It was not until David Marquand’s 1977 biography that the conviction of treason was effectively appealed. Marquand was, of course, writing at a time when the post-war consensus the next generation of Labour built was failing. Marquand was a Labour MP until, in 1977, he followed his mentor Roy Jenkins to the European Commission. By 1918, he had left Labour and joined the SDP (you can read about that here, and here). Marquand was thus particularly interested in different left of centre traditions. In his excellent DNB entry on MacDonald, he sees him as, in some ways, a forerunner of Blair.
The charge of treason against MacDonald was useful for Labour history: it covered up failure, blaming it on MacDonald and his tiny band of supporters. The idea of a ‘banker’s ramp’ served a similar use. Just as there was no treason, there was no ‘banker’s ramp’. Not that the Labour politicians of 1931 could even agree on which bankers were doing the ramping. For Christopher Addison (who coined the phrase) it was the Bank of England; for Lansbury, it was New York. The Bank of England and New York may have made erroneous assumptions, and May might have got his figures wrong, but conspiracy might be pushing things a little far. There was, after all, a genuine financial crisis. If there was any political manoeuvring to destroy Labour from without, it might be thought to be more likely to come from Baldwin.
All this begs a final issue. There was no immediate need to invite MacDonald to form a national government: Baldwin could have formed a minority administration. The circumstances of the king’s invitation, along with the wider political and economic situation of 1931 might also shed some light on MacDonald’s motives. For Marquand, MacDonald was doing what he held to be his national duty in a time a crisis. Attlee did call it an act of treason but, more tellingly, pointed to MacDonald’s vanity and the low opinion he held of his colleagues. Certainly, he would fail to carry them with him, and did not consult them when the national government was formed. In the end, it was Baldwin that called the shots, and MacDonald who went along. MacDonald might be yet another to have been, in John Charmley’s words, ‘scalped by Baldwin’.
At the heart of it all was Labour’s failure to deal with the Great Depression. It is also true that they inherited a British economy with serious problems, and with little idea of what to do about it, and with little of the bureaucratic, economic or financial machinery to do anything in any case. The brief post-war boom was followed by the severe recession of 1920-21 from which the economy never fully recovered. The hallmarks of the British economy in the 1920s were stagnation (or at best slow growth) and the arrival of structural unemployment in the form of the ‘intractable million’. To make matters worse, the British economy had underlying weaknesses. The great staple industries (cotton, coal, shipbuilding) were all struggling thanks to relative inefficiency, an overall contraction in world trade and an over-valued currency.
Policy made the currency issue worse. The panacea for Britain’s ills was, according to the Cunliffe Commission at the end of the Great War, the treasury throughout and Winston Churchill in 1925, was the gold standard. Before the war, the pound had been fixed to the value of gold at a value of $4.86. In 1925, Britain went back on the gold standard at its pre-war rate. It was a mistake: to paraphrase Keynes, The Economic Consequences of Mr Churchill were grave (you can read about Churchill as chancellor here). To get back onto gold, and maintain that rate, required deflationary policies at home, making unemployment worse: it also sowed the seeds of the 1931 crisis.
Then there were the public finances. If one pillar of economic orthodoxy was the gold standard, the other was a balanced budget. This would also prove problematic, especially for Labour. The recession of 1920-21, and a right-wing campaign against high spending that spooked his Conservative coalition partners, had seen Lloyd George forced to wield the Geddes Axe: sharply cutting spending on defence, education and housing. There was little room left for cuts thereafter. War debts were another problem: at its peak in the middle of the ‘twenties, servicing the debt accounted for 28% of government expenditure. The next biggest portion was social expenditure. The Lloyd George government had extended the unemployment insurance scheme. In the face of the intractable million the scheme’s finances were badly strained. Furthermore, some were not covered by the scheme. They had to be helped by the Victorian Poor Law. It could no longer cope. Futhermore, in the government’s eyes some local authorities, like George Lansbury’s Poplar, were too generous. Thus as minister of health, Neville Chamberlain had, in effect, abolished the old system and introduced so called transitional relief for those not covered by the national insurance scheme. Thus, the majority of the burden of unemployment relief now fell on the central government purse, just as the coming of the Great Depression saw unemployment shoot up. It was that creaking economic, financial and bureaucratic edifice that Labour found itself saddled with when the blizzard came.
It might also be felt that the Labour government were not wholly up to the job. That is not to say it lacked experience. It had been in government for ten months in 1924; Henderson had served in Lloyd George’s war cabinet. It is perhaps fair to say that the men at its centre were not equal to the crisis they faced. At the heart of the problem was MacDonald. MacDonald was hardly a minor figure, and his achievements were considerable. More than any other individuals, MacDonald and Henderson were responsible for the transformation of Labour from a regional party of 42 seats to the largest party in the Commons, polling almost 38% of the popular vote as they had in 1929. His arrival at King’s Cross after that victory saw him greeted by large, enthusiastic crowds. MacDonald was, in Manny Shinwell’s word, ‘a prince among men’. The problem was he knew it and, perhaps as a consequence, as noted above, had a low opinion of his colleagues.
This is perhaps best seen in his treatment of Arthur Henderson (seen with MacDonald, left), which would bear bitter fruit in the crisis of 1931. In his first government, MacDonald had been his own foreign secretary; his greatest interest was in foreign affairs, and in 1929 he wanted to do the same. Unfortunately, Henderson wanted the post (he had a similar attachment to foreign policy and, indeed, would go on to win a Nobel Peace Prize for his work on the World Disarmament Conference). Henderson won the job, but did not forget that MacDonald had tried to deny him (you can read about that here).
MacDonald knew little of economics, a fact he recognised: hence his appointment of the ‘wise men’ to advise him. Then, there was Snowden (right). Ernie Bevin famously quipped that ‘Gladstone was at the Treasury until 1930’: the implication being that Snowden was in the grip of an old-fashioned Victorian liberal Treasury orthodoxy. In the first place, Snowden was never quite the iron chancellor we often suppose (you can read about that here). However, by 1929 his relations with MacDonald were strained. MacDonald, as later Labour prime ministers would, sought to circumvent the grip of the Treasury. He appointed the Macmillan Commission to examine future economic policy; he put JH Thomas in charge of trying to deal with unemployment. As Attlee and Wilson would also discover, the Treasury is not easily circumvented. In March 1931, MacDonald had wanted to boot Snowden upstairs to the Lords and introduce tariffs: Snowden bitterly resisted tariffs, and held on. Those arguments, though, informed his increasingly staunch Treasury orthodoxy.
Even had his hands not been tied by the treasury, it would still be true to say that JH Thomas (left) would not have been up to the job of finding ways to tackle Britain’s unemployment problem. Whether anyone would have been is a moot point. The only alternative policy was coming from Oswald Mosley, who was neither trusted, nor trustworthy. It probably didn’t help that the recommendations of the Mosley Memorandum, higher spending on public works, were essentially an echo of Lloyd George’s We Can Conquer Unemployment. MacDonald, and Snowden had rejected them.
Which brings us to the root of Labour’s problem: they were a minority government. Thus, even if they had been minded to adopt more radical policies, they would have needed Liberal support. By the time the crisis had deepened, the Liberals had split; half of them, the Simonites, were de facto Conservatives. Snowden was not merely wedded to orthodoxy for orthodoxy’s sake. Governments do not like to see sterling undermined. The governments of 1931 had two awful spectres haunting them. The first was 1923, when Germany had seen hyperinflation. The others were the United States and Germany, both of which were undoing catastrophic downturns and a collapse in their banking system. For both MacDonald and Snowden, the economic blizzard was a time to hunker down not go forth boldly: it was not the time for radical and untried economic experiment.
Thus, in the absence of an alternative, they made do with an absence of policy. In that absence, and in the absence of a majority, MacDonald looked for cross-party solutions. The Macmillan Commission had been appointed to look into the underlying problems of the British economy, as manifest in a projected balance of payments deficit of £112m. By 1931, mounting unemployment saw tax receipts falling and welfare spending rising. At the suggestion of the Liberal Sir Donald Maclean, The former secretary of the Prudential Assurance Company, Sir George May (right) was appointed to investigate the public finances, given a budget deficit projected to be £82m. The idea of cross party cooperation was not invented in the summer of 1931; by then, it was simply more urgent and in the face of Labour’s failure to grasp the crisis, it began to seem like a way out.
The problem that the recommendations of both May and Macmillan would come as a sterling crisis had erupted and constrained the government’s room for manoeuvre. The sterling crisis began in Austria, with the collapse of Credit Anstalt in May, and then with the subsequent collapse of the German bank Darmstader on 13th July: as a consequence, £70m of British funds were frozen. (The photograph above shows queues outside the Berlin bank Sparkasse). The result was a crisis in British markets: between 13th July and 1st August, the Bank of England lost £33m in gold and £21m in foreign exchange.
The Macmillan Report had already strongly recommended staying on gold at the existing rate. Then, in the teeth of that sterling crisis, on 31st July, the May Report forecast a budget deficit of £120m and called for cuts of £96m (£66m from unemployment insurance, from a 20% cut and an increase in contributions). The sterling crisis and the budget deficit had become conflated and, worst of all, international markets and the banks came to see the government’s willingness to cut spending as the litmus test of its financial orthodoxy, just when Britain needed emergency loans to prop up sterling. The Cabinet set up an Economy Committee, but by then the cabinet could not agree on the £79m of cuts & £89m of tax increases recommended. To cope with the run on the pound, the government had negotiated £50m of foreign credits from Paris and New York. However, the failure of the government to agree on enough cuts to satisfy the markets meant that, between 7th and 19th August, £28m of the £50m was used up. The government tried to arrange further credits of £25m; to get these, the Bank of England, its New York financiers (JP Morgan) and Snowden were convinced that at least £70m cuts were needed. In short, the government were over a financial barrel. That fact, in the end, broke them.
The problem McDonald had was also political. In the first place, he was slow to react. Literally, in that he was slow to come back from his summer holiday in Scotland. Initially, it seemed that he and Snowden believed they would succeed in getting the cuts required. However, by the 18th August, it was clear that the full package of cuts could not be agreed, primarily because Arthur Henderson had changed his mind and now flatly refused to accept even a 10% cut in unemployment benefit: perhaps MacDonald’s cavalier treatment of his old comrade was coming home to roost. By the 21st, they were overtaken by events: even the original package was no longer enough, and the smaller revised one was regarded as unacceptable by the JP Morgan. This was the supposed ‘banker’s ramp’, the moment when JP Morgan and the Bank of England were said to have decided to bring a government down.
Philip Williamson has shown that such an accusation fundamentally misunderstands the situation. JP Morgan thought they had a deal with the Bank of England, the chairman of the Bank of England, Sir Montague Norman (seen with MacDonald, above) thought he had a deal with the government. Rather than seeking to bring down a government, the realised that yet another emergency loan in the absence of the cuts that would reassure markets would see sterling crash off the gold standard anyway, and that the government may well have gone with it. It is also true that the Bank of England made contact with the other parties. This was, however, to try and ensure they would not oppose an adequate government package and understood the gravity of sterling’s position. The real crisis was, instead, political: the cabinet was split down the middle over the issue and they all, like MacDonald, believed that the prime minister had no choice other than to resign. 1931 was a crisis of Labour, and a failure of leadership on MacDonald’s part, a failure of statecraft as seems to be the current mode. MacDonald’s neglect of his cabinet gave him insufficient goodwill to drag his colleagues with him. It might also thought, though, that there was an unwillingness to face facts in a crisis on the part of Henderson and co. Whichever, it was a failure of government as a whole, as well as of MacDonald: it was a Labour failure.
That political failure made the creation of a national government possible. When MacDonald went to the palace, it was to resign. Both he and Baldwin, it seems, foresaw the creation a Conservative minority government. The origins of the national government might, in part, be attributed to the honourable intentions of Baldwin, MacDonald, Herbert Samuel and the king: this was a national emergency, and a national government stood the best chance of taking those difficult decisions, and dragging the country with it. The idea was put by Samuel, but it seems that over a meeting with Baldwin and two with MacDonald, George V used his good offices.
In truth, all three had their political and personal reasons too. For Samuel (left), this offered a way back into government for a Liberal party seeming intent on self-destruction. For Baldwin, a national government had considerable political advantages. Unpopular and unpleasant cuts needed to be made, if they were made by a national government under MacDonald rather than a Tory one led by Baldwin, less political blame would accrue. For those who supported cuts, he would get credit. Baldwin had just seen off his own right, in the form of the Empire Free Trade Crusade: if he had failed in this, he may well have fallen, or might still have been embroiled in the battle for hos own leadership; now, coalition would help keep the right wing dissidents in their box. Most of all though, if we assume Baldwin intended to force an election on MacDonald, then a national government would deliver moderate and liberal votes and a landslide for the brand of Conservatism Baldwin wanted. For Baldwin, the price of leaving MacDonald in number ten was worth that gain, and maybe fairly convivial in the first place.
As ever in a time of crisis, Baldwin (right) took time to react, but when he did it was with the same sure-footedness he had shown in 1926 and 1930, and would again in 1936. For MacDonald, we should assume a sense of duty and honour, though he cannot wholly escape the charge of vanity, which the king played upon very effectively. He kept power, or at least its trappings. He did not foresee his permanent separation from his party. In truth, for all three honourable motives and political advantage intertwined, no more so than for Baldwin: the result was a national government and a general election for the ‘doctor’s mandate’ and thus, a national government for the long run.
The creation of the national government represented a political and economic failure of the most grievous kind for Labour. MacDonald was no traitor, but he had failed to bring his cabinet and party with him. In part, that showed a lack of realism on their part, but it still amounts to a failure of leadership. None of the key figures of that Labour government comes out of 1931 with much credit. True, they were faced with an economic blizzard that swept them away, and that had some of its roots in the problems that the Conservatives had bequeathed them. Nonetheless, they were not up to the task. In contrast, Baldwin, at his best in the teeth of a blizzard, used all his political gifts to their maximum effect, and with some help from Samuel and George V. Nonetheless, above all else, Baldwin made the national government happen, and work. In 1931, Lucy Baldwin’s ‘Tiger’ had one of his finest hours.
To fully understand that, we need the wider political context. And that’s for part two.
Here, is Pathe News‘ coverage of MacDonald’s resignation and the creation of the national government:
And here, is a 1931 election address:
RGS History 
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