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Stockton-on-Tees constituency suffered deeply in the Depression, and who was exasperated by ‘a shadow Cabinet … worn to a shadow by its exertions’, a party with too many ‘open questions and too many closed minds’ — a criticism that could have been levelled at all three parties. Indeed Macmillan, who would in a little more than two more decades preside over Britain’s return to affluence, had been tempted to work with Mosley’s New Party himself, but had decided that ‘Men do better to stick to their own parties and try to influence their policies and their characters from within.’ Keynes too recognised much that he advocated in Mosley’s proposals. He found the memorandum ‘a very able document and illuminating’. And whereas before Mosley’s resignation the dispute had been over the efficacy of public works, afterwards the focus of the argument was increasingly about tariffs. Protectionist policies began to find support not just from industrialists, but also from the City of London, economists — including Keynes — and trade unionists. But not from Snowden. The Chancellor remained as intransigent as ever, opposed both to increasing government expenditure to create jobs and also to any form of tariff barriers. Irritated by sniping from his own backbenchers, Snowden decided to give them a cold douche of reality as he saw it. In February 1931, in response to Conservative charges that unemployment costs were too high, the government accepted a Liberal amendment and set up a committee to report on the matter.

      Sir George May of the Prudential Assurance Company assumed the role of picky auditor of the government’s books, and his committee’s report was published on 31 July 1931, the day before the House rose for the summer recess. The deliberations of the men whom Beatrice Webb described as ‘five clever hard-faced representatives of capitalism and two dull trade unionists’ were ‘sensational’ (or ‘devilish’, as the Bank of England feared). The May Committee forecast a budget deficit of £120 million, and to avoid this it recommended total spending cuts of £96 million, two-thirds to come from unemployment benefit, plus cuts in public works projects and the pay of teachers, the police and the armed forces. ‘Luxury hotels and luxury flats, Bond Street shopping, racing and high living in all its forms is to go unchecked; but the babies are not to have milk and the very poor are not to have homes. The private luxury of the rich is apparently not wasteful expenditure,’ expostulated Beatrice Webb. The Cassandra-like May report, which was considerably exaggerated but not questioned at the time, could not have come at a worse moment. On 11 May the Credit-Ansalt, the most important bank in Austria, had failed, threatening the collapse of the German banking system. France started to withdraw gold in large quantities from London, and by the end of July MacDonald noted ‘Run on the Bank of England … £5,000,000 exported’ as foreign holders of sterling unable to withdraw their money from Germany withdrew it from London instead, in what Treasury officials warned was ‘an unprecedented exodus’. What had been a liquidity crisis was turning into one of confidence.

      The Labour government was ill-placed to know how to restore it. In line with its election pledges benefit payments had been increased and access to benefits widened in January 1930, but the rapid escalation of unemployment and a shrinking tax base meant that the insurance fund was soon in deficit — by £75 million in 1930, and expected to rise. Unemployment benefits generally had soared as a cost to the Exchequer, from £12 million in 1928 to around £125 million in 1931. To its critics, unemployment insurance had become symbolic of the Labour government’s financial ‘unsoundness’ and ‘profligacy’. The Holman Gregory Commission on Unemployment Insurance, set up in December 1930, issued its interim report at the end of June 1931, calling for reductions in unemployment benefits and increases in unemployment insurance contributions. And when Lord Macmillan’s Committee finally issued its report in early July, ‘it was not exactly a document of limpid clarity and gave little practical assistance to a distracted administration’ (rather it gave the reverse, exposing the extent of London’s short-term foreign indebtedness to the government’s putative overseas lenders), while the minority report signed by Keynes and others saw the big picture and the long term, but was equally ‘of no immediate help’.

      Indeed, even after the publication of the May Committee report (on which his views were not fit for publication), Keynes still thought that MacDonald should consult ‘a Commee. consisting of all ex Chancellors of the Exchequer’ about the issue. Beatrice Webb, writing her diary at 4 a.m. in the middle of the crisis, considered that ‘The only excuse for the Labour Cabinet is that no other group of men, whether politicians, businessmen or academic economists, whether Tory, Liberal or Labour, seem to understand the problem. No one knows either what the situation is … or the way out of it to sound finance. Even the fundamental facts of the situation are unknown.’

      MacDonald set up a Cabinet Committee consisting of himself, Snowden, Henderson (who despite his position as Foreign Secretary discussing US loans considered that finance was a matter for the Treasury), J.H. Thomas and William Graham, President of the Board of Trade, to consider ways of reassuring foreign investors and easing the strain on sterling. ‘Will the country pull through?’ the Governor of the Bank of England Montagu Norman was asked on 15 August 1931. ‘Yes,’ he replied, ‘if we can get them [i.e. the government] frightened enough.’ Undoubtedly the government was frightened. It was also divided.

      On hearing that more than £6 million in gold reserves had leached away during the past month, Snowden wrote to MacDonald on 7 August 1931 stressing the ‘terrible gravity of [the whole situation]. Three millions of unemployed is certain in the near future and four millions is not out of the question. We are getting very near exhausting our borrowing powers for unemployment … we cannot allow matters to drift into utter chaos, and we are perilously near that.’ It was reported in the City that MacDonald was hopeful that a loan to help prop up sterling ‘could be placed in New York if satisfactory promises of good behaviour are made here’. But whatever Snowden and MacDonald thought about the imperative of balancing the budget — and by mid-August Snowden was predicting that the deficit would be £170 million, rather than the £120 million the May Committee had forecast — what the City regarded as ‘good behaviour’ went against the very raison d’être of the Labour Party: to represent the interests of working people. Now a Labour government that had proved unable to tackle, let along conquer, unemployment was being expected to penalise those very people who were already suffering most from this failure. ‘It certainly is a tragically comic situation that the financiers who have landed the British people in this gigantic muddle should decide who should bear the burden,’ again expostulated Beatrice Webb.

      The Bank of England’s agent in New York, J.P. Morgan & Co., reported that Wall Street needed to have confidence in the financial competence of the British government, and that no further loans would be forthcoming unless an economy package could be put together which satisfied the opposition parties. But this proved impossible. The Conservative Party insisted that taxation must not rise, and Neville Chamberlain, the shadow Chancellor, insisted that the economy package the government was proposing must be increased by around £30 million, while the Liberal leader Herbert Samuel insisted that there had to be ‘drastic action’ on unemployment insurance.

      There was another option to swingeing cuts, one that Keynes had come round to favouring, and even Bevin had ventured was not unthinkable, and that was coming off the Gold Standard, and allowing the pound to settle at a lower value than its parity with gold. But no other member of the government or opposition even contemplated such apostasy: the Gold Standard was a sine qua non of the financial stability necessary for a permanent revival of trade, industry and employment, and all other economic decisions had to be taken in light of this given. Anything else would, in the words of the usually cautious economist Hubert Henderson, who was no Treasury man, let loose ‘a real déringolade [meltdown] which would lead to the complete collapse of the currency which in turn would lead to far harsher cuts than any so far contemplated’. In what is probably an apocryphal story, Sidney Webb is supposed to have gasped, ‘I didn’t know we could do that,’ when Britain did abandon the Gold Standard a couple of months later.

      Meanwhile, the Cabinet accepted that the budget had to be balanced to restore confidence in sterling, and no one said anything about coming off the Gold Standard (rather Snowden warned the Cabinet on 8 August that the effect of departing from the Gold Standard would be a 50 per cent fall in the standard of living of working men). Hour after hour that humid August the Cabinet wrangled, cutting,

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