The Thirties: An Intimate History of Britain

The private dining club, named the XYZ, met fortnightly or monthly in a room above a pub ‘over a City alley deserted by night’, in the private rooms of quiet Soho restaurants, a Charing Cross hotel, or in members’ homes, depending on whose memoirs one reads, but always in great secrecy. Dalton, Herbert Morrison, Stafford Cripps and Attlee, all of whom except Cripps were ‘sublimely ignorant of the City and suspicious of its institutions, especially the Stock Exchange which they regarded as a casino where rich men gambled to make money regardless of the state of the economy’, were wined and dined so that what Dalton rather grandly called ‘my experts’ could attempt to ‘enlighten them and exorcise the ghosts of Puritan bigotry and prejudice which haunted them’. Dalton’s experts wrote papers and produced statistics on such matters as nationalising the Bank of England and the reform of the Stock Exchange, and advocated setting up a National Investment Board and an Industrial Finance Corporation.

‘I like to think we did some good,’ Davenport reflected forty years later, and quoted one of their number, Francis Williams, who had been City editor of the Labour-supporting Daily Herald at the time, and later took over as editor, assuming the role of Attlee’s press spokesman after the war, who reckoned that ‘Over the years, the XYZ Club drew up a blueprint for Labour’s financial policy much of which … was adopted by the first postwar Labour government … [which it did] in the most private manner without attracting attention to itself.’ But useful though that surely was, neither the XYZ Club nor any of the other think tanks, committees and ginger groups managed to find any immediate solution to the problem of conquering (or tackling, as the word had less ambitiously become) unemployment.

‘In the chaos of our political life today, there will be many meteors passing through the firmament,’ wrote Beatrice Webb in her diary, with little enthusiasm at the prospect. ‘Have there ever been so many political personages on the loose?’ Mrs Webb was particularly thinking of Sir Oswald Mosley and Winston Churchill, but there were other unaligned souls out there on the loose with notions of how to conquer, tackle, solve the problem of ever-rising unemployment. The Fabian and best-selling novelist H.G. Wells thought there might be some mileage in a scheme to ‘grow vines and produce white wine on the slopes of the hills in the South Wales mining area — as they do in Grasse in the South of France’, wrote Thomas Jones. ‘He also thought we should have large horticultural farms to produce early vegetables. I quickly discovered that he had no sense of the actual position in the derelict areas.’

The modernist poet Ezra Pound was another economic loose cannon. Long concerned about the plight of the under-remunerated artist, after the First World War he was attracted to the economic ideas of Major Clifford Hugh Douglas. Douglas, a Scot, had noticed when he was Assistant Director of the Royal Aircraft Works at Farnborough during the First World War that there was always plenty of money available to pay for what was needed, whereas before the war he was always being told that there was no money to do something useful. He came to the conclusion that there was a simple explanation for the persistence of unemployment and poverty in a modern world that was producing more and more goods. Basically, people couldn’t afford to buy the things they produced: it was the persistent problem of under-consumption. So there was widespread poverty ‘when physically all could be living in plenty’. If modern technology was leading to increased productivity, then the state would have to step in to increase people’s ability to pay for those goods, and this could be done by effectively extending wartime controls, which to Douglas’s mind had worked well.

The answer, Douglas argued, was contained in his ‘three demands’: a ‘National Credit Office’ to work out how much credit should be circulating in the economy; a ‘just price’ — a mechanism to absorb profits in times of inflation and return them to the people in the form of subsidised prices when the goods on the market exceeded the money available to buy them; and a ‘national dividend’ (a bit like a Co-op divi) to give a guaranteed basic income to all, regardless of whether they had a job or not.

This may have been an attractive economic argument, but it was a fallacious one, as G.D.H. Cole and Hugh Gaitskell (and many others) pointed out. Another of Douglas’s wackier — though again rather appealing — ideas was reducing the working day of all those who worked in government offices to four hours, but doubling their number, the second shift intended to check the work of the first.

Major Douglas’s economics might have been ‘heresy’ rather than unorthodox, a ‘piece of nonsense’, even a ‘farrago of confusion’, and Douglas might indeed be better regarded as ‘a religious rather than a social reformer’, but he was a hit with ‘the political and social crowd that hangs round Speakers’ Corners and joins in any march or demonstration’ in the early 1930s. He also managed to snag the imagination of the ‘fringes of the left and right’, men like Hilaire Belloc, G.K. Chesterton, the poet Edwin Muir, the ex-editor of the New Age, a journal of ideas much concerned with modernism in culture, politics, Nietszchean philosophy and spiritualism which had been very influential among the avant garde before the First World War, A.R. Orage (who also published Pound on the pound) and of course Pound himself, who not only penned economic treatises, but incorporated his economic thinking into some of his poems: ‘and the power to purchase can never/(under the present system) catch up with/prices at large/and the light became so bright and so blindin’/in this layer of paradise/that the mind of man was bewildered’. However, in a time of slavish adherence to the Gold Standard, Pound was prescient in seeing that money was nothing more than a token: ‘Money is not a commodity but a measure’. ‘Real credit is a measure of the reserve of energy belonging to the community,’ he maintained, and he proposed a ‘citizen’s income’ given as of right, much like the vote. And, since ‘far from employment bringing riches to a man, employment takes riches away since a person’s riches should be calculated according to their store of time and energy, and are diminished by any encroachment on these’ (a true creative artist’s economics!), working hours should be cut to ‘possibly three hours a day for adults between 18 and 40 … [which] should supply all men’s necessities’.

One of the reasons Ezra Pound found Douglas’s economic theory so appealing was that it was an implicit attack on banks and financiers, since inflation and deflation were controlled in ‘a dark room back of a bank, hung with deep purple curtains’. So, ‘Who my brother controlleth the bank?’ For the virulently anti-Semitic Pound, the answer was obvious: a conspiracy of Jewish financiers.

Another maverick thinker frustrated with orthodox economic theories was the British-domiciled Canadian newspaper magnate, owner of the Daily Express, Lord Beaverbrook. Like Mosley, Beaverbrook, frustrated with the political party he had tried to influence with his radical ideas, set up a new movement. In Beaverbrook’s case it was the Conservative Party that he had lost patience with. And his ‘new wine’ was Imperial Preference (which had been championed by Joseph Chamberlain in 1903), a tariff-protected internal market between Britain and her dominions intended to bind the Empire together and insulate Britain from the buffetings of the world economy.

In the eighteenth century Adam Smith, the principal theorist of Free Trade, had argued that the removal of trade restrictions between nations would encourage the exploitation of natural advantages, producing an efficient international division of labour and world peace. It was a doctrine perfectly attuned to the industrial hegemony that Britain had enjoyed as ‘workshop of the world’, buying raw materials in the cheapest markets and selling its manufactured goods in the most costly. But as foreign competition increased in the nineteenth century and the workshop began to look rickety, there were calls for trade barriers to protect British manufacturing industry and the wages of the workers, which free trade imports could undercut.

By 1930 the pressure to protect the home market was beginning to come from some unexpected quarters. It was a highly sensitive political matter, since Labour relied on the support of the Liberals in government, and for the Liberal Party, political and ideological heirs to Cobden and Bright, free trade flowed through their very veins. Snowden, too, was implacably opposed to the erection of any form of tariff barriers. Yet while the Labour government remained firm in its commitment to free trade, a protectionist movement under the leadership of Sir John Simon was stirring deep in the heart of the Liberal Party. And Stanley Baldwin, leader of a Conservative Party that was no more united in its policies to deal with the economic crisis than Labour or the Liberals, felt the breeze too, noting in April 1930 that ‘The age of free trade is passing … because no new free traders are being born today.’ He grew more confident about reviving old Conservative policies of tariff protection, talking cautiously about safeguarding industry and holding a referendum on what had previously been a vote-loser: food taxes. This however was not enough for those in the party who wanted MacDonald to commit to the pursuit of Empire Free Trade.

In early 1930 Beaverbrook jumped the gun and announced the start of an Empire Crusade, since ‘The old Parties, slaves of tradition — impervious to new ideas — have let us down too, and … out of these old bottles it is no use looking for any new wine.’ Beaverbrook’s plan was to create a single economic unit from the variety of territories within the British Empire: the Empire would provide Britain with its food, while British industry would provide the Empire with the manufactured goods it needed, all behind a protective tariff barrier.

The Crusade, publicised in Beaverbrook’s Daily Express, and Lord Rothermere’s United Empire Party, supported by his Daily Mail (between them these two papers had a circulation of nearly four million), formed an uneasy alliance ‘to save the country … if necessary at the expense of wrecking every political party’ by putting up candidates in every constituency represented by a free trade Conservative (though in fact Rothermere was less concerned about Empire trade than about the loss of British influence in India). In March 1931 the Empire Crusade and the United Empire Party joined together to support an independent, anti-Baldwin Conservative in a by-election in the St George’s division of Westminster, the safest (and without doubt the richest) Conservative seat in the country, where the official Conservative candidate was Duff Cooper. Baldwin, who was being attacked from ‘under the piecrust’ in his own party, was so anxious about the result that he almost considered standing himself. Cooper was a former diplomat and MP, a skilful gentleman-who-lunched, and both the husband of one of the notable beauties of the age, Lady Diana Cooper, and a close friend of the Prince of Wales. In the event, in a campaign in which ‘the gloves were off’ and there had been ‘no baby or butcher-kissing’, the socialite Tory ‘slayed the dragons’, winning a resounding victory despite the ‘power without responsibility’, as Baldwin accused it, of the popular press.

What Mosley and Beaverbrook advocated in extremis — and tainted with their advocacy — also figured in John Maynard Keynes’ thinking, found instinctive support from the trade unions, and drew praise from radical young Tories like Robert Boothby and Harold Macmillan, whose 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, trimming. By the twenty-first, agreement had been reached that rather than making economies of £78 million and cutting unemployment benefit payments by £48 million, economies would be reduced to £56 million, unemployment benefits cut by £22 million. But the City dismissed the new targets as inadequate — and warned that gold reserves would probably only last for four more days. Chamberlain for the Conservatives and Sir John Simon for the Liberals said the same; the two opposition parties would ‘turn them [the Labour government] out immediately the House met’ (being August, Parliament was in recess), insisting that it was MacDonald’s duty to avoid the crash. The Conservatives would give him ‘any support in our power for that purpose, either with his present, or in a reconstructed government’, and Samuel committed the Liberals to that line too — stressing the immense urgency of the situation.

The General Council of the TUC, seeing no ‘equality’ in the sacrifice they were being asked to make, and convinced that the situation was not quite so desperate as was being alleged, refused to agree to any cuts in benefits or in the pay of teachers or policemen (‘Pigs,’ spluttered Sidney Webb, meaning the TUC) — though it was prepared to condone those for judges and ministers. ‘Practically a declaration of war,’ MacDonald noted in his diary; he must have felt he was staring at a brick wall. The bankers insisted on cuts; the trade unions insisted on no cuts. As for support within Cabinet, according to his son Malcolm, MacDonald was ‘disgusted with the behaviour of many of his colleagues; they lack grasp of the situation and the guts to face it … He will carry on if he can, but it is more likely that the situation will be such that he has no alternative but to resign.’ At 10.30 a.m. on Sunday, 23 August 1931, MacDonald set out for the Palace apparently intending to resign ‘with the whole Cabinet’, but the King made it clear that should the Labour government resign, his view was that MacDonald should attempt to ‘carry the country through’ with Conservative and Liberal support.

That evening nine of the eleven members of the Labour Cabinet (including the key player, the Foreign Secretary Arthur Henderson) made it clear that they would not agree to a 10 per cent cut in unemployment benefit, by far the most important part of the package. Clearly the government could not continue. MacDonald was confronted with some unpalatable choices: the Labour government could resign, hand over to the Conservatives and Liberals and oppose the cuts in unemployment benefit from the opposition benches, when in fact MacDonald considered them to be necessary; he could resign the Labour leadership and support the cuts; or agree, in his daughter Sheila’s words, to be ‘P.M. of coalition govt. (this is what King wants) Wld. have to face whole antagonism of Labour movt. Seeming desertion of principle & playing for office. Lose hold of party.’ MacDonald havered: on 24 August he returned to the Palace.

The King again tried to persuade him that resignation would be a dereliction of duty: MacDonald must put country before party and head a National Government. The Prime Minister agreed that in the circumstances he would be prepared to remain as head of a government in which the Conservative and Liberal leaders Baldwin and Samuel would also serve ‘until an emergency bill or bills had been passed by Parliament, which would restore once more British credit and the confidence of foreigners’, after which time Parliament would be dissolved and a general election would be fought along party lines. ‘Certain individuals, as individuals, [would be invited] to take on their shoulders the burden of government’ in the new configuration. ‘MacDonald has been crawling along the hedgerows in search of Labour ministers these last few days,’ wrote Hugh Dalton, who was not trawled. In the event, Snowden, Thomas and Lord Sankey, the Lord Chancellor, were the only three Labour Ministers who agreed to serve in the National Government.