5 June 1929 – 24 August 1931
Labour won 287 seats to the Conservatives 260, at the 1929 General Election. James Ramsay MacDonald was Prime Minister for a second time and again at the head of a minority government. Margaret Bondfield was appointed Minister for Labour, the first woman to serve in the Cabinet.
The 1930 Greenwood Housing Act provided subsidies for slum clearance and the building of new council houses. A limited naval disarmament agreement between Britain, the USA and Japan was signed in London.
MacDonald also improved Anglo-American relations when he became the first British Prime Minister to visit the USA.
However, the second Labour Government was dominated by the effects of the global trade depression. It plunged Britain into what MacDonald referred to as an ‘economic blizzard’.
By December 1930 over 2.7 million people were out of work. The Government were slow to act and their attempts to deal with unemployment were largely ineffectual.
The financial crisis in the summer of 1931 led to fears that Britain would have to come off the gold standard.
With the Treasury predicting a budget deficit of £170 million, the Cabinet struggled to agree on a package of expenditure cuts that would balance the budget and restore confidence in sterling.
It was the proposed cuts to unemployment benefit which proved most divisive. On the 24 August 1931 the Labour Government resigned.
Labour won 287 seats, the Conservatives 260 and the Liberals 59. Labour lacked an overall majority. Stanley Baldwin, the Leader of the Conservatives, refused to make a deal with Lloyd George’s Liberals and resigned.
The three main parties had each put up over 500 candidates. Labour won seats across the country making it more of a national party.
However while Labour had won more seats, the Conservatives had taken 38.1% of the vote to Labour’s 37.1%. Several seats had been highly contested and Labour had won them by only narrow margins.
James Ramsay MacDonald returned for the second time as Prime Minister. There was a row over who should be Foreign Secretary. A reluctant MacDonald eventually gave the post to Arthur Henderson.
Philip Snowden was made Chancellor of the Exchequer, while J R Clynes became Home Secretary. Sidney Webb, who had been given a peerage and was now Lord Passfield, was made Colonial and Dominians Secretary.
The only left winger to be given a Cabinet post was George Lansbury (First Commissioner of Works). He was to assist Jimmy Thomas (Lord Privy Seal) in tackling unemployment.
The Cabinet also included the ex-Liberals Charles Trevelyan (Education), Noel Buxton (Agriculture) and William Wedgewood Benn (India Office). The ex-Conservative Lord Sankey was made Lord Chancellor.
A V Alexander was given the Admiralty, Arthur Greenwood Health, William Graham the Board of Trade and Margaret Bondfield was appointed Minister for Labour.
There were some early successes in foreign policy. Keen to improve Anglo-American relations, in October 1929 Ramsay MacDonald became the first British Prime Minister to visit the USA. In April 1930 a limited naval disarmament treaty was signed in London between Britain, America and Japan.
On the domestic front the 1930 Coal Mines Act reduced the miner’s working day to seven and a half hours.
The 1930 Greenwood Housing Act provided local authorities with subsidies for slum clearance and the re-housing of tenants. By 1939 over 700,000 new council homes had been built.
Labour were only in government for a short time and they did not have a parliamentary majority. An attempt to repeal the 1927 Trades Dispute Act failed. An Education Bill which would have increased the school leaving age to 15 was rejected by the House of Lords.
The second Labour Government was dominated by rising unemployment and the ensuing global economic crisis.
The Wall Street Crash in October 1929 had been followed by a worldwide trade depression. The second Labour Government had to deal with a steep rise in unemployment.
When they took office in June 1929 unemployment stood at 1.1 million. In January 1930 that figure had risen to 1.5 million and by June it had climbed to 1.9 million.
By December 1930 over 2.7 million people were out of work.
The Cabinet minister Jimmy Thomas had been given responsibility for unemployment. He was aided by George Lansbury and two junior ministers Oswald Mosley (Chancellor of the Duchy of Lancaster) and Tom Johnston (Scottish Office).
Thomas travelled to Canada to promote British exports, but with little success. He also tried to encourage British industries to improve their competiveness by introducing schemes of rationalisation. Finance for these would come from the City.
The Government attempted to create more jobs by investing in public works projects, such as road building. Only limited sums of money were allocated by the Treasury and there were long delays in implementing the schemes.
Government attempts to reduce unemployment was ineffective. Thomas was heavily criticised. He was replaced as Lord Privy Seal by Vernon Hartshorn in June 1930.
The first meeting of the Economic Advisory Council was held in February 1930. Its members included representatives from the trade unions, businessmen, and economists including J M Keynes.
Its main purpose was to advise the government and provide solutions to the current economic crisis.
In the event the EAC proved ineffectual. It had a limited impact on government policy and its members disagreed on how to tackle unemployment and promote economic recovery.
In January 1930 Oswald Mosley sent Ramsay MacDonald a memorandum detailing his proposals for solving the unemployment crisis.
A loan of £200 million should be used to finance public works projects, such as road building. The school leaving age should be raised and the pension age lowered, to decrease the size of the labour market.
Mosley also advocated the introduction of tariffs. Instead of an economic policy which focused on exports, domestic markets should be given priority. Unemployment policy should be centrally coordinated by a small Cabinet under the Prime Minister.
The memorandum was referred to a sub-committee headed by the Chancellor of the Exchequer Philip Snowden. They reported back to the Cabinet on the 1 May 1930, rejecting Mosley’s proposals.
The Minister for Transport Herbert Morrison dismissed the mass road building scheme as unworkable.
Snowden was also against the proposals. He was committed to economic orthodoxy, believing in balanced budgets and limiting government expenditure. A large loan would push up interest rates and destroy business confidence.
Ramsay MacDonald thought the idea of solving unemployment by borrowing money for a public works programme was ‘ill-considered’.
The introduction of tariffs went against the Labour Party’s belief in the principle of free trade.
On the 20 May Oswald Mosley resigned from the Government. He left the Labour Party in February 1931 and formed the New Party.
In January 1931 the unemployment insurance fund was in debt by £70 million and the Treasury were predicting a large budget deficit. The Labour Government was coming under increasing criticism for its inaction.
In February 1931 the Commons voted in favour of a Liberal amendment to set up an independent committee on national expenditure. The committee was headed by Sir George May of the Prudential Assurance Company.
Its findings were published at the end of July.
The May Report forecast a budget deficit of £120million.
It recommended cuts in government expenditure of £97 million. £67 million of this was to come from expenditure on the unemployed. Unemployment benefit was to be cut by 20%, insurance contributions raised and a means test brought in.
The Government’s initial response to the May Report was to set up a committee (MacDonald, Snowden, Henderson, Thomas and Graham) which would meet on the 25 August 1931 to consider it.
During July there had been large withdrawals of gold from the Bank of England. This had been triggered by the collapse of Austria’s largest bank in May and the banking crisis in Germany.
The Bank of England had to borrow £50 million in foreign loans. There were fears that it would not be able to maintain the gold standard.
The £120 million budget deficit forecast by the May Report reduced confidence in sterling even further.
The worsening financial crisis forced the committee to bring forward their meeting to the 12 August.
The economy committee decided that foreign confidence in sterling had to be restored by cutting expenditure and balancing the budget.
The alternative was to leave the gold standard and devalue the currency. At the time most thought this would lead to financial chaos. This was the view of the Bank of England.
The Treasury estimated the budget deficit would actually be £170 million, not £120 million.
The economy committee proposed raising £89 million from increased taxation. Expenditure would be cut by £78 million, less than recommended by the May Report. The cuts would be made to unemployment benefits and the education and defence budgets.
The financial crisis now became a political crisis as well.
The Liberal and Conservative Party leaders demanded bigger cuts in expenditure, particularly on unemployment. The TUC was opposed to all cuts.
On the 21 August, the Cabinet agreed on a saving programme of £56 million.
This figure was too low for the bankers and for the opposition leaders, who stated that they would join forces against the Government once Parliament was recalled.
MacDonald approached the Federal Reserve Bank in New York for a loan in return for a greater reduction in government expenditure. This would include a 10% cut in unemployment benefit.
The biggest point of contention for the Labour Cabinet had always been the cut to unemployment benefits.
The Cabinet voted eleven in favour and nine against the 10% reduction in unemployment benefit. It was clear that the Cabinet was too divided.
On the 24 August, Ramsay MacDonald went to the Palace to offer his Government’s resignation.
Ramsay MacDonald stayed on as Prime Minister, heading a National Government. Few Labour MPs followed him. He was regarded as a turncoat for his betrayal and subsequently expelled from the Labour Party.
