The 1930s Squeeze. From Revenue Squeeze to Spending Squeeze via Political Crisis
Background: The Period in Perspective
Financial market upheavals played some part in most of the fiscal squeezes explored in this book. But (along with the mid-1970s and the period after 2008), the early 1930s stand out as a time when such upheavals were particularly dramatic and politicized. This squeeze episode occurred during a once- in-a-century world slump together with a global financial crisis that was arguably not equalled until 2008. And the market processes were politicized in that a narrative of an international 'bankers' ramp', forcing a weak, beleaguered Labour Government to abandon its socialist ambitions by cutting spending on welfare in a vain attempt to protect the currency, became the dominant account of this episode on the left of British politics for decades. And that dominant narrative arguably explains why the first enterprise to be nationalized by the 1945 Labour Government was the Bank of England (Williamson 1984: 770).
As Chapter Two showed, an analysis of reported financial outcomes reveals two different fiscal squeeze episodes in the 1930s. The first was a revenue squeeze originating in the 1930 budget, announced by the Labour Chancellor Philip Snowden and aimed at correcting what was seen at the time as a serious budget deficit. The second, originating in an emergency budget of September 1931, also announced by Philip Snowden as Chancellor, but by then operating within a three-party 'National Government', took the form of a squeeze on both spending and revenue, although not a 'double hard squeeze' on the criteria used in this book.
Britain's second Labour Government—like the first, a minority government and led by Ramsay MacDonald—took office in 1929. Only a few months later, a stock market crash in London preceded the biggest international market collapse in a century. Then, instead of a hoped-for quick recovery, a world depression ensued, with unemployment rising everywhere and prices falling. And in May 1931 Austria's largest bank collapsed, starting a European financial crisis in some ways redolent of what happened after 2008.
In contrast to the 'Geddes Axe' episode discussed in Chapter Three, when spending cuts were made on a budget already in balance, the UK government was running a deficit in 1931 (estimated at the time at about ?170m, or roughly 4 per cent of GDP, a figure that included a ?70m deficit in its unemployment insurance fund as a result of mass unemployment). It also faced continuing severe pressures on the currency (which had been returned to the gold standard at the pre-World War I rate by the previous Conservative Government in 1925), with foreign investors withdrawing some ?2.5m in gold per day at one point. That is why the often-overused term 'crisis', rather than merely 'stress', seems justified as a descriptor of the background to the squeeze in 1931.
Further, this period of fiscal squeeze seems to have produced more turmoil than any of our other specimens, producing political twists and turns redolent of some of the more dramatic eurozone fiscal squeezes of the 2010s, even though, as Chapter Two showed, it was by no means the deepest or longest over a century in the level of spending cutbacks or revenue increases achieved. Indeed, it is the only unambiguous case in this book where a government suddenly collapsed as a result of inability to agree on fiscal squeeze measures. Ramsay MacDonald's Labour cabinet agreed to substantial spending cuts and tax rises in August 1931, but collapsed after failing to finalize the package. What followed was the hasty formation (without an election) of an emergency coalition 'National Government' under the same Prime Minister and Chancellor, which proceeded to implement the fiscal squeeze measures the previous Labour cabinet had agreed on plus extra spending cuts that cabinet had been divided over. The emergency government then called a general election, which the coalition parties won by a landslide after asking the voters to grant them a 'Doctor's Mandate' to do whatever was needed to deal with the financial crisis.
As well as that remarkable electoral outcome, this episode produced a serious and long-lasting split in the Labour Party that had political significance for at least a generation, a constitutional crisis in which the political neutrality (or at least judgement) of the monarch was called into question, and a mutiny in the armed forces over pay cuts leading to a financial market reaction that forced the currency off the gold standard.
-  According to retrospective data, the budget deficit was more moderate—some 1.6 per cent ofGDP in 1932—and the public sector primary deficit was not in deficit but showed a surplus of some7.6 per cent of GDP.