Spartacus Blog

The Politics of Austerity

Tuesday, 16th June, 2015

In 1930 Britain was suffering from a terrible economic depression. Philip Snowden, the Chancellor of the Exchequer, wrote in his notebook on 14th August that "the trade of the world has come near to collapse and nothing we can do will stop the increase in unemployment." He was growing increasingly concerned about the impact of the increase in public-spending. At a cabinet meeting in January 1931, he estimated that the budget deficit for 1930-31 would be £40 million. Snowden argued that it might be necessary to cut unemployment benefit. Margaret Bondfield looked into this suggestion and claimed that the government could save £6 million a year if they cut benefit rates by 2s. a week and to restrict the benefit rights of married women, seasonal workers and short-time workers.

In March 1931 Ramsay MacDonald, the Labour Party's first prime minister, asked Sir George May, to form a committee to look into Britain's economic problems. The committee included two members that had been nominated from the three main political parties. At the same time, John Maynard Keynes, the chairman of the Economic Advisory Council, published his report on the causes and remedies for the depression. This included an increase in public spending and by curtailing British investment overseas.

Snowden rejected the ideas put forward by Maynard Keynes and this was followed by the resignation of Charles Trevelyan, the Minister of Education. "For some time I have realised that I am very much out of sympathy with the general method of Government policy. In the present disastrous condition of trade it seems to me that the crisis requires big Socialist measures. We ought to be demonstrating to the country the alternatives to economy and protection. Our value as a Government today should be to make people realise that Socialism is that alternative."

When the May Committee produced its report in July, 1931, it forecast a huge budget deficit of £120 million and recommended that the government should reduce its expenditure by £97,000,000, including a £67,000,000 cut in unemployment benefits. On 5th August, Maynard Keynes wrote to MacDonald, describing the May Report as "the most foolish document I ever had the misfortune to read." He argued that the committee's recommendations clearly represented "an effort to make the existing deflation effective by bringing incomes down to the level of prices" and if adopted in isolation, they would result in "a most gross perversion of social justice". Keynes suggested that the best way to deal with the crisis was to leave the Gold Standard and devalue sterling.

Philip Snowden presented his recommendations to the government that included the plan to raise approximately £90 million from increased taxation and to cut expenditure by £99 million. £67 million was to come from unemployment insurance, £12 million from education and the rest from the armed services, roads and a variety of smaller programmes.

The following day MacDonald and Snowden had a private meeting with Neville Chamberlain, Samuel Hoare, Herbert Samuel and Donald MacLean to discuss the plans to cut government expenditure. Chamberlain argued against the increase in taxation and called for further cuts in unemployment benefit. MacDonald also had meetings with trade union leaders, including Walter Citrine and Ernest Bevin. They made it clear they would resist any attempts to put "new burdens on the unemployed".

At another meeting of the Cabinet on 20th August, Arthur Henderson argued that rather do what the bankers wanted, Labour should had over responsibility to the Conservatives and Liberals and leave office as a united party. MacDonald went to see George V about the economic crisis on 23rd August. He warned the King that several Cabinet ministers were likely to resign if he tried to cut unemployment benefit. MacDonald wrote in his diary: "King most friendly and expressed thanks and confidence. I then reported situation and at end I told him that after tonight I might be of no further use, and should resign with the whole Cabinet.... He said that he believed I was the only person who could carry the country through."

On 24th August 1931 Ramsay MacDonald returned to the palace and told the King that he had the Cabinet's resignation in his pocket. The King replied that he hoped that MacDonald "would help in the formation of a National Government." He added that by "remaining at his post, his position and reputation would be much more enhanced than if he surrendered the Government of the country at such a crisis." Eventually, he agreed to form a National Government.

MacDonald returned to 10 Downing Street and called his final Labour Cabinet. He told them that he had changed his mind about resigning and that he agreed to form a National Government. When the meeting was over, he asked Philip Snowden, Jimmy Thomas and John Sankey to stay behind and invited them to join the new government. All three agreed and they kept their old jobs. Other appointments included Stanley Baldwin (Lord President of the Council), Neville Chamberlain (Health), Samuel Hoare (Secretary of State for India), Herbert Samuel (Home Office), Philip Cunliffe-Lister (Board of Trade) and Lord Reading (Foreign Office).

On 8th September 1931, the National Government's programme of £70 million economy programme was debated in the House of Commons. This included a £13 million cut in unemployment benefit. The cuts in public expenditure did not satisfy the markets. The withdrawals of gold and foreign exchange continued. On September 16th, the Bank of England lost £5 million; on the 17th, £10 million; and on the 18th, nearly £18 million. On the 20th September, the Cabinet agreed to leave the Gold Standard, something that John Maynard Keynes had advised the government to do on 5th August.

The Great Depression continued in Britain. Maynard Keynes took his ideas to the United States. President Herbert Hoover economic policies were similar to those of Ramsay MacDonald. In 1932 the national deficit was nearly $3,000,000,000 and the unemployment-rate was 23.6%. When President Franklin D. Roosevelt took office in 1933 his Treasury Secretary Henry Morgenthau, and aides within the Treasury Department favored an approach that sought to balance the federal budget. But other advisers in the President's inner circle, including Harry Hopkins, Marriner Eccles and Henry Wallace, had accepted the recent theories of Maynard Keynes, who argued that technically advanced economies would need permanent budget deficits or other measures (such as redistribution of income away from the wealthy) to stimulate consumption of goods and to maintain full employment. It was argued that it was the attempt to balance the budget that was causing the recession.

President Roosevelt was eventually convinced by these arguments and he recognized the need for increased government expenditures to put people back to work. An important part of his New Deal programme was increased spending on government expenditures for relief and work schemes. From 1933 to 1937, unemployment was reduced from 25% to 14%.

Roosevelt was much attacked by his political opponents for not concentrating on reducing the national deficit. However, as Roosevelt explained in a speech in 1936: "To balance our budget in 1933 or 1934 or 1935 would have been a crime against the American people. To do so we should either have had to make a capital levy that would have been confiscatory, or we should have had to set our face against human suffering with callous indifference. When Americans suffered, we refused to pass by on the other side. Humanity came first."

Unfortunately, the British government followed the failed policies of Hoover rather than the successful measures of Roosevelt. The governments of Ramsay MacDonald, Stanley Baldwin and Neville Chamberlain continued to try and balance the budget. Something of course that is very difficult to do with high spending on unemployment benefits. This of course changed with the outbreak of the Second World War. It now became necessary to use deficit spending to achieve victory.

One of the main reasons why the British public voted in the way that it did in the 1945 General Election was because it remembered the way the Conservative leaders had behaved in the 1930s. Clement Attlee was the first prime minister in British history to accept the economic theories of John Maynard Keynes. At the beginning of the war the National Debt was 110% of GDP. By 1945 it was 200% but still the government did not cut back and by 1947 it was 238% of GDP. With this increased spending the government was able to build more than a million homes, 80% of which were council houses. They were also able to establish the National Health Service. However, full-employment meant that the government was gradually able to reduce the national debt.

In the last General Election the three major parties supported the policy of austerity. Paul Krugman, who was awarded the Nobel Memorial Prize in Economic Sciences in 2008, pointed out during the election campaign: "Cameron is campaigning largely on a spurious claim to have ‘rescued’ the British economy – and promising, if he stays in power, to continue making substantial cuts in the years ahead. Labour, sad to say, are echoing that position. So both major parties are in effect promising a new round of austerity that might well hold back a recovery that has, so far, come nowhere near to making up the ground lost during the recession and the initial phase of austerity.”

Krugman went on to argue that the government has falsely sought to claim that the economy’s recovery was due to austerity when in fact recovery only began once the coalition adopted a less aggressive approach to deficit reduction in 2012. Krugman was highly critical of the Labour Party policy during the election. Although the shadow chancellor, Ed Balls, predicted in 2010 that austerity would lead to lower growth and a higher deficit than the government was expecting, they gradually accepted the coalition’s narrative and it was left to the Green Party and the SNP.

Krugman quotes John Maynard Keynes as saying in 1937: “The boom, not the slump, is the right time for austerity at the Treasury.” He goes on to argue that " I often encounter people on both the left and the right who imagine that austerity policies were what the textbook said you should do – that those of us who protested against the turn to austerity were staking out some kind of heterodox, radical position. But the truth is that mainstream, textbook economics not only justified the initial round of post-crisis stimulus, but said that this stimulus should continue until economies had recovered. What we got instead, however, was a hard right turn in elite opinion, away from concerns about unemployment and toward a focus on slashing deficits, mainly with spending cuts. Why?"

Krugman suggests one of the major problems is the electorate do not have a very good understanding of economics. "Part of the answer is that politicians were catering to a public that doesn’t understand the rationale for deficit spending, that tends to think of the government budget via analogies with family finances."

Krugman is not alone in criticising the economic policies of the three major parties. The Centre for Macroeconomics polled 50 economists, asking them whether they agreed that the government’s deficit-reduction strategy had had a positive impact on growth and employment. One-third disagreed and a further third strongly disagreed. Only 15% agreed, with none strongly agreeing.

The news that Jeremy Corbyn obtained the 35 nominations required to stand for the leadership of the Labour Party is to be welcomed. He is unlikely to win but at least we will get a debate over the wisdom of austerity and will add to the public understanding of the economic alternatives.