Why 1931?

I have commented a number of times on the current cuts being put in place by the coalition government as ‘taking us back to 1931’, with the implication that the economy could contract so much that we would go beyond recession into a full-blown long-term depression. Let me take a little time to explain what I mean by such a remark, and offer a warning to the coalition government and its European partners on the dangers of fetishising sovereign debt and systemic deficits. The actions of the UK and other governments in the early 1930s led to a depression that was only ended by the outbreak of global conflict.

One of the first comparisons we can draw between economic interventions taken by the UK government in 1931 and 2010 is that each can be seen as reacting to global economic crises in the preceding two or three years. The second comparison is that in both 1931 and in 2010 the economic austerity measures have been taken by coalition governments purporting to act in the national interest with a clear implication that it is the only possible strategy. The third comparison is the centrality of the role of the United States of America in the creation of the initial economic crisis whilst ironically the United States appears more open to alternative remedies than do the UK and the countries of Western Europe [Roosevelt’s New Deal and the Obama administration’s attempts to maintain public spending].

As well as a number of comparisons between 1931 and 2010 there are significant differences. The global financial world of 1929 to1931 was both more dependent on the American economy than that of 2007 to 2010, and complicated, at least from a European perspective by the consequences of the First World War. The economies of France, the UK, Germany, and to a lesser extent, the USA, were distorted by the impact of heavy German reparations to the allies in the wake of the Treaty of Versailles, and the huge amount of debt built up by the European countries simply through paying for the war. The destabilising effect of this distorted economy had varying impacts in different countries. One of the major impacts on the UK was a year on year decline in economic output in the years immediately following the First World War, amounting to a decline of almost 25% by as early as 1921. The cost of the war to the UK both in terms of collateral losses and the divestment of foreign investments was catastrophic; leading to a 20% loss in foreign investments by 1918. The upshot was an increasing dependence throughout the 1920s on exports, but traditional markets for coal, steel and textiles had been lost. Attempts to shore up the economy by production in new technologies such as electrical goods and motor vehicles for the domestic market were successful to a point but foreign imports in these goods grew throughout the 1920s. British agriculture was also in terminal decline with around 80% of food being imported by 1930.

A slow economic recovery had begun in 1921, but the restoration of the £ sterling to the Gold Standard in 1925 brought this to a shuddering halt as the price of what remained of British exports rocketed due to the fixed Gold Standard Exchange Rate of £1 sterling : $4.86 US. To offset the high exchange rate the exporters cut workers wages precipitating the General Strike of 1926, and an ongoing unemployment rate of around 1million concentrated primarily in the industrial areas of Scotland and the North of England throughout the 1920s. Then came October 1929 and the Wall Street Crash; a real ‘game-changer’. The Wall Street Crash was provoked by the aggressive overselling of listed stocks on credit to a far wider range of people than could legitimately afford them. When the credit became due it was unaffordable and people attempted to sell their stocks; but of course there were no buyers. The ensuing American economic collapse shook the world: World trade contracted, prices fell and governments faced financial crisis as the supply of American credit dried up. Many countries adopted an emergency response to the crisis by erecting trade barriers and tariffs, which worsened the crisis by further hindering global trade. In the UK the effects on the industrial heartlands were devastating. Demand for British products collapsed, unemployment rose to 2/5 million by 1930, government Tax Revenues fell and benefits costs rose. In some parts of Scotland and North East England as many as 30% of men of working age became unemployed.

Since May 1929 a Labour Government had been in place, wedded like all parties to the pre-Keynsian notion of balanced budgets come what may.  All party consensus in the July 1931 May Report into the Public Finances recommended public sector wage cuts and large cuts to benefits and other public spending to avoid a deficit. This was accepted by Philip Snowden, the Chancellor of the Exchequer, but threatened to split the Labour Party. [The only ministerial opposition, however, came from Oswald Mosley who proposed the nationalisation of the banks and increased pensions to boost spending. After being turned down Mosley resigned from the Government and the Labour Party and went on eventually to found the British Union of Fascists.] The split in the Labour ranks and the resulting deadlock led to the resignation of the government and the forming of the National Government un Ramsey MacDonald; comprising some senior Labour members but primarily a Conservative government with a Labour leader. [MacDonald and his coterie were expelled from Labour for this action].

In an effort to balance the budget and restore confidence in the pound, on the 10 September 1931 the national government issued an emergency budget, which immediately instituted a round of draconian cuts in public spending and wages. Public sector wages and unemployment pay were cut by 10%, and income tax was raised from 22.5% to 25%. The pay cuts did not go down well however and resulted in a Mutiny in the Royal Navy.

These measures were deflationary and merely reduced purchasing power in the economy, worsening the situation, and by the end of 1931 unemployment had reached nearly 3 million. The measures were also unsuccessful at defending the gold standard, which the National Government had ostensibly been created to defend.

The effects were felt worst in Scotland, Wales and Northern England. The north was the home to most of Britain's traditional heavy industries such as coal mining in Yorkshire and Nottinghamshire, shipbuilding on Tyneside, steel in Sheffield and textiles in Lancashire which were heavily export orientated. The north bore the brunt of the depression, and the '30s were the most difficult time in living memory for people in these areas. Millions of unemployed and their families were left destitute, and queuing at soup kitchens became a way of life. A government report in the mid-1930s estimated that around 25% of the UK's population existed on a subsistence diet, often with signs of child malnutrition such as scurvy, rickets and tuberculosis.

From 1936 onwards, the National Government followed a policy of mass rearmament in the face of the rise of Nazi Germany. This provided an economic stimulus that helped end the depression. By 1937 unemployment had fallen to 1.5 million, from where it fell even further. The mobilisation of manpower following the outbreak of the Second World War in September 1939 reduced unemployment considerably.

Clearly only so many parallels can be drawn from that time to this. For the toxic stock dealings leading to the Wall Street Crash in 1929 substitute the toxic sub-prime mortgage dealings of 2007 and 2008. For the collapse of credit between 1929 and 1931 substitute the credit crunch of 2008 to 2009. For the balanced budget fetishism of 1931 substitute the obsession with deficit reduction in 2010. For tuberculosis and malnutrition and the Second World War substitute …………????