The Deluge: The Paulet Scandal and the Onset of the Great Depression
The Face of Budgetary Stability: Philip Snowden on his way to deliver the emergency budget of September 1930
Having taken power under the strictures of the Chamberlain Doctrine and conscious that a good deal of Labour’s appeal lay in its ability to attract swing voters outside of its electoral base, MacDonald’s government initially charted a moderate course. The government’s first budget, delivered by Snowden in August 1929, contained limited redistributive proposals but nothing particularly radical. A white paper was circulated outlining plans for increasing the scope of compulsory state medical insurance and the government also brought the Holidays with Pay Bill to the House, which would have mandated a minimum of twenty holiday days with pay for all workers. However, MacDonald would find that his government was soon to be blown completely off course by events.
In March 1929, both the Federal Reserve and the Bank of England had issued linked but independent warnings about the dangers of excessive speculation, in response to a spate of shorting of American stocks which had threatened to spook British lenders. However, events would begin to move very rapidly with the announcement of the bankruptcy of the Paulet Group in London in September 1929. A London investment firm with aristocratic connections (the chairman was Henry Paulet, the 16th Marquess of Winchester), it began to get into trouble when a small (but not totally unexpected) contraction in the US construction market drew the curtain back on the firm’s troubled balance sheet. On 13 September, Lord Winchester had personally telephoned Snowden and Montague Norman (the chairman of the Bank of England), urging them to provide emergency loans to his firm. Both men, however, refused, perhaps underestimating the scale of the issues.
When Paulet filed for bankruptcy in London the following day, the whole market was thrown into panic, with the rumours of criminality, which were leaking out of the preliminary investigations of administrators on both sides of the Atlantic, spreading like wildfire and undermining confidence in the credibility of the market as a whole. Sharp drops in both the NYSE and the LSE were reported in both October and November 1929, which in turn spread rapidly to highly-leveraged industries around the world. In January 1930, after meetings between private and central bankers in both London and New York, a syndicate of banks headed by Lloyds in London and National City in New York announced that they would together pump a further $30,000,000 into the stock market, principally into former Paulet holdings. This helped to stop the slide for a while, until April 1930. In a preliminary hearing in a New York court examining the demise of Paulet’s New York office, Judge Joseph Force Crater commented that he was concerned about what he thought appeared to be widespread fraud and criminality on the firm’s books.
Although Judge Crater’s words were taken out of context (he noted elsewhere in his remarks that, overall, he thought that the case looked like a normal example of a firm being overextended and insufficiently diversified), they were regarded as the straw that broke the camel’s back. The following day, rumours of fraud caused a rash of stock shorting with caused the biggest single-day crash in the history of the NYSE. This was followed up with a similar collapse in London the following day. In response, businesses began failing all across the US, Germany and the Commonwealth as investors withdrew their money as fast as they could. In response, London banks drew in their lending capacities at the same speed, which had an inevitable knock-on effect on British businesses, who had to survive in a world where they suddenly had no access to credit.
The government found itself completely incapable of responding to these new financial realities. The whole of the City basically froze up, sucking credit out of the British economy, leaving no money for investment and subsequently hoovering up all demand. The effects on agriculture and industry were immediate and devastating, with widespread layoffs and business bankruptcies. Increases in evictions also contributed to a rise in old age poverty, which in turn put unprecedented strain on the remains of the devolved-administered Poor Laws, which almost collapsed. By the summer of 1930, the government budget deficit had ballooned as a result of the massive increase in unemployment insurance payments, which in turn resulted in speculative attacks putting pressure on the pound.
In this context, the government was faced with two possibilities. The first was to continue with the increase in welfare spending and hope that the depression could be ridden out like the 1919-21 had. The problem with this course was that it would probably necessitate a devaluation of sterling, something that Snowden was unwilling to countenance (he told cabinet that “I will not have the legacy of socialism in this country being the destruction of gold”). Instead, Snowden sought to deflate the economy, all the while shoring up sterling’s position by extracting gold reserves from India and the other colonies.
When Snowden unveiled a series of proposals that would have accomplished this in August 1930, events moved very quickly. Many members of the cabinet were furious at the proposal to enact tax rises and swingeing cuts to welfare payments in an attempt to reach a balanced budget that would, hopefully, calm the markets. A coterie of ministers formed around Arthur Henderson, George Lansbury and Stafford Cripps in their strong opposition to the measures. They sought to put pressure on MacDonald by leaking the proposals to Ernest Bevin, the chairman of the Trades Union Congress (“TUC”). Bevin was outraged by the idea of forcing wage restraint on workers who had not, after all, been the cause of the crisis. Instead, he championed a corporatist approach whereby an agreement would be formed by negotiations between unions, industry, banks and politicians.
At a ‘beer and sandwiches’ summit in September 1930, Bevin and other union chairmen visited Downing Street to discuss their demands. However, it soon became clear that Snowden was unwilling to alter the government’s approach and had simply called it as a cover to better persuade the TUC to make a public statement in support of the plan. When Bevin announced that the talks had been unsuccessful, the majority of Labour MPs rose up in open rebellion and took the extraordinary step of unilaterally electing Arthur Henderson as the ‘Chairman of the Parliamentary Party,’ effectively organising themselves as a shadow party outside of MacDonald’s control. Amidst the background of bankers and union leaders giving evidence to select committees, arguing for deflationary or expansionary fiscal measures, respectively, an apparent complete loss of government control increased market uncertainty and deepened the crisis.
Despite the resignations of much of his cabinet, MacDonald managed to patch together a cabinet of Labour MPs and resolved to put his monetary measures to Parliament as an emergency budget in September. In sensational scenes in Parliament, Snowden and MacDonald saw their budget voted down by 202 votes to 513, the largest defeat of a Prime Minister in the democratic era. Most devastating of all was the fact that 236 Labour MPs rebelled against the whip to vote down the emergency budget, with the majority of the 202 votes coming from the Conservative benches. At this point, it became clear that MacDonald’s majority was in tatters and Labour surely could not continue in government. But, the question remained, who could?