Professor Roger Middleton Coping with Crisis Conference Durham 26-28.07.13 ‘Crisis, what Crisis’: another look at 1931 University of Durham, 27 July 2013 2 Prologue [I]f we carry ‘economy’ of every kind to its logical conclusion, we shall find that we have balanced the budget at nought on both sides, with all of us flat on our backs starving to death from a refusal, for reasons of economy, to buy one another’s services. [Keynes, ‘The budget’, New Statesman and Nation, 19 September 1931] [Y]ou will never balance the budget through measures which reduce the national income ... Look after the unemployment, and the Budget will look after itself. [Keynes , ‘Spending and saving’, The Listener, 11 January 1933] 3 Introduction (1) Up until 1 August  it would be true to say that insofar as it affected England the financial crisis was regarded as a technical matter, arising from the German moratorium and the unique position of the London moneymarket. In other words, it was not regarded as England’s fault. [Skidelsky 1967, 343] • May report turned a technical matter (European financial crisis) into a fullscale crisis; • Crisis (Table 1 for key dates): collapse of 2nd Labour Govt (24.08.31), National Govt (25.08.31), emergency budget (11.09.31), but forced off gold (19.09.31), in which a naval mutiny (15-16.09.31) over cuts had a role; • Huge significance of one government report? 4 Table 1: Key Dates 29-Jan-31 Hopkins evidence to RC on Unemployment Insurance 11-Feb-31 House of Commons Censure debate 17-Mar-31 May Committee established 27-Apr-31 Budget 13-Jun-13 RC on Unemployment Insurance, first report (Cmd 3872) 13-Jul-31 Macmillan report (Cmd 3897) published 31-Jul-31 May report (Cmd 3920) published 24-Aug-31 Labour Government dissolved 25-Aug-31 National Government formed 10-Sep-31 Supplementary budget 19-Sep-31 Gold standard abandoned 31-Oct-13 General election 5 Introduction (2) • 1931 an exemplar of political and economic crisis; combing key characteristics: Primary: extreme events; instability and risk; Secondary: enduring myths about what happened; why; culpability; conspiracy; BUT NOT one other usual primary characteristic: suddenness; little or no warning. • May report = ‘canonical crisis document’: ‘most foolish document I have ever had the misfortune to read’ (Keynes 1931a); • BUT, beyond the £120m deficit headline and the proposed unemployment benefits and public sector salary cuts, has the report been appropriately studied? • Want to: 1. Show more to the Report then the headlines; 2. Question the inevitability argument that underpins the orthodox interpretation of its role in the 1931 crisis. 6 Introduction (3) • Note: the attention is not on Keynes’ campaign to convince opinion of the endogeneity of the budget and thus the futility of intensifying the deflationary fiscal stance. • Thus what follows should not be taken as an indication that I depart from the conventional Keynesian path to become a latter-day convert to Expansionary Fiscal Contraction, though in the fevered circumstances of the time we must take seriously that fiscal conservatism in 1931 made possible monetary expansion in 1932 (Middleton 2013); • Paper in two sections: 1. examines the proximate origins of the May committee through to the publication of its report (January-July 1931); this informed by, though as yet not explicitly modelled in terms of, the ‘construction of crisis’ concept. Generic contention is that the anatomy of a crisis matters; historical objective is to tease out the logic/sustainability of Snowden’s strategy when his stated political goal was the survival of the Labour government and his economic objective the maintenance of C19th liberal political economy; 7 Introduction (4) 2. examines the May report itself, in particular an element – what we might call the public sector accounting conventions – which has been very little explored and, like the report, too often dismissed as, at best, ‘rather controversial’ (Skidelsky 1967, 344) • Note: very preliminary research motivated by rather more to 1931 crisis than just an opportunity for business and finance capital to take advantage of situation to mobilise a debt and deficit discourse (Tomlinson). 8 The genesis of the May Committee (1) • Background: cyclically highly sensitive budget; acute fiscal stress from the depression affecting ex ante and ex post budgeting (Table 2 for budget cycle); over-riding the automatic stabilisers but still ex post deficits; • Three key events: 1. Hopkins evidence to RC on Unemployment Insurance (29.01.31); 2. HoC censure debate (11.02.31); and 3. May report (01.08.31) published and government mishandled significantly how it was presented. • The first event provided ‘unrefuted evidence which startled the world when it was given by the Treasury that payment of [unemployment] benefit was bringing the country to the brink of a chasm in which her credit might be lost.’ • Key phrase in Hopkins’ evidence 9 The genesis of the May Committee (2) This additional borrowing – for purposes other than productive – is now on a scale which in substance obliterates the effect of the Sinking Fund. Apart from the impairment of government credit which such operations inevitably involve these vast Treasury loans are coming to represent in effect State borrowing to relive current state obligations at the expense of the future, and that is the ordinary and well recognized sign of an unbalanced budget. • Hopkins’ bombshell widely publicised in the international press. • HoC debate; censure motion by Cons (Sir Laming Worthington-Evans): That this House censures the Government for its policy of continuous additions to the public expenditure at a time when avoidance of all new charges and strict economy in the existing services are necessary to restore confidence and to promote employment. 10 The genesis of the May Committee (3) • Debate stylised (rehearsing every argument that would be discussed in summer/autumn 1931); politically opportunistic by both Cons and Libs. • Cons: deficit due to Labour extravagance; Snowden: deficit due to depression, whilst anyway Cons were the high spenders (1924-9) to win elections; • Result: vote of censure comfortably defeated at the price of Liberal amendment: establish May Committee; • Took 5 weeks to establish. Why? Membership dominated by businessmen. Why? Snowden’s gamble (hubris?) of managing what he set up to be a thoroughly Gladstonian report. • Snowden’s strategy, 3 elements all time-critical: 11 The genesis of the May Committee (4) 1. with unemployment insurance RC and Macmillan committee financeindustry relations (in reality, under Keynes’ influence, monetary policy) all currently in the long grass, time was needed for these two key reports to emerge; 2. time was vital to build a broader understanding of the public finance issues, where, as Snowden argued in the 11 February debate, and the May majority report concurred (HMSO 1931c, paras 20–5), the current situation was a complex of long-term political forces making for high expenditure growth combined with what we would now call the endogenous properties of the budget in face of a global depression; and 3. time to build a three-party coalition for shared sacrifice, this recognising that with some Liberal and Labour MPs implacably opposed to cuts in unemployment insurance support from the Conservatives was essential (Williamson 1992, 222). 12 The genesis of the May Committee (5) • Snowden’s strategy: intellectually defensible, but a political gamble that economic fundamentals would not deteriorate; no further economic shocks; coalition politics. • Policy space narrow post-Mosley; AJP Taylor: Snowden calculated that a fearsome report from [the] May committee would terrify Labour into accepting economy, and the Conservatives into accepting increased taxation. Meanwhile, he produced a stop-gap budget, intending to produce a second, more severe budget in the autumn.... • Historian treads carefully in criticising past policy-makers for their assessment of the known unknowns let alone the unknown unknowns, BUT 1. the timing of its publication; 2. government’s communication strategy; and 3. the sense of urgency and resolve they conveyed 13 May Report: three critical days, 29-31 July (1) • Critical that the May report appeared (31 July) just over six weeks after the interim report of the Gregory commission, which was even more pessimistic about current expenditure and projected borrowing than Hopkins’ bombshell, and a fortnight after the Macmillan committee’s report was issued, this on, as Sayers (1976, I, 372) notes, the ‘very day the [European financial crisis] spread to London, opening the last phase of the doomed gold standard’. • Why was the May report issued with no significant government press statement when an inchoate sterling crisis would obviously require confidence-building measures? • Answer: 1. Policy-makers underestimated the risk of contagion from the emerging financial crisis to perceptions of the public finances as a new dimension of crisis, as illustrated by; 2. Crisis in successive editions of The Times: 14 May Report: three critical days, 29-31 July (2) • 29 July (2 days before publication): conveyed the essence of the report, including minority and public sector wage cuts; sufficiently relaxed that ‘it is clear that no definite action can be taken until the House of Commons meets again in October.’ • 30 July: politics unpicked rather more explicitly and portentously; language used which central bankers, let alone forex dealers, do not like (‘unless drastic measures are taken this country may find itself in as serious a financial position as Austria and Germany’); the question put boldly ‘Will the government act?’, with an assessment that ‘no one believes that a Labour Government will have the courage to carry out more than a fraction of the economies proposed’; and the conclusion drawn that an earlier reassembly of the Commons might well be necessary; • 31 July: reported on Appropriations Bill 2nd reading, in which Snowden reported on the economic situation but few had seen the report. • 31.07.31 debate: Snowden sought to project calmness/resolve, but message nuanced. HoC then went into recess. 15 May Report: three critical days, 29-31 July (3) • No government statement as such on what would be done (beyond a Cabinet Committee) and when; already talk in The Times about a National Government and Parliament having to be recalled before October. • Verdict: publication of May Report very badly handled. 16 May report: unsound methodology and alarmist? (1) • £120m deficit: treated by contemporaries as huge, but 1. Deficit £120m = 2.75% of 1931 GDP 2. Eventual fiscal action £76m = 1.7% 3. Small sums by comparison with modern fiscal consolidations. • £120m highly controversial. Table 3 shows how constructed: 1. Endogenous affects on income/expenditure (A1, A6) 2. ‘nest-eggs’ to end (A4); 3. Road Fund & Unemployment Fund borrowing to end (AA2, A3) • Even Treasury (Hopkins, £70m) thought this initially an excessively strict criteria for balanced budget. • BUT: once published – flashed around the world; £120m the price for restoring confidence. 17 May report: unsound methodology and alarmist? (2) • Snowden’s gamble backfired? • Fiscal fundamentalism of ceasing to borrow for two funds; two background issues: 1. No statutory definition of the budget 2. Fiscal window-dressing (FWD) followed from 1 but made urgent by characteristics of fiscal system. • Importance of FWD: Table 2 shows 1931/2 finally closed with £0.4m surplus, subtract FWD and becomes deficit of £38.6m. • Bigger problem (Wormell 2000): between 1920/1-1933/4 ostensible debt repayments £910.1m, but adjusted for hidden sinking fund, raids on offBudget funds, interest on debt capitalised and other accounting devices, actual payments £483.8m. • Why foreigners so sensitive to £120m? 18 May report: unsound methodology and alarmist? (3) • Brussels (1920)/Genoa (1922): sound public finances underpinned gold standard;‘Balanced budget fiscal policy is a simple, if crude, way to rule out unsustainable deficits and the threat of monetization’ (Eichengreen 1985); • ‘explanation lies not simply in the tenacity of Gladstonian views of budgetary rectitude – though this was part of the story – but more in memories of the currency disorder of the early twenties, which were, after all, less than ten years behind.’ (Sayers 1976); • Britain’s comparative debt problem: debt did not just dominate interwar public finances, it swamped them. Figure 1: between 1920–37 debt interest exceeded 25% of TPE, and was over 30% between 1923–9. • Figure 3: but big debt effort; by historical standards the primary balance huge, averaging 7.4 per cent of GDP for the period. Judged both by contemporary standards, and by more modern experience with fiscal consolidations, this was an extraordinary debt management/amortization effort (Middleton 2013). 19 Figure 1: UK: outstanding national debt, debt interest and total public expenditure (% of GDP), 1900–50 20 Figure 3 Public sector budget balances, % of GDP, 1900– 39 Figure 2: G6: percentage of government expenditure financed by revenue, 1929 and 1930 1929 1930 115 110 105 100 % 21 95 90 85 80 75 Canada US Germany Source: calculated from League of Nations (1932, 269). France UK Italy 22 May report: unsound methodology and alarmist? (4) • Alarmist?: Snowden on 31.07.31 claimed Britain’s budgetary position less serious than other major economies. Figure 2 shows G6 position and he was right, but it was a poor speech. • Political elite confronted by an uncomfortable truth? MPs discomforted by: The electoral programme of each successive Party in power, particularly when it was formally in opposition, has usually been prepared with more regard to attracting electoral support than to a careful balancing of national interests.... The problem is a serious one and it is hardly for us to suggest a solution: yet a solution has to be found if democracy is not to suffer shipwreck on the hard rock of finance. [HMSO 1931c, para 574] • Shades of later public choice arguments but all of this intrinsic to C19th fiscal constitution. 23 Conclusions (1) • • • • 1931 crisis a long-time coming; in many respects outcome (off gold>major policy reorientation) very positive, but didn’t have to turn out as it did ... had the public finance dimension to this crisis been less prominent the September 1931 budget might have been less deflationary and recovery might have begun earlier Two elements to this counterfactual: 1. Snowden’s gamble: a different report (Chair, composition, ToR, methodolgy)>different role for this report in crisis; 2. Capie et al’s (1986, 150, 163) too often ignored finding that in summer-autumn 1931 the government’s problems were not budgetary: ‘the budget deficit was not growing at a rate so rapid that monetization with inflation was inevitable’ and the structural deficit was negligible. Thus ‘the underlying budgetary position was not at fault in pushing the UK off gold’; indeed, ‘UK budgetary policy was certainly not inconsistent with a fixed exchange rate’. Why does it matter? 24 Conclusions (2) • An alternative political settlement (some other sort of coalition from that of the National Government formed in August and consolidated in the October 1931 general election); • less deflationary September 1931 budget and perhaps thus the avoidance of a the second of the recessions with the pass-through effects of that further deflation, for there had been an inchoate recovery beginning in 1931Q3–4 but a second downturn 1932Q2–3. • All this is speculation and maybe it doesn’t matter, but in investigating what is thought to be a known crisis it is the case that the May committee has been made a scapegoat for deeper governance issues about the management of Britain’s public finances. 25 Conclusion (3) • • 1931 cannot be properly understood as a crisis without appreciating that for many policy-makers there lurked the fear of inflation if sound finance was not restored, and that these fears heightened once Britain came off gold (the immediate response was to increase Bank Rate). 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