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 [1931] 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). Fearing hyperinflation
amidst generalised price deflation may seem curious, but understanding the
environment that can produce such a paradox leads to a richer
interpretation of the long economic shadow cast by the First World War
and its immediate aftermath.
And finally, May’s reputation remained high with the National
Government which rewarded him with the chairmanship of a central plank
of its industrial policy, the IDAC (Westall 2004). In some countries fiscal
consolidations could have extreme personal consequences: in 1923
Czechoslovakian Finance Minister assassinated.
26
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Crisis, what crisis? Another look at 1931