In 1977, a group called Counteract released a satirical LP called The Cuts Show, in protest against the Callaghan government's squeeze on public spending. One song, 'Labour Party History', reviewed the story of Labour in power since World War Two. It is sung as if by the party's leaders and begins with the optimism of 1945. After outlining their bold plans for reform they reveal that there will, after all, be a delay: 'We hope some time this year to implement our plans/But at the present moment there's crisis on our hands.' The story is picked up again in 1964 and 1976. Each time a crisis provides a reason for delaying the implementation of high ideals. The leaders - who adopt increasingly refined accents as the song progresses - seem to become positively gleeful about this. The refrain runs: 'So excuse us for delaying for another year or two/The policies and promises and plans we said we'd do.' The song was not intended as a perfectly fair account of Labour's history, but it was a witty take on a common left-wing theme: the perpetual betrayal of the promise of change. Today the Labour Party under Gordon Brown appears to lack a clear sense of purpose, other than its own survival in power, and again faces severe economic crisis. Does The Cuts Show provide a template for how the current crisis will unfold politically?
One thing is certain: Brown himself has been fully aware of the pattern of crisis and disappointment, and has been determined to break it. In 2002 he told the Labour Party conference:
Let us remember that while all past Labour governments were forced to retrench, cut back, and were overwhelmed by world conditions in 1924, 1931, 1951, 1967 and 1976, it is because we painstakingly built the foundations in economic management that we are the first Labour government with the strength to be able to plan for the long term on the basis of stability not stop-go.
But within a few months of taking office as Prime Minister in 2007, that claim was beginning to look like hubris. The run on the Northern Rock bank in September of that year was a major sign that problems in the US sub-prime loan market would have a real impact on the UK economy. As Brown's government struggled to get a grip on the problem, its brief honeymoon of popularity came to an end. As Labour's support atrophied it appeared that Brown might go down in history as a failure, even if he did not suffer the ignominy of being dumped by his own party before he had an opportunity to fight a general election.
However, as Brown struggled for his political life in the autumn of 2008, something unexpected happened. As the Credit Crunch intensified Brown and his Chancellor, Alistair Darling, suddenly seemed to find their feet. They injected equity into British banks and provided guarantees on bank debt in a bid to get inter-bank lending restarted. The influential American economist Paul Krugman praised them for taking the lead in the worldwide rescue effort, writing that 'this combination of clarity and decisiveness hasn't been matched by any other Western government, least of all our own.' Labour's opinion poll rating increased and the party won a crucial by-election. Journalists started to observe that Brown seemed to be enjoying himself.
There was still no denying that the government had been blown off course. Darling's Pre-Budget Statement of 25 November 2008 was a landmark. It was widely seen as abandoning Brown's so-called 'Golden Rule', adopted in 1998 under the government's Code for Fiscal Stability. This stated that the government should borrow only for the purposes of investment, and not for current spending, over the course of the economic cycle. A further fiscal rule, that Public Sector Net Debt (PSND) would be held below 40% of Gross Domestic Product (GDP) over the course of the economic cycle, appeared to be set aside as well. As he boldly increased borrowing, Darling predicted that net debt would peak at 57% of GDP in 2013-14. Although he aspired to balance the Budget by 2015-16, a significant underlying budget deficit would persist in the meantime. In the past Labour governments' spending plans were disrupted by economic crisis, as the need for retrenchment threw cold water on the hopes of left-wingers. Now, a government that prided itself on fiscal prudence was forced by global turmoil to cast aside its austere, rules-based approach in favour of massive reflationary borrowing. New Labour, it seemed, was dead; Keynes, once again, was the man in the news. And even more strangely, far from wrecking the fortunes of a previously popular administration, this financial storm appeared to cast a political life-raft in front of a floundering Prime Minister.
Understanding how this was possible requires knowing the political, as well as the economic, context of previous crises. We can only hope to see what is distinct about British political culture today if we examine it in relation to Britain's recent past. This paper, therefore, addresses three relevant historical questions. In what ways has the Labour Party changed in the period since it first came to power in 1924? To what extent have the economic crises that Labour has faced in power been similar to one another? To what extent have changes in political culture affected the ways economic crises are perceived, and their political outcomes?
Although Ramsay MacDonald's first (minority) Labour government took office in 1924 at a time of high unemployment, Gordon Brown's suggestion that it was 'overwhelmed by world conditions' was somewhat misleading as it fell for reasons not directly related to the economy. Therefore, the crisis of 1931 must be our real starting point. Elected in 1929, again without a parliamentary majority, MacDonald's second government failed to react decisively to that autumn's Wall Street Crash. Nevertheless, the government did survive for some time, even as dole queues lengthened and dissent within the Labour Party increased. Ideologically, ministers were wedded to financial orthodoxy, which at that time meant a balanced budget and the maintenance of sterling at a fixed exchange rate via the gold standard. Both of these constraints - absent today - limited the possibility of increasing spending to boost employment.
The crisis intensified in Europe in the summer of 1931, with the failure of the Austrian bank Kreditanstalt. Skidelsky, in his influential historical critique of the Labour government, later argued that 'Up to 1 August [...] insofar as it affected England the crisis was regarded as a technical matter [...] it was not regarded as England's fault.' However, Britain's position was then made much worse by the publication (on 31 July) of the so-called May Report, a government committee to consider savings in public expenditure. Forecasting a budget deficit of £120 million the report dramatically urged sweeping cuts. Designed to alert ministers to the need for drastic action, its unintended consequence was to further undermine confidence in sterling, already under pressure. As Parliament broke up for the summer the problem was intensified by the government's failure to give any sign of what it planned to do. It would be idle to suggest that a good spin-doctor could have saved the government's bacon, but it is nonetheless clear that a lack confidence plaguing the financial markets at that time was the key problem to be faced. Investors were clearly convinced at the time that the pound was bound to depreciate and acted accordingly. They were right, as it turned out, but the prophecy was in large part self-fulfilling.
The Labour Cabinet was agreed on the need for economies to restore confidence. It did not, however, agree on the composition of the cuts. MacDonald and his Chancellor, Philip Snowden, insisted that these should include a 10% cut in the rate of unemployment benefit. A minority refused to accept this. On the 23 August the Cabinet agreed that, with the split so deep, it had no alternative but to resign. The next morning it transpired that MacDonald had handed in the Labour government's commission only to accept a new one, in collaboration with Conservatives and Liberals. A handful of MacDonald's Labour colleagues joined him in this new 'National Government'; he himself was expelled from the Labour Party as a result of his actions. The sterling crisis was now so severe that even the National Government's implementation of the full package of cuts could not avert the final departure from the gold standard, in September 1931. Yet although the new government had failed to secure what was supposedly its own chief objective - the restoration of confidence in the currency - it reaped rich political rewards for having grasped the nettle of office. By contrast with its leaders' steadfastness, it was alleged, the rump of the Labour party had 'run away' from its responsibilities, refusing to take the firm measures needed to solve problems of its own creation. At the general election that followed, Labour was reduced to a pitiful remnant of 52 MPs.
The crisis was long remembered. Herbert Morrison, one of the ministers who lost office, later wrote that 'The spiritual and psychological effects upon the Labour movement of what became known as "the Great Betrayal" were, I am inclined to think, as serious as the thing in itself and its immediate electoral consequences.' These psychological effects had an impact on how participants in subsequent crises perceived what was happening to them. During the 1976 IMF crisis, Tony Benn, Secretary of State for Energy, came to believe history was repeating itself. To drive the point home, he arranged for the 1931 cabinet minutes to be reproduced in the leftwing weekly newspaper Tribune. It is worth emphasising, though, that after 1931 history never did repeat itself, in the sense of economic crisis leading to a formal split in the governing party.
1931 had a major impact on the economic programme that Labour subsequently developed. The results were somewhat paradoxical. On the one hand, there was a renewed commitment to financial orthodoxy and 'an honestly balanced budget.' There was a willingness to grant, hypothetically, that it might be correct in times of slump to unbalance the budget in order to stimulate the economy, as recommended by Keynes, but Labour MPs also liked to argue that the National Government was risking inflation by borrowing irresponsibly. On the other hand, there was a move from MacDonald's gradualist perspective, which assumed that socialism would progressively evolve out of the institutions of capitalist society. Now it was believed that a Labour government would need to act quickly to establish a planned economy. A theme emphasised by left-wingers was that rapid action would be needed to tackle the financial crisis that the election of a socialist government would itself inevitably provoke: in effect, it would be necessary to break a capitalist conspiracy aimed at frustrating the will of the people. As the former MP Frank Wise wrote, the 1929-31 government 'was crippled from the beginning by finance and was finally killed by the financiers', and they could be expected to try the same thing again in the future.
Against the wishes of the leadership, the 1932 Labour Party conference adopted the policy of nationalising the major retail banks, although the plan was later quietly sidelined. At the time it seemed like an extreme left-wing proposal, an impression cemented by the feverish rhetoric adopted by its advocates. It was a striking moment, then, when in 2008, in the wake of the emergency nationalisation of Northern Rock and Bradford & Bingley, the Governor of the Bank of England refused to rule out further state takeovers, in order to compel banks to lend. There were of course big differences in context. In the 1930s, socialist advocates of nationalisation did not point to clear evidence that the banks were failing to lend, as appears to be the case now. Rather, they were advancing the somewhat apocalyptic claim that nationalisation would be needed to cope with the consequences of a socialist government coming to power. In fact, no such crisis materialised in 1945, and the Attlee government contented itself with the relatively uncontroversial nationalisation of the Bank of England. Nevertheless, some 1930s Labour criticisms of the banks do have resonance today. In his book Practical Socialism for Britain, Hugh Dalton, an influential moderate, complained that excessive remuneration for bank directors contributed to the banks' failure to pass on interest rate cuts to customers, which in turn frustrated hopes of economic recovery.
When Labour secured its first parliamentary majority at the end of World War II, it was Dalton who became Chancellor. Not only was Britain virtually bankrupt at the war's end, and heavily dependent on American aid, but the physical destruction of infrastructure in many parts of the world led to a global scarcity of necessities. Post-war optimism quickly turned to gloom. The initial blow was not a financial one but a physical shortage: that of coal. The failure to introduce a rationing scheme during the war combined with ministerial incompetence and an exceptionally severe winter to produce a crisis. In February 1947, the Minister of Fuel and Power asked permission from the Cabinet for electricity to be cut off from industry in large parts of the country and from all domestic consumers for five hours a day. At this point, the government lost its earlier lead in the Gallup opinion poll, remaining tied with the Conservatives through the month of July.
The Conservatives then went on to open up a lead in the polls, as the so-called 'convertibility crisis' of July-August further dented Labour's reputation for economic competence. Britain had returned to fixed (but adjustable) exchange-rates under the Bretton Woods agreement of 1944. As a condition of the American loan agreement of 1945, which was essential for the survival of the British economy, the government had pledged to make the pound convertible into other currencies. When this took effect it led to a rush to exchange sterling for dollars and, after the reserves had plummeted, the experiment was quickly suspended, to be followed by a new round of domestic austerity. Nevertheless, it should be remembered that even this crisis did not ring the government's final death-knell; nor did the similarly awkward sterling devaluation of 1949. Labour won the general election of February 1950, albeit narrowly.
Its majority might have been greater had Stafford Cripps, Dalton's replacement as Chancellor, not insisted quixotically that he would resign if the election were delayed until after his Budget in April 1950. He believed that an 'Election Budget' would be reprehensible, and so the election took place before popular measures were introduced. As a junior minister, Douglas Jay, recalled:
[t]his accident had profound consequences for the entire post-war history of the country. Opinion polls in May 1950, after petrol had been de-rationed, suggest that in that month the Labour Government would probably have won a majority of forty or fifty in the House of Commons. In this case there need have been no 1951 election.
In that case, Labour would have had much longer to recover from the impact of the crisis caused by the outbreak of the Korean War in June 1950. The crises of 1947 and that of 1949 had caused no great divide in the ranks of the government, but in early 1951 the Cabinet split. The new Chancellor, Hugh Gaitskell, and Aneurin Bevan, Minister of Health, clashed over the former's insistence on introducing National Health Service (NHS) prescription charges. Gaitskell claimed these were essential in order to help meet the costs of the rearmament that the war required. He won the battle but Bevan and his ally Harold Wilson resigned, which marked the start of long intra-party feud. The poll lead sustained by Labour during the previous year evaporated and the Conservatives won the election called in the autumn by a tired Prime Minister. The campaign, it should be observed, was not fought exclusively on economic issues; and it should be further noted that Labour won more votes than the Conservatives, but was defeated in part as a consequence of the first-past-the-post electoral system.
Gordon Brown implied in his 2002 speech that the Attlee government had been 'overwhelmed by world conditions' because it had failed to 'painstakingly' build 'the foundations in economic management'. This was a little misleading. In the face of appalling world conditions, and with the assistance of the USA, Labour had succeeded, by 1950, in combining full employment with low inflation. In order to do this it had used Keynesian methods, but not in the sense of unbalancing the Budget in order to boost demand. In fact, it ran large surpluses (combined with physical controls such as rationing) in order to rein demand back. It is true that a yet more restrictive policy might have reduced pressure on sterling at the cost of higher unemployment. But the Attlee government's problems do not correspond neatly to the caricature of a well-meaning administration undone by the consequence of its own spending plans. It met its end due to a combination of political misjudgments, the peculiarities of the voting system, and, most importantly, the shock administered by the need to fight a very significant war. Here is another contrast with today. Although, in 2007-8, Britain had major military commitments in Iraq and Afghanistan, reducing the Brown government's room for economic manoeuvre, the origins of the Credit Crunch lay within the financial system itself.
Just as the 1945 generation of politicians attempted to take lessons from the experience of 1931, so, too, did Harold Wilson, as Prime Minister from 1964, have to contend with the legacy of Attlee. The new government quickly decided not to devalue sterling. Justifying this choice in his memoirs, Wilson argued:
The financial world at home and abroad was aware that the postwar decision to devalue in 1949 had been taken by a Labour Government. There would have been many who would conclude that a Labour Government facing difficulties always took the easy way out by devaluing the pound. [...]When, three years later, devaluation was forced on us, the whole world recognised that there was no alternative - central banks and governments accepted the decision as necessary, recognising the courage and determination we had shown in the fight to hold the parity.
This was an over-optimistic assessment, but it was true that the government's original position had been invidious, not least given Wilson's wafer-thin parliamentary majority. Moreover, the decline in Labour's popularity from 1967 cannot be attributed purely to economic problems (it lost its Gallup poll lead prior to devaluation). Devaluation achieved its object: exports rose and in the final half-year of the Labour government Britain's balance of payments ran a healthy surplus. Furthermore, although Labour lost the 1970 election, it was at least ahead in the polls as it went into the campaign. What mattered crucially were perceptions. Wilson's post-devaluation broadcast was widely criticised for its blithe tone, given that ministers had previously seemed to suggest that devaluation would be a national catastrophe and was to be avoided at all costs. It was also, of course, hard for Labour to make a convincing case for its own achievements. If the medicine of devaluation had worked, why had the government spent three years trying to avoid swallowing it?
When Labour returned to power in 1974, the Bretton Woods exchange-rate system had collapsed, so the government no longer had to defend a fixed parity. Nevertheless, the authorities were reluctant to allow the pound to find its own level, and were prepared to spend foreign exchange in order to manage the rate. After Jim Callaghan replaced Wilson as Prime Minister in 1976, he faced the problem of a falling pound and rapidly dwindling reserves; bankruptcy appeared to loom. Lack of confidence in the UK economy was undoubtedly worsened by fiscal laxity in 1974-5 in addition to industrial relations problems and the consequences of the 1973 oil shock. Callaghan was haunted by his own experience as Chancellor during the previous devaluation. His handling of the new crisis was in fact masterly, and in this respect his political skills must be rated above those of his predecessors, even though, unlike them, he was never to win a general election. Callaghan's ministers were more ideologically divided than Wilson's had been in 1967, but he nonetheless managed to secure consensus on the deflationary package demanded by the IMF as a condition of financial assistance.
Although seen by many on the left as treachery, the measures were a remarkable success. Tony Benn's fears of another 1931 proved groundless. During 1977, sterling recovered, as did the reserves and the balance of payments; inflation began to come under control, without notably adverse consequences for employment. It is often speculated that had Callaghan called an election in the autumn of 1978 he would have won it. In the event, the government's hopes of victory were cast away during the wave of industrial action known as the 'Winter of Discontent', and the Conservatives under Margaret Thatcher triumphed in 1979. Callaghan was brought down not by world economic conditions nor by economic naivety but by his insistence on taking a tough line with the unions, at a politically inopportune moment, in the cause of reducing inflation.
The experience of the late 1970s does, however, raise some interesting questions about the Brown government's current reflationary efforts. Then, there was considerable interest in common expansionary effort by the world's largest economies. This was thought necessary because expansion by individual countries would not have any significant effect on the world economy and, in the absence of similar action by others, would simply create balance of payments problems for the countries concerned. Ultimately, however, efforts at coordination proved abortive. We may wonder, then, if Brown's hopes for a concerted international effort to combat the Credit Crunch are likely to be realised. If they are not, a purely 'national' Keynesian effort is likely to leave Britain's economy exposed, as imports are sucked in without demand for exports rising accordingly. Although balance of payments and exchange-rate issues have fallen from the forefront of public discussion of the economy in recent years they may, perhaps, be due to make a comeback.
As we have seen, the familiar narrative of successive Labour governments being confronted by, and failing to deal with, a series of archetypal crises is somewhat misleading. Each crisis had distinct characteristics at odds with the stereotype, and furthermore - with the exception of 1931 - these governments did not collapse supinely in the face of disasters, unprepared though they often were. Several crises brought forth intelligent policy responses which in turn brought forth beneficial outcomes. If the Labour Party did not reap the political rewards which perhaps it deserved, this was in part due to presentational weaknesses, other political mis-judgements, and unexpected events (such as the Korean War) that were beyond its control. Nevertheless, the perception that Labour history had been the story of 'one damned crisis after another' was important even if it was of doubtful accuracy. This was because it helped shape the way political actors viewed their own experience, providing the definition of what they were trying to avoid. For the left, it provided a narrative of socialist promise betrayed. For the originators of New Labour, it taught a different moral: that Labour's historic aims could only be met by a form of self-conscious economic toughness of a kind supposedly never practiced in the 'old days of reckless borrowing unsupported by fiscal prudence.'
The final part of the Cuts Show song on Labour Party history took the tale into the future. The beginning of the verse was sung weakly, as though by someone in extreme old age:
It's wonderful to be here in two thousand years and ten,
Wonderful to see you voting me [another voice: 'Labour, silly'] ... Labour in again,
We hope some time this century to implement our plans, But at the present moment there's a [with great vigour] crisis on our hands!
This final time 'the export trade with Mars' and 'the movement of the stars' are to blame, but change is still promised 'in a thousand years or two.' A cynic might be tempted to suggest that the authors showed a good deal of foresight. It might be fairer, though, to acknowledge that the current crisis does not match the Cuts Show model any more than Old Labour governments fitted the mould delineated by Brown. In spite of the current economic problems, the Prime Minister may legitimately claim to have avoided the historic Labour curse. That curse, though, never had the power that he so compellingly attributed to it. He may, however, yet be able to show that he genuinely differs from his predecessors if, unlike them, he can fully exploit the political opportunity which the economic crisis presents to him. History suggests that Labour leaders' political judgments about perceptions and public opinion have repeatedly been more important than economic events in themselves in determining the fates of their governments during financial crises; great care in matching presentation and tone to public mood may be even more crucial than ever for Brown's government in the special financial circumstances of the present and immediate future.
I would like to thank Alan Booth for comments on an earlier draft of this paper. Any errors that remain are of course my own responsibility.
Robert Skidelsky, Politicians and the Slump: the Labour Government of 1929-31 Papermac 1994; first published 1967.
William Keegan, The Prudence of Mr. Gordon Brown, John Wiley & Sons, London, 2003.
Kenneth O. Morgan, Callaghan: A Life, Oxford University Press, Oxford, 1997.
Kurt W. Rothschild, 'The Neglect of Employment in the International Economic Order', Annals of the American Academy of Political and Social Science, Vol. 492 (July 1987), pp. 49-60.
Richard Toye, The Labour Party and the Planned Economy, 1931-1951, Royal Historical Society, London, 2003.
Richard Toye,'"The Smallest Party in History"? New Labour in Historical Perspective', Labour History Review, Vol. 69, No. 1, April 2004.
Richard Toye, 'The Labour Party and Keynes', in Duncan Tanner and E.H.H. Green (eds.), The Strange Survival of Liberal England: Political leaders, moral values and the reception of economic debate, Cambridge University Press, Cambridge, 2007.
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