‘Rachel Reeves faces a similar challenge to Labour’s Iron Chancellor in 1931’

In the past week, “market jitters” appear to have thrown a spanner in our iron Chancellor’s works. The fiscal headroom Rachel Reeves thought – or at least hoped – she had for the coming years may have evaporated. 

At the root of Reeves’ problems is the willingness or otherwise of the financial markets to lend the British government money. As investors begin to question whether the Chancellor’s sums add up, so confidence in both Sterling and government bonds takes a corresponding hit. 

This is almost an exact repeat of the challenge another Labour ‘iron chancellor’ faced in 1931, amidst the economic blizzard of the Great Depression.

Snowden, a man of granite Yorkshire stoicism

Philip Snowden, whose remarkable autobiography I edited in a recently republished edition, was unlike any holder of his office
before or since. Growing up in the poverty of a rural Yorkshire weaving village, he was paralysed in his twenties and taught himself to walk again with the aid of two sticks.

It would take all of Snowden’s granite Yorkshire stoicism to face down the great crisis of August 1931, a market panic that would make Kwasi Kwarteng’s brief tenure at 11 Downing Street look like a walk in the park. 

Although Snowden has a reputation today as a parsimonious advocate of austerity economics, this was not the approach he adopted in the first years of the second Labour government, a minority administration that took office in 1929. 

In his budgets of 1930 and 1931, Snowden actually increased government spending (despite collapsing tax revenues) and allocated tens of millions to job creation schemes – not ambitious enough for an impatient Oswald Mosely, who resigned in protest.

Nor did Snowden’s measures make a dent in the unemployment figures, which only spiralled further with the collapse of the world economy. 

Alarm over Labour finances back in 1931

By 1931, concern about the yawning budget deficit was growing in parliament and the City. Snowden’s solution of a Land Tax on great estates did not serve to calm the proprietor class that sat on the Liberal and Tory benches.

As a minority government reliant on opposition goodwill, Labour was forced to concede to a Liberal demand for an enquiry into public finances.

The subsequent report predicted a yawning deficit of £170 million (extreme for the period) and a disastrous run on the pound followed.

In August, the Labour cabinet held a series of all-day meetings to try and find a formula to calm the markets, balance the books and prevent what Snowden labelled “the deluge” of a currency collapse.

Despite broad agreement on an austerity package, deadlock resulted from Snowden’s proposal to cut the greatest expense on the balance sheets – unemployment benefit – by 10%.

In the end, the cabinet split 11-9 in favour of the cut, but prime minister Ramsay MacDonald felt he could not continue, offering his resignation to the king. 

The monarch, and the opposition leaders, persuaded MacDonald to stay on at the head of a National Government of all three parties.

Market jitters and government cuts prompted a party split

Snowden continued as chancellor in the coalition but the Labour Party rejected cooperation, instead expelling its leaders and going it alone.

The party suffered dearly for its decision, reduced to just 46 seats to the National Government’s 554 in the subsequent general election.

READ MORE: Reeves v the markets: ‘Three lessons from past Labour governments’

Snowden proceeded to carry out the proposed economies (including the cut in the dole) in an emergency budget. When Britain was forced off the Gold Standard a few weeks later, the markets were kind to Sterling and although the next few years were hard, by 1934 the public finances were in such good shape that all the cuts could be restored, just two-and-a-half years after they had been implemented.

Snowden had little wriggle room

Historians have revised the universally negative view of Snowden’s approach; like Reeves he had virtually no wriggle room in the first years of the Depression and Britain actually came off considerably lighter than comparable economies. While other nations cut to the bone, Britain went on spending under Snowden’s tenure from 1929-31. The spending carried on until no one would lend Britain any more money and the result was a collapse of the Labour government, the worst split in the party’s history, and an electoral massacre.

What lessons are there for Rachel Reeves and Labour today? The dire outcomes of 1931 are certainly a warning from history. And far more recent bond market panic did for Liz Truss and arguably led to the worst result in the Conservatives’ history two years later. Black Friday in 1992 also set John Major’s government on the long round to defeat.

But 1931 also showed that the Labour movement struggles to tolerate austerity, even when the situation appears to demand it – it goes against so much that the party faithful hold dear. Ninety years on, the challenge remains the same for Labour ‘iron chancellors’; how to simultaneously placate the markets and the party, a question to which there appear to be no easy answers. 

Britain’s Iron Chancellor, an autobiography of Snowden edited by Alexander Clifford, was published in August 2024 by Pen & Sword publishers.

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