The National Government 'Emergency' Period, August to October 1931
The second phase of this fiscal squeeze period began after the Labour Government was replaced without an election by an all-party National Government. That emergency government, comprising a cabinet of just ten members, was headed by Ramsay MacDonald, the former Labour prime minister, who had been importunately called by King George V to form a new government to deal with the financial crisis. That government, drawn from the three major parties but dominated by the Conservatives under Stanley Baldwin, included Philip Snowden, the former Labour Chancellor of the Exchequer, who remained at the Treasury. The formation of the emergency National Government exposed the King to political criticism from the left, who argued that (in contrast to other cases where the monarch merely ratifies decisions already agreed among political parties) the monarch had in this case exercised choice and influence in an unavoidably party-political move which seriously split the Labour Party (see, for example, Moodie (1957); Marshall and Moodie (1964): 64-6; Bassett (1958); Williamson (1984); Bogdanor (1991)).
Once appointed, the new National Government presented itself as acting in 'emergency mode' to deal with the crisis. It rapidly issued a White Paper proposing some ?80m of extra taxes and ?70m of spending cuts to correct the budget deficit. And—far from following the 'Geddes' policy mentioned in Chapter Three, of concentrating on cuts that could be implemented without legislation—it introduced an omnibus 'National Economy Bill' to put spending cuts rapidly into effect, by in effect overriding the normal legislative process. That Bill provided for Orders-in-Council (edicts of the Privy Council, a relic of monarchical government and normally used as a method of secondary legislation in exercising detailed powers under statute or bringing provisions of statutes into effect) to change existing legislation, those Orders having the effect of an Act of Parliament and only able to be changed by further legislation. The new government justified this draconian approach as a necessary response to severe financial emergency, enabling changes such as pay cuts in the public services to be made quickly and equitably across multiple policy domains. But the use of Orders-in-Council to supersede Acts of Parliament was of course contested by the Labour opposition as unwarrantably overriding normal parliamentary procedure.
These measures were introduced in a political atmosphere seething with bitterness and rancour. The bulk of the Labour Party stayed out of the National Government under a new leader (Arthur Henderson), and the Party expelled MacDonald immediately on the formation of the National Government. MacDonald and his Labour colleagues who supported the National Government came to be denounced as 'traitors' to the Labour cause by their erstwhile party companions, and MacDonald's accounts of decisions made under the previous Labour Government were fiercely contested.
On top of the spending cuts agreed by the Labour cabinet in August 1931, the National Government proceeded to implement the most politically contentious measure that had split that cabinet, namely a cut in unemployment benefits at a time of mass unemployment. But one of the main justifications given for crossing that political Rubicon and making those cuts—to maintain the exchange rate of the currency—was superseded within weeks. On 21 September the pound was forced off the gold standard as a result of the National Government's handling of a naval mutiny in protest against public sector pay cuts, which occurred in the warships stationed at Inver- gordon in Scotland. On the second day of that mutiny, the National Government announced that pay cuts for the lower ranks of the armed services (along with teachers and police) would be limited to no more than 10 per cent. That announcement spooked the financial markets to the point that the pound was forced off the gold standard and began to 'float', enabling devaluation to take place.
-  Memorandum on the Measures Proposed by His Majesty's Government to Secure Reductions inNational Expenditure, Cmd 3952 1931, London: HMSO.