Economies in Crisis 997money to Germany began to call in debts. Already reeling from agricultural
Depression in Eastern Europe, the failure of the largest Austrian bank in
May 1931 immediately brought the collapse of several German banks to
which it owed money. A general financial panic ensued. U.S. President
Herbert Hoover (1874-1964) suggested a moratorium on the repayment
of all reparations and war debts, hoping that confidence and the end of the
cycle of defaults would follow. The other powers accepted the moratorium
in August 1931.
As the British economy floundered because of the decline in world trade,
European bankers intensified the run on the pound. They exchanged their
holdings of British pounds sterling for gold, 2.5 million pounds' worth per
day during the summer of 1930, dangerously reducing Britain's gold reserves.
As investors panicked, sterling quickly lost a third of its value.
With Labour not having a majority in the House of Commons, McDonald
was forced to negotiate with the other parties, but the latter insisted on
reducing the budget, including cutting unemployment benefits. This
McDonald's Labour colleagues could not accept. But instead of resigning
as everyone expected, McDonald formed a “National Government” of mem
bers from the three parties, although most Labour leaders declined to join
him. He thus stayed on as prime minister. Worsening conditions forced the
National Government to take Britain off the gold standard in September
- This meant that the Bank of England would no longer remit gold in
exchange for pounds. This seemed like a step into the economic unknown.
Wild fluctuations in the values of other currencies followed. This further
discouraged business, and international trade declined even more steeply,
but it did permit some domestic recovery. In April 1933, the United States,
too, went off the gold standard.
In Britain, the Conservatives’ deflationary measures, which sought to
reduce expenditures, seemed to British voters to be the only way out of the
crisis. In the elections of October 1931, the Tories won an overwhelming
majority of seats in the House of Commons. Neville Chamberlain (1869—
- now became chancellor of the Exchequer. His aloof manner, invet
erate dullness, rasping voice, and whiny disposition did little to inspire
confidence—one critic suggested that he had been “weaned on a pickle.”
Chamberlain promised a “doctor's mandate” to extract Britain from the
economic crisis. The government imposed higher tariffs, further reducing
consumer spending. Many members of the Labour Party called MacDonald
a traitor for going along with deflationary measures because they included
reducing unemployment benefits, and they proposed the nationalization of
mining, the railways, and other essential industries as first steps toward the
implementation of a more planned economy. But Labour's campaign ran
headlong into traditional Conservative opposition and middle-class fear of
socialism, as well as the orthodoxy of deflationary economic policies.
Across the English Channel, smaller-scale industries, artisans, and family
farmers in France at first were sheltered from the Depression because they