Page last updated at 12:55 GMT, Thursday, 4 March 2010

Debt, cuts and the ghost of Geddes

A girl with baby in the 1920s, and now
There are parallels between then and now

By Finlo Rohrer
BBC News Magazine

Big cuts on the horizon, the media campaigning for an end to waste and those affected bitterly protesting. Sound familiar?

It might surprise a lot of people to think that 1921 and 2010 have a lot in common.

In 1921 public finances were looking shaky after years of rocketing expenditure during World War I and its aftermath.

The national debt had risen rapidly and many people - even outside the worlds of politics and business - weren't happy.

The Geddes committee was a piece of political rhetoric saying we are going to slash public expenditure
Prof Martin Daunton

Agitation was led by Lord Rothermere, the Daily Mail owner, whose Anti-Waste League had started fighting by-elections on a manifesto of attacking excessive public spending.

At the same time cost-cutting was not a simple issue, with the Labour Party looking to use it to rally people to its cause.

"The government of Lloyd George was being caught between Labour in the North and the Anti-Waste League in the south being led by the Daily Mail," says Martin Daunton, professor of economic history and author of Wealth and Welfare: An Economic and Social History of Britain, 1851-1951. " They were putting on candidates in this lower middle class attack on waste."

Shuffling responsibility

With this gathering storm in mind, at the start of August 1921 David Lloyd George announced the creation of an advisory committee of businessmen to advise him on departmental spending and the policy underlying that spending.

"Lloyd George, although a liberal, had a habit of calling on businessmen," says emeritus professor of history George Peden, author of The Treasury and British Public Policy, 1906-1959. "They had a reputation of being impartial, experts who knew how to get things done. It is politicians shuffling off the responsibility onto someone else."

The committee was led by businessman Sir Eric Geddes, who had joined the government in the war, before becoming minister of transport. He was not an uncontroversial choice, having presided over a ministry associated with lavish spending.

Tank
Expenditure on WWI pushed the UK into debt

But everybody knew which way the wind was blowing. The Times on 4 August 1921 had christened Geddes's new body the "Big Axe" committee, and coldly noted: "The Prime Minister has desired to set up the committee to take the sting out of the anti-waste agitation."

By 9 August, the Times was dubbing it the "Super-Axe" committee and asking questions about a body that seemed to bypass the chancellor, cabinet and even Parliament.

The need for action was clear to many. As Prof Daunton notes, the national debt had risen dramatically from a paltry £677.4m against a GDP of £2.233bn in 1910. By 1920 it was £7.809bn against a GDP of £6.23bn.

And the cost of servicing the debt was unpleasant with interest rates running at 5% in 1921, compared with 3% 10 years earlier.

"The Geddes committee was a piece of political rhetoric saying we are going to slash public expenditure," says Prof Daunton.

Defence cuts

"It was an incredibly tense period. The lower middle class really felt they had been hammered [through taxation]. There had been a big rise in trade union membership and militancy."

In February 1922 the recommendations of the first two-thirds of the report were made public, totalling £75m of annual cuts. The first part dealt with cuts in the armed forces, and the defenders of the Navy, for example, were quick to rail against some of the measures. The third part followed a short while later and covered another £15m in cuts.

The next government is going to have many challenges, but tackling a public sector that has become obese and poor value for money is going to have to be a priority
The Times, 2010

"The bigger cuts were in defence. More controversial were the cuts in social services," says Prof Peden. "The then government under Lloyd George had promised a 'land fit for heroes' and then began to cut back on those promises."

Speaking in the Times after the release of the report, Sir Daniel Stevenson of Glasgow attacked the "cheeseparing" planned for the vital field of education.

But George Terrell, MP and president of the National Union of Manufacturers, probably gave some indication of the mood of business in response to the report.

He told the Times: "When the history of the war is written I am firmly convinced that Sir Eric Geddes will rank as a superman who not only performed great work in the war but who, by his Report, has indicated reforms which are necessary if we are to overcome the evils of unemployment and to recover financial stability."

There are signs of an astonished realisation of the alarming bill for civil pensions that in a few years will be a millstone on the taxpayer's neck
The Times, 1922

The overwhelming feeling was that something had been done and cuts were being made. "They were pretty severe at the time," says Prof Peden.

Apart from defence where there were widespread reductions, the blade of the Geddes Axe fell primarily on education and social housing.

Geddes scalpel

But the effect was not permanent. After cuts in the financial years between 1921-1924, expenditure again began to creep back up.

"After a couple of years the onward march of public expenditure resumed," says Prof Peden.

And for some, the Geddes Axe was not really that sharp at all.

Geddes report being delivered
The report was well received by business but did draw protests

"My argument is that it was not a Geddes Axe - it was a Geddes scalpel," says Prof Daunton. "It didn't slash expenditure as much as expected. It wasn't very rigorous. The level of government spending does not go down."

Instead, the real story is successive British governments quietly steering towards calmer fiscal waters.

"Compared with Germany and France, in Britain the government very carefully moves through this. It doesn't introduce a sales tax, it doesn't put up the income tax rate - but it does keep up the taxation on business.

"You gradually work your way out without cutting government expenditure."

It's certainly possible to find echoes of 2010 in 1921.

"The parallel you might make is the tremendous effort made by whoever's in power to win the confidence of the markets," says Prof Peden.

And the idea of taxpayers getting exercised over the national debt is also familiar. The idea of a taxpayers' revolt has certainly come up since.

"That's comparable to the feeling that brought Margaret Thatcher to power," says Prof Peden.

Lord Rothermere
Lord Rothermere's Anti-Waste League helped spur the cuts

There are other echoes. The Times noted in 1922: "There are signs of an astonished realisation of the alarming bill for civil pensions that in a few years will be a millstone on the taxpayer's neck."

Perhaps the most extraordinary thing about the Geddes Axe was that it seemed to work as a political tool. The Anti-Waste League wound down. People were largely satisfied by the cuts, says Prof Daunton.

Lloyd George's political career was ended, but not by the issue of the national debt. The government continued to operate.

"Looking back the finances of the period look very sound and conventional compared with where they are now," says Prof Peden.


Below is a selection of your comments.

It is not so much taxpayers getting exercised over the national debt, but not seeing value for money when they pay their taxes, If the services for which they are paying are not being provided it is natural to resent handing money over to the government. Nobody pays taxes to service loans - they pay them so that the government has the funds to provide the services that the individual citizen cannot provide for himself. If those services are cut, however good the reason may be in a politician's mind, taxpayers quite naturally get unhappy.
Megan, Cheshire UK

Professor Peden's final comment about the soundness of government finances in 1921 compared with now is important. The IMF would not have been breathing down our neck in 1921 if it had existed then, but it is now. If the government that emerges from our next election does not come up with a credible long-term plan for the economy, including tax increases and spending cuts, within a month or two after 6 May, the IMF will impose the changes on us, as they did in 1976.
Michael, London

Michael, don't panic about the IMF. They cannot impose anything on us unless we ask them to. If we ask the IMF for money, it will attach conditions to the loan and we can decide whether to take it or leave it. The IMF cannot just impose austerity on any country that is not begging it for money.
Victoria, London

One area not mentioned is the relationship of the very rich to the very poor - that gulf has grown consistently over the last 30 years (not just the poor unemployed that are poor). Why is it always the middle to lower income groups that have to feel the greatest pain, for example non dom politicians paying very little tax if any, the bankers who largely caused the present crises still get very large bonuses, while many are made unemployed or homeless, just the same as in the early 1900s. Remember the Glasgow rent strike - no real difference to toady's home repossessions.
Wmoonie, Denny, UK

The big difference between now and 1921 is that today's massive public debt have not been caused by the cost of fighting a world war - it has been caused by a Chancellor who failed to save during an unsustainable boom and sold off the country's gold reserves at the bottom of the market.
Graham Cox, Brighton and Hove

What came after 1921? Hmm... The Great Depression, hyperinflation, rationing, and World War II. The UK is already in more debt than it ever has been, and the Western economy has been hit far harder than it ever remembers being hit, even pre-1921. Unemployment is still at record levels too. So if this article is accurate, and 2010 is going to be a lot like 1921, then I'm not looking forward to the next decade one little bit. We can look forward to mass starvation, power outages, war, mass poverty and widespread death. Joy!
Alex, Manchester, UK

Neither the Depression, or the boom and bust cycle are caused by public spending. They are caused by the blind pursuit of profit by big business, fuelled by the speculative lending of the financial sector. Cutting public spending expenditure by governments in the US, Britain and elsewhere in the early 30s made the Depression worse. Roosevelt's decision in 1936 to cut back on government support for the economy was just starting to recover caused the US economy to plunge again. Cutting public expenditure means less business for the private sector pubic bodies no longer purchase their goods and services. Public sector workers laid off or whose pay is cut spend less goods and services, no longer pay taxes and claim unemployment benefits which in turn deepens the recession and government finances. Consumers have got into debt because wages have been cut in real terms, particularly in the US over the last three decades.
Tony Phillips, London

The striking thing about the present crisis is the way a total banking collapse was avoided thanks, in part, to Gordon Brown. What we have now is a far greater degree of international cooperation than in 1921, an IMF which is there as a financial backstop (it only imposes conditions when it lends by the way), and much greater knowledge about how an economy operates. On top of this there is nothing like the level of poverty experienced by so many millions not just in 1921 but for years afterwards. In 1997 even after the North Sea oil boom and vast amounts of money flowing into government from privatisation we had a dreadful back log of decaying schools, long NHS waiting lists, poorly equipped hospitals, etc. I wonder where the money went - but no wonder the Labour government decided it had to invest in such areas.
Phil, Market Drayton

The cycle of boom and bust is unlikely to disappear. Having said that, big crashes have occurred under both Keynesian and Monetarist economic policies. The biggest issue the UK faces is the high level of private household debt and public spending that is well beyond our short term means. On another point fixing any currency to a commodity, say gold which is currently in a bubble itself, would likely cause huge deflation. Just look to Japan and you'll see that isn't any more desirable that inflation.
Simon, Osaka

Why weren't there any of these "let's learn from history" missives in the middle of the unsustainable boom of the last ten years? Consider the South Sea Bubble which burst in 1720 and almost bankrupted the nation or the French Louisiana bubble that some say led directly to the French revolution. Nobody says nay while the good times roll, but when you wake up with a hangover everyone knew better.
Alan, Towcester

Unfortunately, modern economists are mostly Keynesians who believe that consumers want to borrow and consume more, and the only impediment to their wishes is the cost of borrowing money and the availability of money. Surely not a coincidence that this is the most profitable strategy for bankers. And look where it's got us. It seems to me that Lloyd George was quite politically astute to get the industrialists in - he knew what was needed but was too scared to put his own name to it. Let's hope today's crop of politicians are brave enough to give the country its medicine.
Steve, Cambridge

We will never stop this damaging cycle of boom and bust as long as governments respond to each crash by further inflation. Governments must either commit to a stable money supply - a currency backed by a commodity - or must get out of the money business altogether.
Tom, London, UK



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