In October 1929 the Wall Street Crash sent the US economy into turmoil. A worldwide economic depression followed. The government tried to implement schemes to create employment, but achieved very little.
As well as the economy, politics was in turmoil at this time. In the 1929 general election, although not in an overall majority, the Conservative Party won the most seats in the House of Commons. Ramsay MacDonald became Labour Prime Minister but was forced to depend on the Liberals in the House of Commons to pass legislation.
MacDonald was from the moderate wing of the Labour Party and his attempts to work with the Liberals caused problems between him and the more radical elements of Labour. MacDonald felt that he had to cut government spending to keep the country solvent through these hard times but many Labour MPs could not reconcile themselves with this idea.
In 1931 there was no improvement in the economic situation and there was real danger the government would not be able to balance its budget. Facing serious difficulties, the government was forced to make hard choices. One option was to introduce tariffs on goods coming into the country to raise revenue and protect British industry from competition. The downside of this was that it might lead other countries to do the same, making it harder for British industries to export. Another option was a 20 per cent cut in unemployment benefit. The Cabinet was split on these issues and in August 1931 Ramsay MacDonald resigned as Prime Minister.
On 24 August the King asked MacDonald to form another government. This time, believing it best for the country, MacDonald formed a National Government with ministers from the Labour, Liberal and Conservative parties. The majority of the Labour party refused to support the National Government, expelling members who supported it.
Despite the National Government winning a landslide victory in the October 1931 election, MacDonald remained almost a hate figure for trade unions and the Labour Party. When the Conservative leader, Stanley Baldwin, was put in charge of most domestic politics, the situation worsened. Although Ramsay MacDonald was the first Labour Prime Minister in British history, the harsher critics see him as a traitor to the Labour movement.