In 1928 speculation in the US stock market diverted funding abroad that had previously been available for American loans. A downturn in American imports and world trade followed. The October 1929 stock market crash in New York triggered a widespread depression. American credit could no longer be obtained and governments sought to expand exports and reduce imports by raising tariffs. Demand for British goods collapsed, accompanied by a rapid rise in unemployment to 22 per cent. Government revenues fell while expenditure rose through dole payments to the unemployed. As the gold standard was still operative, and sterling was convertible to gold, gold reserves rapidly diminished. Increases in the bank rate failed to halt the flow of gold, which produced financial crisis in 1931.
Ramsay MacDonald's Labour government appointed the May Committee, which recommended severe cuts in expenditure, including payments to the unemployed. MacDonald and the Chancellor of the Exchequer, Philip Snowden, supported the May Committee's findings but the majority of the government rejected them. MacDonald resigned, only to form a new National Government with the Conservatives and Liberals. He was subsequently expelled from the Labour Party but continued as Prime Minister until 1935.
The new government instituted severe spending cuts (although not as severe as those agreed by the outgoing Labour Cabinet), including unemployment benefits. It raised interest rates but gold continued to drain from the reserves. In September 1931 the government abandoned the gold standard. Sterling immediately devalued against the dollar, improving the prospects for export manufacturers and heralding the beginning of a slow recovery. The financial crisis came to end by mid-1932.