Following the House of Lords' rejection of the 1909 "People's Budget", the House of Commons sought to establish its formal dominance over the House of Lords, which had broken convention in opposing the bill. The budget was eventually passed by the Lords, after the Commons' democratic mandate was confirmed by holding elections in January 1910. The following Parliament Act, which looked to prevent a recurrence of the budget problems, was also widely opposed in the House of Lords and cross-party discussion failed, particularly because of the proposed Act's applicability to passing an Irish home rule bill. Following a second general election in December, the Act was passed with the support of the monarch, George V, who threatened to create sufficient Liberal peers to overcome the then Conservative majority.
The Act effectively removed the right of the House of Lords to veto money bills completely, and replaced it with a right of veto over other public bills with a maximum delay of two years (the Parliament Act 1949 reduced this to one). It also reduced the maximum term of a parliament from seven years to five.
Until the Parliament Act 1911, there was no way to resolve disagreements between the two houses of Parliament except through the creation of additional peers by the monarch. Queen Anne had created twelve Tory peers to vote through the Treaty of Utrecht in 1713. The Reform Act 1832 had been passed when the House of Lords dropped their opposition to it: William IV had threatened to create eighty new peers by request of the prime minister, Earl Grey. This created an informal convention that the Lords would give way when the public was behind the House of Commons. For example, Irish disestablishment, which had been a major point of contention between the two main parties since the 1830s, was passed by the Lords in 1869 after Queen Victoria intervened and W.E. Gladstone won the 1868 election on the issue. However, in practice, this gave the Lords a right to demand that such public support be present and to decide the timing of a general election.
It was the prevailing wisdom that the House of Lords could not amend money bills, since only the House of Commons had the right to decide upon the resources the monarch could call upon. This did not, however, prevent it from rejecting such bills outright. In 1860, with the repeal of the paper duties, all money bills were consolidated into a single budget. This denied the Lords the ability to reject individual components, and the prospect of voting down the entire budget was seemingly unpalatable. It was only in 1909 that this possibility became a reality. Prior to the Act, the Lords had had rights equal to those of the Commons over legislation but, by convention, did not utilise its right of veto over financial measures.
There had been an overwhelming Conservative-Unionist majority in the Lords since the Liberal split in 1886. With the Liberal Party attempting to push through significant welfare reforms with considerable popular support, problems seemed certain to arise in the relationship between the houses. Between 1906 and 1909, several important measures were considerably watered down or rejected outright: for example, Augustine Birrell introduced the Education Bill 1906, which was intended to address nonconformist grievances arising from the Education Act 1902, but it was amended by the Lords to such an extent that it effectively became a different bill, whereupon the Commons dropped it. This led to a resolution in the House of Commons on 26 June 1907, put forward by Liberal Prime Minister Henry Campbell-Bannerman, declaring that the Lords' power ought to be curtailed. In 1909, hoping to force an election, the Lords rejected the financial bill based on the government budget (the "People's Budget") put forward by David Lloyd George, by 350 votes to 75. This action, according to the Commons, was "a breach of the constitution and a usurpation of the rights of the Commons". The Lords suggested that the Commons demonstrate at the polls the veracity of its claim that the bill represented the will of the people. The Liberal government sought to do so through the January 1910 general election. Their representation in parliament dropped heavily, but they retained a majority with the help of a significant number of Irish Parliamentary Party (IPP) and Labour MPs. The IPP saw the continued power of the Lords as detrimental to securing Irish Home Rule. Following the election, the Lords relented on the budget (which had been reintroduced by the government), and it passed the Lords on 28 April, a day after the Commons vote.