The people's palace taking on London's elite

The gaudy banners under which the early unionised dockers, bricklayers and servants of the railway once defied their paymasters to march through the streets for their basic rights tell a story little heard today.

So too do the political cartoons featuring top-hatted grotesques; the cumbersome dresses worn by the suffragettes and the posters celebrating the nobility of inter-war organised labour. Even the 1980s Rock Against Racism memorabilia reveal something about the struggle to build the world we recognise today.

The newly restored People's History Museum, home to this unique collection of artefacts, recordings and documents, that together weave a complex tapestry detailing two centuries of proletariat struggle, is currently streaking ahead in the battle for the 2011 Art Fund prize for the museum of the year.

It seems appropriate come June when the judging panel hands the winner the £100,000 cheque, that exhibition space dedicated to the fight for universal advancement might triumph in a year when opposition to budget cuts and reform of the voting system has made the subject of political engagement – or the lack of it – more relevant than at any time in a generation.

The museum's modern building is a short cavalry charge from the killing grounds where a drunken yeomanry sought to crush 19th-century democratic demands in the massacre known as Peterloo. And it is here that the exhibition begins its journey through the ideas and actions that have transformed working-class life.

The museum's director Katy Archer believes that the appeal lies in showing how the collective struggle is explained in the words and work of those that took part. "It is about telling the story of ordinary working people, their causes and their achievements," she explains. "We have been leading the online poll since Day 1. In a way it wasn't really a surprise because the museum has a real cult following. People are very passionate about it."

Today's collection of 124,000 donated items, 1,300 of which are currently on display, originates from what was the archive of the Trade Union, Labour and Co-operative History Society originally shown at Limehouse Town Hall in London between 1975 and 1986. Greater Manchester's councils clubbed together to bring it North believing it reflected the world's first industrial city's long association with radical ideas and social change.

It moved to its present address at the Edwardian Pump House on Bridge Street in 1994 before closing for a three-year £12.5m facelift in 2007 paid for by the Heritage Lottery Fund.

As it prepares to celebrate its first birthday since reopening, the museum now boasts 80,000 visitors a year and hopes to double that number soon.

But despite presenting what many may consider a partisan view of history there are surprisingly few complaints, said Ms Archer. "The team and the designers have worked very hard to present a non-partial point of view." There is even a recording of Mrs Thatcher's famous "You turn if you want to" speech. Yet these are difficult times for the arts and with the change of government the museum has found itself without the kind of ideological support it once enjoyed in the corridors of power.

The museum was one of seven non-national institutions to lose funding in October's comprehensive review. This means that come 2014-15 it will have to fill a 15 per cent hole in its budget. And while most of the funding continues to come from the 10 councils that make up the Association of Greater Manchester Authorities – even that is under review next year. "The ambition is to continue to be free and we would not want to start charging for admission," said Ms Archer.

Meanwhile, the museum hopes to continue to tap into the growing fashion for political activism. John Monks, the former TUC general secretary who is chair of trustees and passionate supporter of the museum, said it enabled young people to learn the lessons of the past. "This museum is vitally important. Being able to see and hear real people's stories is a key way of helping to inspire a new generation to stand up for their rights."