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Gladstonian Finance

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The equation of sound money and balanced budgets with moral probity became difficult to maintain once the high point of 'laissez-faire' had been reached in Gladstone's mid-Victorian financial policies.

Anachronism is an awkward business for the historian. The search for 'relevance' when teaching encourages the discovery of continuity, but close study of a period usually leads to a stress on its distinctiveness. Nineteenth-century finance used not to be thought of much interest: in the philosophy of a welfare state it was merely a detail of a period left behind. Faced today with ministers who, on the one hand, claim to support minimal state intervention but, on the other, claim with respect to any particular area of state spending to have increased expenditure (i.e. overall government spending should decrease, but no sector should be acknowledged to be suffering), historians have begun to turn their attention to both the mechanics and the ethos of the Victorian 'minimal state' and its finances.

William Ewart Gladstone's background was commercial, and it might be thought that finance would have been a natural interest. His father, John Gladstone, made a fortune speculating in commodities, particularly in the expanding Liverpool corn trade in the late eighteenth century; he became the political organiser and friend of Huskisson and Canning, the two Liverpool Members of Parliament, both Tories. But the young William never had any direct experience in the family firm, and his education at Eton and Oxford was in the classics and in philosophy. As a young Tory MP in the 1830s his interests were chiefly theological and philosophical, and his reading and writing in those years show no particular interest in commerce or finance, though family interests required him to play an active part in bargaining with the Whig government about the terms of compensation for West Indian slave owners at the time of emancipation. Perhaps to ween him away from theology, Sir Robert Peel made him Vice-President of the Board of Trade in 1841 (at the age of thirty-one) and he was its President from 1843-45, when he resigned over the Maynooth affair (the government's proposal to give St Patrick's College, Maynooth, a Roman Catholic seminary in Ireland, a permanent endowment).

Gladstone rapidly showed an aptitude for figures and the details of tariff negotiations, and he played an important part in the making of the budgets of 1842 and 1845. Even so, his appointment as Chancellor of the Exchequer by the Earl of Aberdeen in 1852 was by no means inevitable, for having briefly been Peel's Colonial Secretary in 1846, Gladstone had become chiefly known in the late 1840s as a speaker on colonial matters. His speech attacking Disraeli's budget proposals in 1852, which contributed to the fall of the minority Tory government, and the influence of Prince Albert, seem to have led to his Chancellorship. He was Chancellor from 1852-55, and again, under Palmerston and Russell, from 1859-66. When Prime Minister, he twice appointed himself Chancellor of the Exchequer as well (in 1873-74 and in 1880-82).

Gladstone relished the Chancellorship. He enjoyed the details of figures, and he had the capacity to communicate his enthusiasm. His budget speeches raised what, under predecessors such as Henry Goulburn and Charles Wood, had been rather humdrum occasions to one of the chief moments of the political year. The importance of Gladstone's annual budget day is still symbolised by twentieth-century Chancellors carrying their budget speech from Downing Street to the House of Commons in what is believed to have been the despatch case he used for the 1853 budget. His budget speeches were huge – four hours was not uncommon – but they fascinated the Commons. They were delivered from notes only, Gladstone unfolding the record of national financial progress and the details of the financial proposals partly as if he were narrating an Homeric epic, and partly as if he was the detective at the end of a novel, unravelling a complete plot and bringing the esoteric details into clear and dramatic relationships.

The creation of the budget was the job of the Chancellor. Gladstone worked out the sums himself – once literally on the back of an envelope – and rarely took advice. Indeed he usually decided on the shape of his budget proposals while at Hawarden, his brother-in-law's house in North Wales. The 1860 Cobden Treaty with France, which together with that year's budget greatly extended free trade, was sketched in the Hawarden garden. Of course, convention and the sense of what was politically possible were constraining factors, but the Chancellor bore responsibility for his proposals alone. If things went well, the reward was great; if badly, the Chancellor stood exposed, as Wood found in 1851 and Robert Lowe in 1872. Gladstone was good at spotting and anticipating difficulties, and one of his advantages to his Prime Minister and his party was that he had a safe pair of hands when it came to financial details. The Whigs in the 1830s and 1840s had acquired a reputation for financial fumbling. In the 1860s, the Liberals with Gladstone could claim to be the party of financial reliability.

Despite Gladstone's personal prominence and authority, 'Gladstonian Finance' was not a personal invention. It built on Peel, and it related to and reflected the predominant aspirations of a generation. It was in the first two periods of Gladstone's four Chancellorships that his most distinctive work was done, and it had four main consequences.

It clearly established the political and financial importance and distinctiveness of the Chancellorship (a development adumbrated by Disraeli in1852), together with the Treasury, as the central, co-ordinating office of executive politics, second only (and not always that) to the Prime Minister. The Treasury as it developed in the 1850s and 1860s was essentially, though not in every case, a negative influence. Stressing the virtues of probity in public affairs, it and its legislative ally the Public Accounts Committee (begun by Gladstone in 1861), chased waste and corruption, and were the final stage in the long process, begun in the late eighteenth century, which made public service in Britain exceptionally free from bribes. 'Oiling the wheels' ceased to be the way to get things done in British government. This was partly because British government at the centre, outside the area of defence, had few ambitions to construct or to innovate – a point which will be shortly returned to.

A great emphasis was placed on balanced budgets and the annual national account presented in the spring budget. The dramatic performance of these budgets helped to emphasise the centra1 place of finance in the government's annual legislative programme, as well as promoting the personal political position of the Chancellor. A chief purpose of a single annual account was to force spending departments into public accountability by directly relating their expenditure to the raising of revenue.

Revenue was to be raised (or lowered) by a balance between direct and indirect taxation. Direct taxes – the income and property tax revived by Peel in 1842, succession duties and the like – contributed about 30 per cent of central government revenue in the late 1840s and about 40 per cent by the early 1880s. The regressive indirect taxes, levied on a very small number of highly remunerative articles chiefly food and drink – correspondingly decreased from about 70 per cent in the late 1840s to about 60 per cent in the early 1880s. The income tax – the chief contributor to the direct tax side of the equation – was only paid by those with incomes of 6.00 and over (i.e. it excluded the labouring classes almost completely, and some lower- middle-class people as well). Gladstone believed the 6.00 line was 'the dividing line... between the educated and the labouring part of the community', and Dudley Baxter, the Tory statistician, described it as 'the equatorial line of British incomes'.

Thus the propertied classes, which until 1867 constituted almost the whole of the electorate, taxed themselves through the income tax, bearing through the century an increasing proportion of the taxation raised by central government. This fact is all the more distinctive when it is remembered that the shouldering of this burden was refused by the equivalent classes in many of the larger European and North American states. France could only get an income tax approved in the extreme circumstances of 1914, Germany an Imperial income tax not even then, the United States only after a long struggle when the attempt to introduce an income tax was ruled unconstitutional in 1894. When a budget surplus allowed a reduction in taxation, the generally agreed rule of thumb was that each of what Gladstone called the 'twin sisters' of direct and indirect taxation should receive remission. Similarly, when extra revenue was required, the rich and the poor were both expected to contribute.

There was a complete absence of protective tariffs, the reforms begun in the 1820s being carried to an absolute conclusion in the 1860s. No British manufacturer or farmer received any protection from foreign competition; the economy was a completely open market. Taxes on imports were on goods like tea which were not produced in Britain. This openness was rigidly maintained; even the registration of foreign meat importers was frowned on for its protectionist implications. This free trade or laissez- faire reflected much more than merely a preference for cheap imports and an enlarging of the scale of the world market. It represented a political ethos: the government should be above economics, neither the manager of the economy nor the prisoner of economic pressure groups. Protection was, Gladstone said, a 'poison' sheltering nothing 'but the most selfish instincts of class against the just demands of the public weIfare'. It armed producers with 'power and influence largely gotten at the expense of the community, to do battle, with a perverted prowess, against nature, liberty and justice'.

Parliament should balance its accounts as a neutral onlooker, beholden neither to employer nor worker, merely ensuring in the world market-place the cheapest bargain for the British consumer. The consumer was seen as a consumer only, not as one who consumes in order to produce. Or rather, productive factors were assumed to receive their stimulus elsewhere. Certainly, government took no responsibility for the standard of living. When Daniel Jones, a miner from Newcastle- under-Lyme, wrote to tell him of his unemployment and to complain of low wages, Gladstone made the classic mid-Victorian reply:

The only means which have been placed in my power of 'raising the wages of colliers' has been by endeavouring to beat down all those restrictions upon trade which tend to reduce the price to be obtained for the product of their labour, & to lower as much as may be the taxes on the commodities which they may require for use or for consumption, Beyond this I look to the forethought not yet so widely diffused in this country as in Scotland, & in some foreign lands; & I need not remind you that in order to facilitate its exercise the Government have been empowered by Legislation to become through the Department of the Post Office the receivers & guardians of savings.

These precepts of central government finance rested on a variety of assumptions. It presupposed, and indeed the whole strategy emerged from, the energy and drive of early-Victorian entrepreneurial activity. The precepts of Gladstonian finance did not try to create this activity and its accompanying investment, but rather sprang from it. It recognised the central feature of early British capitalism and responded to it; it did not set out to create what was not there. Gladstonian finance also presupposed the success of voluntarism in the provision of welfare services. It is quite wrong to suppose that, because the central government did not set out to supply welfare services, they did not exist. Education, for example, was assumed to be a state function, managed largely by the established churches; when it became clear that the churches could no longer cope in England and in Scotland, Gladstone's first government supplemented their efforts by a national system of elementary schools in the Acts of 1870 and 1872, soon made, with all-party agreement, both compulsory and free. Religious charities of all sorts, sizes and denominations were assumed to cater for other welfare needs often locally defined. A strong role was presupposed for local government acting on its own initiative, to 'municipalise' if it wished. The low profile of central government was in considerable measure premised on a high profile for local government in a wide variety of areas. Indeed the classic Victorian scenario was for central government to identify a problem (or to have a problem brought to its attention) and to solve it by setting up a locally accountable, controlled and financed institution, sometimes helped by a 'grant-in-aid' from the centre.

The financial consensus of the mid-nineteenth century also assumed that the economy would balance at a point close to full employment of available resources of capital and labour, that, as J.S. Mill wrote, 'a general over-supply' is shown to be 'an impossibility'. The process of adjustment by individuals which the prevention of this phenomenon required was painful but unavoidable. Contemporaries were aware that the process of bringing into balance was often prolonged. Gladstone when Chancellor seemed to nod – as Engels was quick to note – towards Marx's view of the 'reserve army of the unemployed' when he said that the economy worked with a chronic 'enormous mass of paupers... what is human life, but, in the majority of cases, a struggle for existence? and if the means of carrying on that struggle are [in 1864] somewhat better than they were, yet the standard of wants varies with the standard of means, and sometimes more rapidly'. He was also aware that 'great vicissitudes mark the industrial condition of society; and we pass rapidly in a series of cycles from periods of great prosperity to periods of sharp distress'. He thought this, of course, at a time when the trade cycle had not yet been identified by political economists either as a concept or as a set of statistics.

All these presuppositions were in the minds of those – an overwhelming preponderance of the electorate – who supported the chief thrusts of Peel- Gladstone finance, which thus expressed the assumptions of society more than it formed them.

In certain respects, this was in its own terms an extremely successful system. Its incorporation of the Treasury at the centre of the machine had an enduring effect felt far beyond the Victorian years. The concentration on codification of the accounts and on low expenditure produced an even relationship between central government expenditure and GNP as the table opposite shows.

This result is all the more remarkable considering that Victorians had only a vague concept of 'national product'. The table shows that even the Edwardian crisis of expenditure was really a readjustment to take account of a greater GNP.

The willingness of the: propertied classes to tax themselves and to help pay for the defence of the Empire they had created (about a third of government expenditure went on defence throughout the period after the1840s) was an important contribution to political stability and to the legitimating the political system. There was a marked contrast with Germany, where the introduction of an income tax was one of the Social Democratic Party's chief objectives.

But this was a financial system responding to the needs of a capitalist society at an early stage of it development. It was a system which occurred at a particular moment of British history because it represented a particular phase of historical development. By the end of the century many of the assumptions which underpinned it were felt to be wrong or irrelevant. Late-Victorian values, as the older Gladstone frequently lamented, were very different from those of the early years of the Queen's reign.

The failure of 'voluntarism' to meet changing needs and expectations of welfare was widely admitted across the political spectrum, just as much on the 'right' as on the 'left' (terms which became fashionable in the 1880s). The capacity of local government and of ad hoc elected boards for the Poor Law and for education to provide a national service with equal standards across the country was successfully called into doubt.

Understanding of the trade cycle began to make possible a much more sophisticated attitude to and treatment of 'unemployment' (again, a term which came into use in the 1880s), and the assumption that those without employment were so because of laziness or personal inadequacy was accepted to be disproved: most of the unemployed were so as a result of forces beyond their control. Analysis of the 'enormous mass of paupers' became sophisticated and particular. Poverty came to be seen as an identifiable, curable and unnecessary condition. The notion that those on weekly wages either could or would pay for their own welfare through voluntary saving was disproved by a succession of Royal Commissions and individually sponsored inquiries.

Expectations of the tax system changed as the propertied classes became less electorally significant and the economy became rich enough to allow the tax system to attempt active redistribution, building on the moderate redistribution already existing in the low-level income tax. Consequently, different expectations emerged about the scope and function of central government revenue- raising and expenditure.

Nothing could be more anachronistic, more dangerous in the long term to political stability, more ignorant of the development of British society, more foolish in its economic and social consequences, than the assumption that the nostrums of Gladstonian finance can be simply or successfully imposed today.

Henry Colin Gray Matthew (1941-1999) was a fellow and tutor in modern history at St. Hugh's College, Oxford, and editor of The Gladstone Diaries (OUP, Volume IX, 1986). He was also the first editor of the Oxford Dictionary of National Biography.  
Further reading: 
  • H.C.G. Matthew, Gladstone 1809-1874 (Oxford University Press, 1986) and 'Disraeli, Gladstone and the Politics of mid-Victorian Budgets', Historical Journal, 1979
  • M. Wright, Treasury Control of the Civil Service 1854-1874 (Oxford University Press, 1969)
  • J.A. Schumpeter, History of Economic Analysis (OUP, 1954) 'Gladstonian Finance' in Part 3, ch. 2
  • D.H. MacGregor, Public Aspects of Finance (OUP, 1939)
  • F.W. Hirst, Gladstone as Financier and Economist (Benn, 1931)
  • R. McKibbin, 'Why was there no Marxism in Great Britain?', English Historical Review, 1984
  • B. Baysinger and R. Tollinson, 'Chasing Leviathan: the case of Gladstonian finance', History of Poltical Economy (1980)


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