Thursday, 13 November 2008

Politics and fiscal policy 1837-1846: Peel and budgetary policy 1843-1846

Having established the momentum for tariff reform and tax redistribution in 1842, Peel sought to capitalise on it in subsequent budgets. The 1842 budget did not produce instant results in terms of reviving trade and reducing unemployment. The major disturbances in the manufacturing areas of northern England occurred after the budget and although a good harvest may have helped, the economy remained in a sluggish state through most of 1843. This made further budgetary reductions impossible in 1843 other than the Canada Corn Act that extended the policy established the previous year. Trade revived from 1843 and the boost of reduced duties to consumption soon outran the lower tariff return on each item. In 1844, there was a strong recovery in the economy because of further good harvests and a boom in railway investment and government finance moved into the red by the end of the year.

In the 1844 budget, Peel slashed excise duties on flint glass and vinegar as well as customs duties on coffee and currants. Later in the session, the government took on the sugar duties. These supplied a third of all customs revenues but were protected by the powerful West Indies lobby in the Commons and Peel had to fight hard to reduce them. Opposition from Philip Miles, the sugar interest’s chief parliamentary spokesman jeopardised the government’s proposal to reduce substantially the differential between colonial and foreign sugar. Peel forced the plan through with a threat to resign and managed to reduce the differential still further in 1845.

Further changes took place in 1845. In February, Peel introduced his 1845 budget reporting an estimated budget surplus of £3.6 million, enough to allow the government to dispense with income tax. However, he proposed that income tax be renewed for a further three years so that the budget surplus could be used to introduce further cuts in indirect taxation. Peel argued that this would promote even greater economic prosperity. All surviving duties on exports were abolished of which coal was the most important. Of the 813 items liable for customs duties, 430 yielding small amounts of revenue disappeared. Duty on raw cotton was abolished at a cost to the Exchequer of £680,000. Duties on colonial sugar from the West Indies and foreign sugar were both reduced, sacrificing £1.3 million of revenue. Excise duties on glass (worth £642,000) and the auction duty (£300,000) were abandoned.

Peel predicted that in three years’ time government revenue from remaining indirect taxes would be so high that he could dispense with income tax. Further reductions followed and when Peel fell in 1846, Britain was almost a free-trading country. Peel succeeded in establishing the budget as the most effective instrument of his government’s domestic policy. Much of its success was directly due to Peel. Few could match his mastery of financial detail or his imagination in making fresh approaches to perplexing problems. Despite the undoubtedly favourable impression made on Parliament and the country at large by Peel’s budgets, there remained the insistent and nagging back-bench opposition to Peel’s reduction of agricultural protection. Peel’s unrivalled financial skills were never translated into the political arts and he was unwilling to take the time to smooth over his differences with the protectionists. It was a mistake that was to cost him dear in 1846.

Three further measures complemented the government’s budgetary policy: the reduction of the National Debt, the Joint Stock Companies Regulation Act and the Bank Charter Act, all passed in 1844. Early in the 1844 session, Goulburn opened an attack on the National Debt[1] by proposing a reduction of 3½ per cent consols[2] to 3¼. The immediate gain to the revenue would be £625,000 annually. There was no parliamentary opposition to the scheme and very little among stockbrokers. Upon a conversion of £250 million of stock, only £247,000 was paid off to ‘dissentients’ (as Goulburn called them). It was a very smooth operation and contributed to the government’s reputation as one that shaped the Victorian budgetary tradition of reducing the National Debt and extending free trade. A similarly easy passage was also accorded the Joint Stock Companies Regulation Act. Since the repeal of the Bubble Act in 1825, joint stock companies had been freed from stringent government regulation. The result was a rapid increase in investment as promoters pressed on clients’ projects of all kinds. However, there were problems caused by the collapse of under-funded companies and the failure of unrealised schemes that caused financial ruin for many individuals. To protect the public from unscrupulous companies, Gladstone, at the Board of Trade brought forward a plan for regulating joint stock companies. It established a Registrar of Companies and all partnerships with more than 25 members and freely transferable shares were required to register. Company directors had to present fully audited balance sheets periodically to the Registrar. These and other regulatory provisions helped protect the public against speculative excesses and created a more responsible climate for company development. This legislation is widely regarded as representing an epoch in the history of English company law. In addition, bankruptcy courts were established.

Bank Charter Act 1844

The baking world was plagued with instability throughout the first half of the nineteenth century. In 1825, 73 banks suspended payments and around 50 collapsed completely. This accelerated the move towards joint stock banking. This made banking safer in that joint stock banks had more partners and were therefore able to accumulate more capital. Despite banking reform in 1833, there were further banking crises in 1836 and 1839. In 1836, the stock market crashed leaving debts unpaid and in 1839 the poor harvest meant that gold was needed to pay for imports of foreign capital. The drain on the reserves was considerable.

The Bank Act of 1819 (also known as Peel’s Act, for his role in its passage) had imposed upon the Bank of England the duty of honouring its notes in gold if asked to do so: the so-called ‘Gold Standard’. In normal times, the bank’s customers did not wish to exchange their notes for gold, and in 1819 Peel had believed that the bank could be trusted to decide how many more notes it would be prudent to put into circulation than it had gold to back. On several occasions, when speculation was rife and sound management was called for, the bank had still been increasing its note issue when prices were rising and gold had already begun to leave the country.

The Bank of England paid too little attention to the state of the foreign exchanges, and the English country banks, which had about one-quarter of the circulation, paid none. The result was that the collapse, when it came, and the consequent business failures and distress were all the greater. Here was another factor bearing upon the condition of England question. Between 1826 and 1844, over-issue by provincial banks had caused the failure of 100 banks or about a quarter of all private or joint-stock bans to issue their own notes. Even this situation did not convince all of the need for change. The so-called ‘banking school’ believed that the volume of currency issued should be left to the bankers to decide and opposed any attempt by government to restrict the quantity of paper money issued. By the 1840s, an alternative view, the ‘currency school’ had gained ground. It believed that the function of a bank was less the transaction of business than the maintenance of a sufficient reserve on behalf of the nation to enable it to meet its liabilities to other countries. If there were too many notes issued, there would be periodic crises of the type seen in 1836 and 1839. Currency advocates believed that note issue ought to be far more closely tied to bullion reserves than the banking school was willing to allow and that the government should decide on the size of the note issue.

As a committed supporter of the currency school, Peel determined to end the discretion allowed to the bank emphasising their larger economic responsibilities. If gold was leaving the country, notes must be withdrawn from circulation until prices fell, British goods became attractive to foreign buyers, and gold returned to the country again to pay for them. The bank’s charter had been renewed in 1833. But there was a break clause, and Peel waited until he could move in and place note issue under statutory control. The result was the Bank Charter Act 1844 which aimed to establish a more stable foundation for the English banking system by preventing the excessive supply of paper money. The Act defined the position of the Bank of England in the British economy very carefully.

There were to be no new banks of issue. Existing country bank (207 private banks and 72 joint-stock banks) issues were frozen at their present levels and no bank that gave up issuing its own notes would ever be allowed to resume. Note issue would imperceptibly become concentrated in the hands of the Bank of England. This led, by the end of the century, to a Bank of England monopoly. By 1901, there were only 33 private banks and 27 joint-stock banks left and by 1918, with the emergence of the Big Five joint-stock bans, there were few survivors of the country banking era, though the last country notes did not disappear until 1921. The bank itself was to be separated into a banking department and an issue department, the first free, the second regulated. After August 1844, the Bank’s ability to issue promissory notes in place of cash was confirmed up to £14 million (the minimum amount needed if the business of the country was to continue) had to be backed by bullion reserves (the credit of the British government). Beyond that amount notes were only to be issued when there was gold in hand to back them, and the figures were to be published every week.

The act had interesting overtones. It was a vindication of the right of the state to interfere with powerful interests, and, in a period when other monopolies were being swept aside, it established a new one. It has been criticised in detail for paying too little attention to other negotiable instruments such as cheques and bills of exchange and to the bank’s role as lender of last resort, but it was an excellent demonstration of Peel’s command of an abstruse subject. The act initially applied to England and Wales but was followed in 1845 by comparable measures for Scotland and Ireland. It did help to reduce the severity of crises and lasted until 1914. Peel considered the Bank Charter Act 1844 as one of his most important achievements.

Assessing Peel’s fiscal policies

Peel recognised the contribution made by the non-agrarian sectors of the economy and endeavoured to stimulate manufacturing and trade and so improve the material well-being of many working people. Britain could not go back to being an agrarian nation and Peel expected the newly revolutionised sectors of the industrial economy to soon outstrip farming. Significantly, Peel does not seem to have envisaged an indefinite expansion of the industrial sector. Parallel to this was his commitment to preserving the political rule of the aristocracy that depended for its economic and political strength on agriculture. This suggests that Peel did not understand that industrial expansion was destined to finally subjugate the agrarian classes. For Peel, his fiscal policies were simply designed to restore prosperity to the existing manufacturing sector and as a result promote social stability and tranquillity. They were, in part therefore simply a way of resolving the current economic and political problems: short-term rather than visionary.

In many respects, Peel had an essentially ‘static vision’ of the economy, a self-regulating machine. This contrasts with the ‘growth-oriented’ perspective associated with individuals such as Richard Cobden. The Bank Charter Act 1844 illustrates this point. Had the measure operated as Peel intended, its effect would have been deflationary since it restricted the scope of banks to finance economic growth and diversification by placing a limit on the issue of currency over £14 million. That this did not occur is down to new gold discoveries from the late 1840s (much of which found its way into the Bank of England’s reserves, enabling note supply to increase) and the development of alternative forms of ‘money’ such as cheques and bills of exchange. It was these, not Peel’s policies that fostered expansionary economic conditions in the 1850s and 1860s.

[1] The national debt is the total amount of debt the government has on its book. Most of the national debt is in the form of government issued bonds

[2] Consols (consolidated annuities) are British government bonds, most commonly used in the 19th and early 20th century, when they constituted the major part of the British national debt.

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