SOUND FINANCE: GLADSTONE AND BRITISH GOVERNMENT FINANCE, 1880-1895 by TODD C. CAMPBELL A THESIS PRESENTED TO THE LONDON SCHOOL OF ECONOMICS AND POLITICAL SCIENCE FOR THE DEGREE OF DOCTOR OF PHILOSOPHY 2004 ©Todd C. Campbell UMI Number: U615B52 All rights reserved INFORMATION TO ALL USERS The quality of this reproduction is dependent upon the quality of the copy submitted. In the unlikely event that the author did not send a complete manuscript and there are missing pages, these will be noted. Also, if material had to be removed, a note will indicate the deletion. Dissertation Publishing UMI U615B52 Published by ProQuest LLC 2014. Copyright in the Dissertation held by the Author. Microform Edition © ProQuest LLC. All rights reserved. This work is protected against unauthorized copying under Title 17, United States Code. ProQuest LLC 789 East Eisenhower Parkway P.O. Box 1346 Ann Arbor, Ml 48106-1346 1h£S£S • F 3 5 I T - - Library British Library of Political and Economic Science In memory of my mother and for my father ACKNOWLEDGEMENTS I would like to thank my supervisors, Professor Anthony Howe and Professor David Stevenson, and also my family and friends whose support and encouragement has meant so much to me. 3 ABSTRACT The fifteen year period 1880—1895 was one o f profound change in government finance, not only in the scale o f expenditure (which increased by a quarter) but the very expectation o f what that expenditure should be as the traditional governing elite began to take notice of the “democratic’’ society which would soon displace it. Although governed by the Conservatives for six o f those years, it was dominated by the fiscal theory o f “Sound Finance”, especially as practiced and perfected by Gladstone as Chancellor of the Exchequer. This philosophy demanded balanced budgets, a low tax burden and minimal government expenditure. It is necessary to explain why this philosophy came about and how it adapted to changing circumstances. “Sound Finance” as a fiscal theory was also closely associated with a belief in free trade and a commitment to the gold standard. Together these formed the trinity o f fiscal orthodoxy for the late Victorian governing class in Parliament, the Treasury, and at the Bank of England. But as Britain fell into the “Great Depression” and economic growth seemed to stagnate, this consensus was attacked by those who believed that these old doctrines were capable o f fulfilling neither the government’s revenue requirements nor the economic imperatives of the nation. Hence their advocacy of bimetallism and “Fair Trade”. In spite of this, at no time were these critics able to implement such doctrines nor even to deviate in any substantial ways from the imperatives of “Sound Finance”. “Sound Finance” dominated the fiscal thinking o f politicians, bureaucrats and business leaders, regardless of political stripe, because it was at the heart of contemporary economic theory, and indeed because it seemed to explain for them the place of the state in that economy while allowing crucial flexibility. Yet just as significantly, the strictures o f “Sound Finance” allowed both a political and economic control of the state while providing, at least in theory, both Parliamentary and democratic supervision and accountability. 4 LIST OF ABBREVIATIONS BL British Library BLPES British Library of Political and Economic Sciences GD Gladstone Diaries GP Gladstone Papers H Hansard HD Hamilton Diaries HP Hamilton Papers PP Parliamentary Papers PRO Public Record Office WP Welby Papers 5 TABLE OF CONTENTS Page ACKNOWLEDGEMENTS................................................................................3 ABSTRACT........................................................................................................... 4 LIST OF ABBREVIATIONS.............................................................................. 5 CHAPTER 1 GLADSTONE AND SOUND FINANCE.................................................8 2 RETRENCHMENT................................................................................... 25 Gladstone as Chancellor of the Exchequer, 1880 — ..........................1882 25 The Budgets of 1880..............................................................................28 Gladstone’s Financial Statement of 1881.............................................. 32 The Financial Statement for 1882......................................................... 37 3 PEACErWAR, DEBT AND TAXES, 1883-1885.................................... 46 4 REFORM..................................................................................................... 76 1885—86: Unsound Finance?........................................................................ 76 5 THE CRISIS OF CONSERVATIVE FINANCE................................... 96 Apostate: Randolph Churchill as Chancellor of the Exchequer..................96 Renegade: Goschen and Liberal—Unionist Finance...................................115 6 CONVERSION AND REDEMPTION.................................................128 1888: Conversion.........................................................................................128 1889: Redemption........................................................................................140 7 SALVATION............................................................................................152 Goschen 1890—1892................................................................................. 152 8 HOBSON’S CHOICE..............................................................................174 9 DEATH AND TAXES............................................................................213 10 CONCLUSION........................................................................................257 6 APPENDIX A FINANCIAL STATEMENTS, 1880-1895............................................ 263 BIBLIOGRAPHY............................................................................................ 279 7 CHAPTER 1 GLADSTONE AND SOUND FINANCE British Government expenditure was £83,107,925 in 1880 and £97,764,000 in 1895. Revenue had reached a peak of £100,000,000 by then.1 This 15 year period was one of profound fiscal change, not only in the scale of expenditure but in the very expectation o f what that expenditure should be, as the traditional governing elite began to take notice of the “democratic” society which would soon displace it. Although governed by the Conservatives for six of those years, it was dominated by the fiscal theory o f “Sound Finance”, especially as practised and perfected by Gladstone as Chancellor o f the Exchequer. “Sound Finance” as a fiscal theory was also closely associated with a belief in Free Trade and a commitment to the gold standard. Together these formed the trinity o f fiscal orthodoxy for the late Victorian governing class. But as Britain fell into the “Great Depression” and economic growth stagnated, this consensus was attacked by those who believed that these old doctrines were capable of fulfilling neither the government’s revenue requirements nor the economic imperatives of the nation. This period is significant because it was during this time that the Peelite—Gladstonian minimal state, which had itself developed in reaction to the old and corrupt Hanoverian fiscal-military state2 during the previous 50 years, was faced with the first real challenges to its fiscal orthodoxy. The expenditure requirements o f Imperialism and what would become the nascent welfare state appeared to some to place the idea of “Sound Finance” under duress, encouraging such heterodox notions as “Fair Trade/Tariff Reform” and a clamour in favour of bimetallism. Yet the outcome was entirely orthodox, 1 B. Mallet, British Budgets 1887—88 to 1912—13 (London, 1913), p. 477 and Sydney Buxton,Finance and Politics: A n Historical Study, 1783 - 1885 (2 vol., New York, 1966, reprint o f the 1888 edition), v. ii, p. 356. 2 P.K. O ’Brien, “Imperialism and the Rise and Decline o f the British Economy, 1688—1989.”New Heft Review, 238,1999 pp. 50—51; P.K. O’Brien, “The Political Economy o f British Taxation, 1688—1815”,Economic History Review, 41,1988 pp. 1—32; and J. Brewer, The Sinews of Power. War, Money and the English State, 1688—1783 (London, 1989). and the fiscal philosophy o f “Sound Finance” emerged even stronger with the return of Liberal government in 1905. “Sound Finance” was able to adapt to both the change in the electorate and their demands, as well as to evolve to accommodate the need for increased expenditure while still upholding the fundamental principles regarding sources o f taxatioA and control of that expenditure. In terms of economic theory “Sound Finance”, although a seemingly conservative fiscal philosophy, was neither behind nor ahead o f contemporary thought but in step with the evolution o f that thinking. In fact it was quite capable of adapting to and meeting the economic requirements of a society and economy undergoing a rapid and profound change. “Sound Finance” as a fiscal ideology developed almost insensibly over centuries £nd can be traced back to the anti-debt ‘country’ ideology of the eighteenth century, but did not take on a coherent shape until the economic doctrines o f Adam Smith defined and determined debate on the proper economic role for the state. Pitt in his financial struggles to finance the Napoleonic wars, and it was he who developed the income tax, can claim pride of place as the precursor to Peel and the ancestor of Gladstone in finance. From his demolition of Disraeli’s 1852 Budget until his