As we witness the Chancellor wrestling with the problem of how to formulate policy in the wake of a period of exceptionally high government spending, it is useful to reflect that this is far from the first time British governments have faced this problem. Traditionally wars have left behind challenging questions regarding the government finances and this was particularly so after the Napoleonic Wars which ended in 1815. The government had borrowed heavily to sustain the war effort and in 1815 government spending exceeded income by 45% and 80% of government spending was used to finance interest charges on the national debt. The strains of war finance had also led the country to leave the gold standard in 1797, permitting the extensive issue of paper currency — which in turn generated inflation. The question was how to respond to this situation.
Again, as with us today, there were contrasting views. The conventional view was that Britain needed to restore the gold standard as the guarantor of sound money and Liverpool’s Tory Government embarked on the steps required to do this — cutting spending and raising taxes in an attempt to balance the books. Taxes on tea, coffee, tobacco, wool, cocoa, and pepper were all raised. The Chancellor, Vansittart, would have liked to keep income tax, but Parliament refused to endorse a continuance of the tax which had been seen as a wartime necessity. Government spending was also cut by 50% in the years 1815–18. Restrictions were imposed on the Prince of Wales’s debts, including the building costs of Brighton Pavilion. In 1817 official salaries were cut by 10%. The problem was, of course, was that this deflationary policy pushed the British economy deeper into recession. And this led to a change in the climate of opinion.
In 1815 there had been general support for a return to gold. This now began to change. The reason was that the years after 1815 had seen a severe economic recession. Whereas prices had risen 15% 1800–1814, they fell 25% 1815–1819. Those whose interests were damaged by the economic recession and falling prices blamed the government for its handling of the economy. In particular, they blamed the Bank of England which, because of its commitment to restore the Gold Standard, had been cutting back on the issue of paper currency. The result, it was believed, was falling prices. Those who suffered included agriculturalists and industrialists, and indeed anybody who had borrowed money during the war. This was because, with falling prices, the REAL value of outstanding interest payments had increased. The most prominent critic of the return to gold policy was the Birmingham banker and iron master, Thomas Attwood, who argued that the money supply should not be fixed by the supply of gold, but needed to be increased in line with the rising population and industrial output. As it was the British economy was being choked by a lack of currency.
With controversy raging, PM Liverpool decided in May 1819 to delegate consideration of the issue to a committee chaired by Robert Peel. This was the famous Bullion Committee of 1819. Two schools of thought were presented to the Committee:
• The Bullion School, led by David Ricardo, then the world’s leading economist, and supported by the city of London and the cotton manufacturers (who wanted a stable foreign exchange rate to lay the basis for an expansion in foreign trade), wanted a return to a gold-backed currency.
• The Currency School, led by Attwood, wanted to retain a paper currency whose supply could be adjusted to meet the needs of industry.
Peel and the Committee favoured the gold-standard viewpoint. It was accepted that it was the system of unbacked paper currency that had fuelled inflation since 1797 and that had caused the fall in the value of sterling on international currency markets. Prices had already fallen substantially since 1815 and the remaining deflection necessary to restore the pound to the gold standard seemed worthwhile. Peel’s Committee therefore recommended that the Bank of England resume specie payments in a period of three years to 1823. This Bill was passed through parliament to become the Currency Act of 1819. Ricardo was delighted. It represented, he said, ‘the triumph of science and truth over prejudice and error.’ Attwood was less impressed, declaring that ‘Peel’s Act had created more misery, more poverty, more discord, more of everything that was calamitous to the nation, except death, than Attila caused in the Roman Empire.’
The restoration of the gold standard proceeded more smoothly than had been expected. As soon as the decision to restore the standard was made people began to buy sterling (as its gold value was set to rise) and the exchange value of sterling increased and the Bank of England’s gold holdings grew. By 1821 the Bank of England had resumed cashing in gold notes presented to it up to the value of £5. The supply of paper currency in circulation fell rapidly. The value of paper currency under £5 in value in circulation fell from £7,400,000 in February 1819 to £900,000 in August 1822. As a result the process of deflation accelerated. Between 1819 and 1822 prices fell by 21%, a rate of price deflation only second to that of the immediate post-war years. For the agricultural critics like Sir John Sinclair, and for some industrialists who found demand for their products falling, it only confirmed their arguments that the interests of the producer had been sacrificed to those of the City of London. Certainly for those in debt in 1819, the price deflation was damaging and there was a fall in money-demand in the economy and this worsened the strain upon an already depressed economy struggling to make the adjustment to peace-time conditions.
On the other hand export industries like cotton welcomed the return to a stable currency and indeed once the Gold Standard had been restored the British economy in the 19th century enjoyed a period of relatively stable prices. In the long run, therefore, the pain of the years 1815–22 may have been worth it. But maybe Attwood would have echoed the words of Keynes, another critic of the Gold Standard: ‘In the long run we are all dead’. As Rishi Sunak contemplates a return to fiscal discipline in the years to come he might reflect that political lives can be especially short — as his predecessor and champion of austerity, George Osbourne, can well testify to.
By Dr Ian StJohn, Author: Gladstone and the Logic of Victorian Politics
