What Gladstone could teach the EU

Published in Features, Issue 6 (November/December 2013), Volume 21

Above: How Gladstone’s ‘mission to pacify Ireland’ was seen by Punch (1872).

Above: How Gladstone’s ‘mission to pacify Ireland’ was seen by Punch (1872).

Because Queen Victoria’s invitation to William Ewart Gladstone to form his first administration in 1868 followed a period of Fenian violence, his response to this was ‘My mission is to pacify Ireland’. There are lessons for the EU authorities in how he went about it.

In both cases, property rights are the crucial factor. Irish people today are servicing huge debts for which they do not think they are responsible, any more than many of their ancestors felt that it was right for them to have to pay rents to landlords. Gladstone’s first approach to this problem was an act of 1870 to extend landlord–tenant customs, which were common in Ulster, to the whole island. In spite of this, agrarian unrest became widespread during the next decade. This was because after the Famine money flowed in increasing quantities from the growing industrial population of Britain to the producers of cattle in Ireland, who were then the only external source of meat. Tenant farmers naturally wanted a bigger share in this new wealth, and the formation of the Land League in 1879 focused this desire and led to what was known as the Land War.

Land purchase
Gladstone’s response was to initiate a series of land purchase acts that eventually delivered ownership of the land of Ireland into the hands of the people who lived on it and worked it. In progressive ways between 1881 and 1909, these acts involved the raising of long-term funding to buy out landlords and then to transfer freeholds to their tenants, subject to annuity payments. Few tenants were in a position to benefit from the first act, in 1881, because it offered only 75% of an agreed purchase price, even though it did so in a loan over 35 years at 5%. The next (Ashbourne) act in 1885, however, provided 100% of the purchase price, repayable over 49 years at 4%. After another act (Wyndham) in 1903, the money was advanced over as long as 68.5 years, at only 3.25%, and landlords were given a 12% bonus to encourage the sale of large estates. Purchase became compulsory in 1909. These measures resulted in well over 400,000 freeholders by the time of Irish independence, and this wide spread of individual property was important in enabling democracy here to survive a civil war.

The EU analogy

The statue of Gladstone, intended for Dublin, paid for by Irish subscriptions and now in the grounds of his library at Hawarden, near Chester. (Gladstone Library)

The statue of Gladstone, intended for Dublin, paid for by Irish subscriptions and now in the grounds of his library at Hawarden, near Chester. (Gladstone Library)

The root of the present world financial crisis is the same as that of the ‘crash’ of 1929: relaxation of control over those who deal in money. ‘Banking is creating purchasing power out of nothing’, and ‘a bank is a manufactory of credit’. Bankers’ power to lend beyond their resources can be exercised in total secrecy and is so profitable that the temptation to use it is virtually irresistible in the absence of an extremely strong institutional deterrent. Historically, this was provided by unlimited liability, because their entire fortunes were at stake in every loan or investment they made, ‘to their last shilling and their last acre’. Of course, in spite of this there were inevitably individual failures, but these were limited in their effects.

However, in the United States almost from the start, from the unification of Germany in 1871 and from 1879 in Britain bankers were permitted to use the corporate form, which limited the owners’ liability to what they had invested. The result was that caution in lending was eventually thrown to the winds in America, which led to the first great ‘crash’ in 1929. Banks were then brought under the control of law there for about half a century, but they escaped again to ‘create money from nothing’ at will in another bubble and bring about the present crisis.

Attempts to replace this discipline with financial regulation administered by bureaucrats have failed everywhere. This is inevitable because of the huge motivational gap between the parties: civil servants can never be a match for financiers, who only listen—if they listen at all—to laws.

Governments under bankers’ control

President Roosevelt had no problem in taking radical steps to ease the burden on ordinary people and imposing discipline on the banks as part of his New Deal.

President Roosevelt had no problem in taking radical steps to ease the burden on ordinary people and imposing discipline on the banks as part of his New Deal.

Even if the cause of both economic crashes is the same, there is a crucial difference between now and 1929. This is that in the intervening years governments have become subordinate to banks through their own deficit financing. In the earlier crash, for example, banks (thousands of them in the US alone) were allowed to fail, and President Roosevelt had no problem in taking radical steps to ease the burden on ordinary people and imposing discipline on the banks as part of his New Deal. This time, because of their own dependence on debt, governments have been forced to try to avoid bank failures at all costs, and these costs are being pushed on to their citizens.

The analogy between Gladstone and the EU is therefore that the Eurozone is facing breakup because both people and governments in its peripheral countries became so vulnerable to ‘money created from nothing’ that they now face decades of austerity to deal with their debts. The payments their people have to make in respect of what they themselves owe and the debts their governments have incurred in their name are precisely comparable to the rents Irish tenants had to pay to their landlords. Only a vision like Gladstone’s can bring them any relief.

The Australian economist Steve Keen, one of the few to forecast the bursting of the bubble, argues that the only solution is some form of massive debt forgiveness, akin to the Jewish ‘jubilee’ every half-century, when all debts were supposed to be wiped out. For anything remotely like this to happen, there would have to be a Gladstonian change of heart in Germany, on whose banks much of the burden would fall.

Thanks to the gold standard at the time, Gladstone and his successors did not have to worry about inflation, so they were able to finance the very large loans under the 1903 act, for example, by an issue of guaranteed loan stock at only 2.67%. In the EU’s case, there would need to be inflation-proofed long-term bonds, and the well-founded German horror of inflation reinforces that country’s understandable reluctance to be the main underwriter of these. This has been confirmed by the remarkably rapid and strong debut in German politics of the Eurozone-sceptic party, Alternativ für Deutschland. Yet the only alternative to Eurobonds if the poorer economies of the Eurozone are to be saved at all may be for Germany to leave it.

In addition, the Germans may not want to remember just how generous some of their own past loan terms have been. Their heavy reparations burden after the First World War was greatly reduced in 1924, and again in 1929. Even at the later date, they were given 59 years to pay it, and were able to borrow heavily from abroad for this purpose until the Nazi government repudiated both reparation and loan agreements. After World War II, unpaid reparations were written off and new arrangements were made for the loans that were still outstanding from the Weimar era. In what could presage what is now needed, it was agreed in 1953 that a large proportion of what was owed would fall due for repayment over twenty years, starting only when Germany was reunified (which was an extremely unlikely prospect at the time). In the event, the final payment was made in October 2010, so that some money borrowed by Germany at the end of the 1920s had an effective 90-year term.

Irish debt origins
We actually know just how and when the borrowing that eventually led to Ireland’s insolvency began. Frank Aiken, finance minister in the late 1940s, was obsessed by the idea that the country could be run on cheap credit, which the Irish bankers of the day, to give them their due, thought was simply mad. ‘Minister’, they said at one meeting, ‘how can we possibly lend money to you at half a per cent and pay our depositors two and a half per cent?’ To which the Minister replied angrily: ‘You don’t have to pay two and a half per cent for it. You can create money at the stroke of a pen. You get it for nothing.’

The witness to this meeting was T.K. Whitaker, who had been c53harged by his departmental secretary, McElligott, to gather arguments to help him constrain the minister. This was still considered to be the role of the Department of Finance at the time, shaped as it had been by Brennan, its first secretary, who had come from the Treasury in London. As the government’s statistician, Roy Geary, put it, ‘Finance is like an inverted Micawber, always waiting for something to turn down’. But McElligott’s instinct was right, because this was the start of the process that eventually led to control of the State by external financiers.

The consequences of Eurozone failure
Even if there was the political will in Germany for some form of ‘jubilee’, it is almost impossible to envisage that country’s constitutional court endorsing it. And even if residual repayment conditions were as generous as those of Wyndham’s 1903 act, it might all come too late for the EU’s peripheral countries. The stringency and short-term nature of their current bail-out conditions are well on the way to destroying economies in some of which youth unemployment has now surpassed 50%.

If the EU does fail them, these countries could face the question that Keynes raised after he resigned from the British delegation to Versailles over the harshness of the treaty terms then proposed for Germany: ‘But who can say how much is endurable, or in what direction men will seek at last to escape from their misfortunes?’ Public order in Greece may yet come to depend on return of the colonels to power, and Ireland could experience its own version of what happened to the Weimar regime in Germany. HI

William Kingston lectures in the Business School of Trinity College, Dublin.

Read More: Irish ironies

Further reading
D.G. Boyce & Alan O’Day, Gladstone and Ireland (Basingstoke, 2010).
M.E. Daly & R.D. Hoppen (eds), Gladstone, Ireland and beyond (Dublin, 2011).
W. Kingston, Interrogating Irish policies (Dublin, 2009).
R. Jenkins, Gladstone (London, 1993).

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