Pitt's Economic Policy
From 'A History of the British Nation' by AD Innes, 1912
[Ed. The author makes reference to 'Pitt' without making clear that it is now William Pitt 'the Younger' in control]
The return of Pitt to power was something very different from the establishment of a ministry of king's friends fourteen years before. Pitt was no subservient politician prepared to act merely as the mouthpiece of the king. He had behind him in parliament a large majority, but not a compact one, nor one upon which he could rely to follow his lead, although in the main it accepted his guidance.
The principal reason why that majority had been returned was that public feeling was disgusted by the coalition of Fox and North, in which it appeared that both Fox and North had thrown over their principles in order to secure power by combination. A large proportion of North's former followers retained their old attachment to the Crown, and deserted North when he deserted the Crown. Chatham's admirers rallied to the support of Chatham's son; there was a proportion of Whigs who would not commit themselves to the latest Whig doctrine, that the king had nothing to do but to accept the ministers at their own dictation.
These various elements gradually crystallised into what became the new Tory party; but in the first years of its existence, before it acquired a special character in consequence of the French Revolution, its leader was a reformer, many of whose aims were only realised by what was coming to be called Liberalism half a century afterwards. Pitt, like his father, was personally incorruptible, and anxious to cut at the roots of the practice of corruption. He desired the reform of representation. He desired the removal of the restrictions on trade. He desired the relief of Roman Catholics, and was a warm advocate of the abolition of the slave trade. But, while he was able to carry out his financial policy, he was able to retain office only because it was not yet recognised constitutional doctrine that ministers defeated in the House of Commons on an important issue should either resign or appeal to the country.
He could not command a majority in the House on specific issues; but he did not therefore resign until a specific issue arose between himself and the king on a question as to which he considered himself finally pledged.
When Pitt began his long career as Prime Minister the world at large believed that the British Empire was tottering. It had been rent in twain; it was exhausted by the strain of a long war, waged against a group of powers. Its naval ascendency had been all but lost, and even now was in question. Its government had gone to pieces, and the reorganisation depended on the wisdom and skill of a youth of four-and-twenty. But now for nearly nine years Pitt kept the country at peace; during the peace its commerce and its wealth expanded with renewed vigour, and when once more Britain went to war, she was able to emerge from it triumphantly.
The wealth she had acquired provided her with the means, and her maritime power preserved her commerce till she had what was practically a monopoly of the seaborne traffic; while the exploiting of her native supplies of coal and iron joined with the triumphs of her inventors to create for her almost a monopoly of manufacture. The new manufacture and the new organisation of transport secured the success of Pitt's financial policy.
Pitt and economics
The main principles of Pitt's finance were derived from Adam Smith. The error of seeking to raise revenue by high tariffs had been shown by the successful lowering of tariffs under Walpole and in the first Rockingham administration. The high duties on tea and spirits ensured to the smugglers large profits which compensated the risks of the illicit traffic. Vast quantities of these articles were brought into the country without paying the duties, and many eminently respectable persons profited thereby, since they considered themselves to be under no obligation to know whether the goods they bought were smuggled or not. Pitt lowered the duties, and to compensate the immediate loss of revenue he imposed a window tax - which could not be evaded, because the number of windows in a house could be ascertained by the simple process of counting - and every penny of the tax except the small amount absorbed in collecting it went direct to the revenue.
The Question of Taxes
For it was one of Adam Smith's principles that since all taxation is to a certain extent a check upon the increase of wealth, the state, which must impose taxation for the purposes of revenue, should see that the whole of the tax goes to the revenue; taxation to regulate trade, not for the purposes of revenue, being inadmissible because the only effect must be to hinder trade. On the other hand, the lowering of the duties on tea and spirits reduced their price in the market correspondingly, diminished the inducement to smuggling and the expenditure on the preventive service, and brought an increased quantity of the goods into the country through the legitimate channel. The same principles were applied to other imports, as had been done half a century earlier by Walpole. In particular the import of raw material was encouraged by reduced tariffs, although the British manufacturer had not yet learnt, as he learnt in the first half of the nineteenth century, to believe in the admission of the foreign competitor. It was not yet possible to attack tariffs of a purely protective character, in each one of which some vested interests were at stake.
Pitt's Sinking Fund
The passing of the old ideas of commercial policy was illustrated when Pitt negotiated a commercial treaty with France in 1786. Each country had hitherto followed a policy of excluding the other's goods. No one since 1713 had attempted in practice to traverse that principle. But now professed economists had nothing to say against opening up commerce with France; the opposition was mainly expressed by Fox, who denounced the treaty on the ground that France, our hereditary foe, would profit by it. A few years later Fox was less ready to denounce our hereditary foe. The French denounced the treaty, because they profited by it a good deal less than the British. But nobody denounced it as injurious to the balance of trade.
An important economy introduced by Pitt was the abolition of the existing method of receiving tenders for public loans. Such loans had been floated by private arrangement and were a gross means of corruption, North's Government in particular having conceded the most extravagant terms for party ends. Pitt threw the tenders open to public competition, which at once secured the best terms possible for the Treasury and destroyed a principal source of corruption. It is remarkable, however, that the financial scheme in which Pitt himself took most pride, and which was hailed with the most enthusiastic applause, was one whose unsoundness was already apparent within a few years of his death, and was possibly realised by himself some time earlier.
This was his scheme for a Sinking Fund which was to wipe out the National Debt. Walpole had instituted a sinking fund, but it had been so repeatedly and so unscrupulously raided that only a fraction of it had really been appropriated to the reduction of the debt. Pitt's plan was to set aside ￡1,000,000 annually, which was to be handed over to a special board, not political, which was to invest it. It was imagined that, accumulating at compound interest, it would in a few years extinguish the entire debt. So long as the money could be set aside out of revenue it was true that the higher interest received by investing money would accumulate a fund for paying off the capital debt; but the scheme broke down as soon as the pressure on government compelled it to resort to borrowing at higher rates.
For in effect the sinking fund was then provided for out of the borrowed money, not out of revenue, and when the country was at war, the money was borrowed at a higher rate of interest than that obtained by its investment. A sinking fund for paying off the debt on which there is a low rate of interest at once becomes unsound if it can only be provided for by incurring a new debt at a higher rate of interest.
In another attempt to act upon free trade principles Pitt was defeated. The question of commerce was still an acute source of friction with Ireland, in the same sort of way as had been the case when there was an independent Scottish legislature. There had been a partial relaxation of the restrictions upon Irish trade under North's Government. Pitt proposed to carry the matter very much further, and in effect, though still with some exceptions, to treat Great Britain and Ireland as a fiscal unit. The commercial gain to Ireland would have been great; nevertheless in Ireland, as well as in England, Pitt's measure was resolutely opposed. In England the opposition came from the commercial classes, who resented being exposed to Irish competition.
In Ireland the opposition was political, and was based on the fact that, if the countries were treated as a fiscal unit, the whole financial control would lie at Westminster, and Ireland, unrepresented at Westminster, would have no voice in it at all. The independence of the Irish parliament won in 1782 would be curtailed in a very important particular, and to this the Irish parliament would not assent, especially in view of the limitations which the commercial interest in England had forced upon Pitt's own scheme. The measure therefore was dropped and was not again revived.