Martin Daunton on the Financial Crisis

12 07 2011

Martin Daunton, who is one of Britain’s most accomplished historians and the author of a number of important works in economic history, has published a new paper on the History and Policy website. It is called “History and the Financial Crisis”.

You can listen to an interview in which Daunton discusses his career as a historian here.





The Gladstone Box, Japanese Highways, and the Yankee Tea Parties

23 06 2010

Yesterday, George Osborne, Britain’s Chancellor of the Exchequer (in Canadian parlance, finance minister), presented his budget. The media have, quite rightly, focused on the substance of this budget, which involves spending cuts and tax increases to deal with the deficit.  However, they have also mentioned some of the rituals surrounding the presentation of the budget to parliament. See here.

George Osborne With Budget in Box

British Chancellors have traditionally brought a copy of the budget to parliament in an iconic red budget box, first used by William Gladstone in the early 1860s. This box, which is supervised by the British National Archives in Kew, will be officially retired after this week’s budget because it is in a state of disrepair. Made for William Gladstone around 1860, it has been used by every chancellor since, with the exception of James Callaghan and Gordon Brown. The box will now be kept on display at the Cabinet War Rooms in Whitehall, which you can visit.

The retirement of this box is a good time to think about financial history and differences in national political culture.

For more about the Gladstone box, see here. You can also see a cool video on the history of British public finance here.  I’ve included a video about the history of the box.

The story of the box is interesting to me because of what it represents. First, in the course of researching my PhD thesis, which dealt with an attempt by Canadian politicians to get money out of the British government in the 1860s, I had to do a fair bit of reading on Gladstone and his financial policies. There is a sizeable literature on Gladstonian finance and the reforms he implemented as Chancellor in the 1860s and later as Prime Minister. These reforms included placing all government funds in a single consolidated fund, which was a step towards transparency. Previously, the British government’s annual expenditure had been divided among a vast array of special envelopes, with revenue from a particular source being hypothecated to a particular class of expenditure. This system was complex, made oversight more difficult, and resulted in “feast or famine” budgets in particular government departments.

Gladstone

After the achievement of Responsible Government, Canadians adopted the British practice of preparing the budget in secret and then announcing the entire budget in parliament. This practice was designed to cut down on last-minute lobbying by rent-seekers, which was once common in Westminster-style democracies and is still a prominent feature of the preparation of the budget in the U.S. Congress. In the U.S. Congress and in state legislatures, representatives will agree to vote for the budget in return for goodies for their home districts, the result being the misdirection of trillions of dollars into “bridges to nowhere”, obsolete military subsidies, and subsidies to farmers.

The existing literature shows that the British financial reforms of mid-19th century reduced the role of special-interest politics in the making of British government budgets and thus helped to increase the average taxpayers’ trust in the state. These reforms reduced anti-statist or anti-government sentiment in Britain, which had been rampant in the days of Old Corruption, and paved the way for the rise of the welfare state. If people in Britain, Canada, and other Commonwealth countries have  a more positive view of “Big Government” than their American cousions, it is likely a result of the reforms undertaken by Gladstone. Of course, this is highly ironic, since Gladstone was a small-government classical liberal. The US never enacted these reforms, which helps to explain why there is a deep suspicion of Big Government in that country, as is evident in the Tea Party movement.

I’m not saying I agree with the Tea Party movement. All of the energies the Americans are putting into the Tea Party movement should be devoted to Transparency International. However, I understand where they are coming from. If I had to live under corrupt U.S. politicians (let’s face it, pretty much every US President from Nixon on would be in jail in a Commonwealth country), I would probably want to reduce the amount of money at their disposal. After all, the US government budget seems to be chiefly devoted to obscene subsidies for farmers and paying for wars the US people don’t believe in rather than paying for service the public might actually value. In fact, if I were a pacifist living in the United States, I might even support the Tea Party movement, since that movement is probably the most effective means of bringing the US war machine to its knees.  Personally, I kinda hope that the Tea Party Revolt and the tax evasion it is encouraging forces the US to pull out of Afghanistan sooner than expected.

Tea Party in Philadelphia

Similarly, if I lived in Japan, I might also become an anti-tax crusader, since so much of that country’s budget is devoted to propping up the construction industry through useless infrastructure spending (e.g., multilane highways in remote parts of Japan). The corrupt gerontocracy that runs that country has spent billions on laughable infrastructure projects that aren’t needed when they should be putting money into encouraging Japanese women to have babies.  At the current rate, there will soon be more bullet trains than children in the land of the rising setting sun.

Half Completed Highway in Japan, Doubtless Built to Please Some Liberal Democrat Crony

Anyway, I digress. You can find an excellent survey of the scholarly debate on Gladstonian finance in historian Martin Daunton’s financial history of 19th century Britain, Trusting Leviathan. see excerpt here.

I’m particularly interested in the ways in which Canadian politicians in the 1860s and 1870s selectively copied some of the reforms that had been undertaken by Britain in the mid-19th century. Luther Holton, who has Canada’s Finance Minister in 1862-4, was an admirer of Gladstone, as were other Canadian politicians of the Liberal stamp.

Luther Holton, Canadian Classical Liberal

Canadians were rather selective in the ways they embrace Gladstonian finance. Like Britain, Canada decided to create a single consolidated fund and begin preparing budgets in secret. Canada also created the office of Auditor-General, to make sure that taxpayer funds were being spent wisely. However, Canada did not imitate Britain in the crucial matter of the tariffs. In the 1840s, the British government of Robert Peel shifted from indirect to direct taxes, cutting customs duties but making up for the shortfall by imposing an income tax on the top 2% of the population. This was a bold and selfless act on the part of the parliament that voted for this shift, since it was a parliament elected by the properties classes.  For better or worse, Canada did not follow suit until the 20th century, although some Canadian classical liberals proposed the introduction of income tax in 1860s. In fact, the failure of Canadian politicians to introduce income tax in the 1860s is one of the reasons I have so little respect for the Fathers of Confederation.  For decades after Confederation, Canada’s government got most of its revenue for the tariff, a rather regressive form of taxation. Needless to say, the tariff-protected industries that had grown up under this form of taxation were among the most vigorous opponents of the introduction of income tax into Canada. Canadians only began paying for income tax during the First World War.

You can read more about Luther Holton here.

There are some great images from recent Canadian budget history here.