Irish economic policy 1922-58

The story of the Irish economy since independence is well known in outline. There is the 1920s when Cumann na nGaedheal was in government and followed a conservative economic strategy. This involved supporting big farmers and encouraging exports of agricultural produce by improving standards and encouraging farmer education, very much in the way in which successive British administrations had done since the 1880s. At the same time, in spite of being the party of Griffith, they resisted all calls for protection for industry, believing that free access to the British market for agricultural produce was essential to the survival of the Irish economy and that this would be damaged by any move to protectionism. Then came the depression in 1930, with even Cumann na nGaedheal showing signs of conversion to protectionism, but with Fianna Fail winning the 1932 election on a protectionist programme. In office, de Valera and Lemass then engaged in an economic war with Britain, which was a strange mixture of nationalism and economic policy. The result of this and the accompanying exercise in so-called “self-sufficiency” was to close the Irish market to imports and to encourage the development of a protected native-owned industrial sector which would produce many items for the home market, though not for export, and create jobs. The Fianna Fail economic policy also neglected the interests of the farming community, especially the large farmers whose exports of beef cattle to Britain were badly damaged by the economic war. The ending of the economic war in 1938 might have changed their policies had not the war forced us to take up self-sufficiency in grim earnest, just to survive. After the war, the protectionist policies of the 1930s were continued for a decade, largely ignoring the changing pattern of European and world trade. The country enjoyed a brief boom in the late forties, which over heated the economy to the point where corrective measures were necessary. These measures were overdone and led to a massive depression, which was accompanied by large-scale emigration. The depression was also aggravated by the continuing failure to export and was made more unpalatable by comparison with the improving economic situation in Britain and Europe. Finally in 1956-7, a crisis was reached leading to the adoption of Keynesian economics under the supervision of T.K. Whitaker and Sean Lemass. This produced the First and Second Programmes for Economic Recovery and the boom of the 1960s. Since then, the state has played a much more direct part in managing the economy – for better or worse, according to your point of view. This outline of the economic history of Independent Ireland has the quality of a cliché. It is found in textbooks, taught in hundreds of classrooms and enshrined in examination papers. Twenty years ago when I wrote my first L. C. textbook it was the accepted interpretation. It had been clearly formulated in the most authoritative general histories of the period, Tim Pat Coogan’s pioneering Ireland since the Rising, which came out in 1966, F.S. L. Lyons Ireland since the Famine which appeared in 1971 and John A. Murphy’s Ireland in the Twentieth Century, which appeared in 1975. Since then a lot of new research has been done and many new details have been added to the old picture, though the outline remains basically unchanged. The new research is based on new sources, which were not available to Coogan, Lyons and Murphy or to the economic historians writing before them from whom they drew much of their information. Their problem with sources is explained by the fact that at the time, – that is the late 1960s, early ’70s – the Irish state still kept a veil of secrecy over its records. There were two reasons for this. One was the culture of secrecy we inherited from the British. The other was the paranoia, which grew up in the difficult years of the state’s birth. The war of independence and the Black and Tan period bred a concern about who was and who was not informing on their neighbours and the best way to avoid trouble was to let nobody see the papers. The civil war meant that members of one party had been involved in the execution or the assassination of members of the other. The only way to deal with that legacy was to bury it behind a wall of silence. Together these developments made the disclosure of the private records of government difficult. They also help to explain the regrettable fact that none of our early leaders left direct memoirs – the biography of De Valera by Lord Longford and T.P. O’Neill is a partial exception. So long as the generation directly involved in the civil war was still politically active, which was up to the late ’60s, the veil of secrecy was unlikely to be raised. In the 1970s things began to open up a bit but it was only in the 1980s, when that founding generation was mostly dead, that legislation was introduced to bring in a thirty year rule and make the records of government departments available to historians in a state archive. Because the private record was hidden, the historians working before the late 1970s had to draw their information from the public record. Thus the classic account of Irish economic policy which I have already outlined was based on a range of sources in the public domain. These included Dáil debates, Acts of the Oireachtas, government reports, national statistics, speeches by politicians, newspaper articles of the time, and the occasional interview with someone like Whitaker or Lemass. These sources were adequate to build up a picture of what was done. What they could not provide was information on the process by which the political and economic policy decisions were reached. Since the late ’70s, however, the situation has changed. Bit by bit, the secrets of government in the years between the 1920s and the 1960s have been unveiled and it is now possible to have a much clearer picture of the process of government decision-making and of the men behind the decisions. It might be expected that the most revealing archives would be those of the Cabinet, where, after all, the final decisions were made, but this has not been the case. Indeed, the culture of secrecy, which enveloped Irish public life, is nowhere more evident that there. When the Dáil government was set up in 1919 it was an illegal organisation. It was on the run and the members were in danger of arrest. Therefore they learnt to put as little as possible on paper. They began to follow the policy of noting in the minutes of Cabinet meetings, only what conclusions were reached, not the discussion, which preceded the conclusion. This custom persisted after independence, perhaps influenced by the civil war and so far as we are allowed to know since that bizarre Supreme Court decision, this continues to be the practise up to the present day. Thus the Cabinet minutes tell us what the government decided on a particular issue, which in most cases we already knew from the public record, but they do not tell us the thing historians most want to know: who pushed a particular policy and who argued against it and who won and who lost. Instead, historians looking for the sources of economic policy have had to turn to the records of the various government departments and to find out what line they took. The pioneering study in this area was Ronan Fanning’s monumental book, The Irish Department of Finance, 1922-1958 (IPA) which appeared in 1978. This was before the archives were generally opened, and Fanning was invited by the Department itself to write an official history. He has told me himself that he feared interference and direction but that he was given a completely free hand. Since then other studies from inside departments have appeared, but the one which has most relevance to economic policy is Mary E. Daly’s Industrial Development and Irish National Identity, 1922 – 1939, published by Gill and Macmillan in 1992 which draws heavily on the records of the Department of Industry and Commerce. These and some other lesser studies have greatly added to our understanding of how economic policy was formulated during the period and of the personalities and of the power struggles that lie behind the decisions about which we already knew. One of the main revelations is of the importance of the civil service. We tend to think of government policy as being the responsibility of elected governments but what Fanning and Daly have clearly shown is that this is not the full story. The formulation of economic policy owes at least as much to a few men whom most of us have never heard of, as to the political leaders whose names we know. The first point that both writers stress is the lack of an economic policy in Sinn Fein up to the Treaty and in Cumann na nGaedheal after 1922. Only two men involved in the independence movement seem to have thought what an independent Irish government should do about the economy and they were Griffith and Collins, both of whom are dead by August 1922. Their successors lacked both experience and confidence in economic matters, so they had to look outside their own ranks for advice. They turned to two sources, the bankers and businessmen who were already active in the economy and to civil servants. The bankers and businessmen were mostly unionist in attitude. They accepted independence but they had not sought it and did not welcome it. Most of them had their headquarters in London and tended to see the world through British eyes – and it is important to remember that for adult men in the 1920s Britain was still the greatest power in the world. (The sense we now have of its weakness and impending decline owes a lot to hindsight.) Therefore the advice of the bankers and businessmen to the new government was to change as little as possible. They urged them to continue the kinds of policies, which would have been followed by a British administration. This included continuing free trade between the two countries. In 1923 the heads of Jameson’s the distillers, Jacobs’ the biscuit makers and Carroll’s the cigarette manufactures, lobbied to stop the introduction of tariffs. Fords who had a car plant in Cork employing 1,600 people threatened to re-locate in the UK if it had to meet tariff payments. In addition, big farmers who were the one of the main sources of electoral support for Cumann na nGaedheal, also wanted free access to the British market. It is no surprise therefore to find that the Cosgrave government resisted calls for protection. These came from some smaller businessmen, people making footwear or furniture and such things for the Irish market. They were competing locally against huge UK operations, which enjoyed the advantage of economies of scale, which were not possible on the small and relatively poor Irish market. They got a sympathetic hearing from some government backbenchers who were influenced by Griffith’s writings and who had business interests of their own. Among them was Joe McGrath, a minister in the early twenties who later set up the Hospitals’ Sweeps and made a million. The Cabinet caught between two pressure groups, set up the Fiscal Inquiry Committee to give the appearance of doing something. But they also packed it with opponents of tariffs and it did not listen the demands of small businessmen. It recommended that tariffs be allowed on only a very limited scale. Renewed pressure from government backbenchers in 1926 led to the setting up of the Tariff Commission to investigate individual requests from businessmen for protection. The result was that only a handful of requests had been granted by 1930 when the Depression pushed the question back to the fore again. A similarly conservative picture emerges on the currency question. The mid-1920s was a period of sharp deflation in Britain causing a fall in the prices received by Irish exporters. This led to a discussion of the proper relationship between the Irish currency and sterling. A Banking Commission was set up to make recommendations and it advised retaining parity with the British currency. The cost of this decision, which remained in place until 1979, was high. In the short-term it cost jobs by making Irish goods less competitive than they might have been, but in the long term it tied us closely to the British economy at a time when it was in decline. Historians like Joe Lee have identified this as one of the reasons why the Irish economy did less well than comparable small, agricultural economies such as Denmark, especially after the second World War. But it would be unfair to blame all the conservatism of the period on the business community. The civil service too was very conservative and its role in guiding the economy was even more important. Under the terms of the Treaty, the civil servants that had served the British government were given the choice of retiring, moving to Northern Ireland or remaining on in the service of the Free State. The vast majority of the 20,000 civil servants – of whom most were postmen! – remained on. These people were trained in the British system and continued after independence to operate according to the rules they had learnt under their earlier masters. One of the characteristic features of the British government system was the primacy of the Treasury. All other departments were accountable to it for the money they spent and all-important decisions about taxation and spending were taken in the Treasury. Other departments had to argue their case for money but were not allowed to make the final decision. This system was carried over into the Irish civil service, with control by the Department of Finance replacing control by the Treasury. This was partly in emulation of the British model which was respected and admired in many countries, but also because between 1919 and 1921, the Dáil minister for Finance was Michael Collins. Collins’s energy, his organising ability and his range of roles in both the government and the Volunteers gave made him the dominant figure in the Dáil government and this dominance rubbed off onto his department. Even when he was on the run with a price on his head, Collins insisted on keeping careful records of spending and wanted the other departments to report on their financial dealings to him. In 1920 he got the Dáil to appoint an Auditor General, whose role was to check on the spending of other departments. Thus even while the Dáil was operating as a banned organisation, the British-style pattern of Finance control was emerging under Collins’s tutelage. Joseph-BrennanOnce the Treaty was ratified the task of setting up the new state and appointing its civil servants fell to the Provisional Government led by Griffith and Collins. The key post was that of Secretary of the Department of Finance, but there were few Irishmen in the British service with the financial experience to fill the post. The man they chose was Joseph Brennan. He had served in Dublin castle in the Irish branch of the Treasury since 1912. During the Treaty negotiations he had secretly advised Collins on the financial clauses of the Treaty and when the new Department was set up he was rewarded with the top job.   Brennan retired in 1927 but he did not leave public life. He went on the chair the Currency Commission until it was replaced by the Central Bank in 1943 and then he became its first Governor until he retired in 1953. Brennan thus remained close to the centre of power and his conservative economic philosophy retained its influence, whichever politicians reigned in Merrion Street. J.J. McElligott succeeded Brennan as Secretary. McElligott had joined the Free State Department of Finance early in 1923. He had started his career in the British Local Government Board but been sacked for complicity with the Easter Rising. He then worked as a financial journalist until Brennan recruited him as Assistant Secretary. He remained Secretary from 1927 until he succeeded Brennan as Governor of the Central Bank in 1953. Like Brennan, McElligott was trained in the British system and shared its values, both good and ill. The good were a high standard of personal and public integrity – the outstanding legacy of which was the Civil Service Commission which the two men were responsible for setting up and which guaranteed that recruitment to the Civil Service was not subject to political patronage. The downside was a determination to resist innovation. J.J.McElligottLike Brennan, McElligott opposed protection and strove to avoid any interference by the state in the economy. He believed that the Budget should be balanced and that taxation must be kept low as possible so as to favour the big farmers and industrialists whose exports he saw as crucial to achieving a proper balance between imports and exports. A policy of low taxation, however, had serious implications for social policy. It meant low spending on things like housing, poor relief and so on. Thus nothing was done to deal with the dreadful Dublin slums which had been revealed in 1913 until the 1930s or to improve the conditions of the small farmers, the unemployed or the widows and orphans. The Victorian health and social systems remained unaltered apart from some name changes (Workhouses became County Homes) until after 1945 and then were improved over the protests of McElligott. The 1920s were good for the well off in Irish society but the poor might well have been better off under British rule. But even in the 1920s, Brennan and McElligott did not have it all their own way. Resistance to their policies came from the other financial department – Industry and Commerce. The Secretary there was Gordon Campbell, a Protestant and a member of the old ruling class who later became Lord Glenavy. Perhaps because of his background he seemed to be more confident and willing to take initiatives suited to Irish realities than to follow British models. In 1922 he had proposed a government initiative to improve employment but the Department of Finance blocked the necessary expenditure. Backed by his minister, Joe McGrath, he pushed for the Shannon Scheme and won the support of the Cabinet, which enabled him, to overcome the opposition of Brennan and raise the £5m needed. But he also showed his shrewdness by forcing the German company, Siemens which built the Shannon scheme, to give the Irish a much better deal than they had originally intended. Campbell also opposed the government’s emphasis on helping the big farmers, pointing out that they were few in number and that they provided few jobs. He argued that the state should try for a better balance between agriculture and industry.ardnacrusha-aeriel But from the mid-1920s, Campbell lost influence. The Government became more conservative. McGrath resigned over the Army Mutiny and J.J. Walsh who shared his economic interests did not contest the 1927 election. The men who remained tended to be lawyers, professional men, or big farmers rather than businessmen. Patrick Hogan as minister for Agriculture emerged as the dominant economic minister in the Cabinet. He supported the big farmers, was strongly opposed to protection or high taxes which might have pushed up their costs, and resisted state aid for industry. He won the backing of McGilligan the minister for Industry and Commerce and of Blythe, the Minister for Finance and Campbell’s influence waned. The Depression and the arrival of Fianna Fail with a coherent economic policy changed the terms of the debate on economic issues. Outside factors also helped. Britain was moving towards protection with a knock-on effect on the Irish economy. Big businesses like Guinness and Ford had already decided before the Depression started in 1930 to serve the British market direct from bases within Britain rather than from Ireland and so they were no longer active in lobbying against tariffs. Cumann na nGaedheal began to introduce tariffs on a wider range of goods in 1930 and 1931 but it was too late to stop the electoral tide flowing towards Fianna Fail. Cumann na nGaedheal economic policy is often damned as too conservative but that is to fail to take account of the difficulties they faced. The inter-war years were not ones of economic growth and, unlike British colonies which won independence after 1945 and which often got grants to help them on their way, the Treaty committed the Free State to paying Ireland’s share of the war debt, for which Irish MPs had voted in 1914. And they were also faced with an economy substantially damaged by 5 years of war. When we keep these handicaps in mind, the Cumann na nGaedheal achievements are considerable. They restored economic stability after the chaos and destruction of the civil war. They kept taxation low and balanced its budget in spite of the cost of paying for that destruction and making substantial payments to Britain. They also significantly improved export performance. Exports were not to return to similar levels until the 1960s. But these achievements must be set against the cost of its policies: high unemployment, high emigration and high levels of poverty and deprivation among those who remained at home. Fianna Fáil’s election victory raised considerable fears among the civil servants who had served Cumann na nGaedheal, but as is well known de Valera and his ministers stressed continuity of service and strove from the first to make it clear that they wanted to continue to employ the same people as before. De Valera took little interest in economic policy. His whole attention was focused on extending the Treaty, though his policy in relation to the oath and the annuities did have a significant indirect economic impact. He appointed Sean MacEntee as Minister for Finance but he was of relatively less importance in the Cabinet than his predecessors had been during the 1920s. A finance committee was set up to decide spending priorities and he was not on it. Lemass as Minister for Industry and Commerce and James Ryan as minister for Agriculture seem to have carried more weight. Lemass had to find a new Department secretary because Campbell had resigned before the election. He picked a young civil servant from the Department of Finance called John Leydon. They developed a good working relationship and up to the mid’30s they dominated government economic policy. Their record is well known, involving the imposition of a range of tariffs on imports and limiting the other imports through systems of licensing and quotas. The aim behind this was to foster an Irish-based and Irish-owned industrial sector to provide for the home market the goods that had previously been imported from Britain or elsewhere. What Daly shows in her study is that there was very little coherent planning behind this policy. Most decisions about what industries were to be licensed and what were not were taken on an ad hoc basis depending on circumstances. Industries were located in an area needing jobs or in areas where Fianna Fáil needed votes, and these considerations seem to have outweighed any question of the viability or necessity of that industry. There was also a good deal of pragmatism behind the decisions made. For example, in theory all industries were to be Irish owned, but Lemass let big British companies like Cadbury’s set up paper companies with a few Irish directors on them while the real decisions continued to be made at the company’s headquarters in Britain. What is noticeably missing, however, is any clear economic strategy. The gaps are amazing. There were no plans, for example, to improve the road network. There was no fertiliser plant in an agricultural country. The lack of a national shipping line, leaving Irish exports at the mercy of British shippers when the war came, is another well known example. Fianna Fáil’s economic policies were not likely to win favour with McElligott or the officials in the Department of Finance and a power struggle developed in the mid 1930s, with MacEntee supporting his officials against Lemass and his. The essence of the struggle was between two interpretations of the events of the early 1930s. Finance’s view was that the developments of the early 1930s, especially the decline in agricultural exports and the consequent growth of a balance of payments deficit, were the results of the economic war and so temporary and regrettable lapse from economic orthodoxy. The view of Lemass and the Department of Industry and Commerce was that these changes represented a fundamental alteration in the nature of the Irish economy. In the late thirties, as relations with Britain improved and as the balance of payments simultaneously grew worse, the Finance view prevailed and Lemass’s reforming drive began to run out of steam. That may also be because it had reached the end of the road. There were difficulties inherent in it, most notably how to pay for the raw materials for the new industries when they were not exporting their produce. These problems would probably have produced a debate had not the war intervened. The needs of the emergency ended any discussion on economic policy at least until 1943 when it became clear that Germany was not going to win. At that point, a few people, and among them Lemass, began to consider post war economic policies. A number of things changed their general approach. Firstly the need to provide food and to ration it during the Emergency, had given Departments like Supplies and Agriculture some experience of planning. This experience made them more aware of new ideas circulation in Britain, especially those associated with the economist, John Maynard Keynes. These economists had argued for state planning, state borrowing and state investment to achieve economic growth and employment. Another factor that encouraged a new approach was the belief that the post war economic situation would be similar to that after 1918. Then there had been depression and high unemployment in Britain. If the same thing happened this time, might not the British send home the thousands of Irish men and women who had emigrated to work in war-time industries? And if they did, how would the Irish economy cope? Lemass presented these fears to de Valera and the Taoiseach reluctantly agreed to approve improved state investment in areas like rural-electrification and house building. The Beverage report in Britain as well as concern about the worsening levels of TB and other conditions associated with poverty, such as maternal mortality also encouraged more expenditure on health. This began under Fianna Fail though it expanded during the First Coalition between 1948 and 1951. It all involved increased expenditure by the state, which aroused fierce opposition in Finance. However, the Finance Minister after 1946 was Frank Aiken who was less conservative than Sean T. O’Kelly who was his predecessor. But in other areas, Finance’s conservatism prevailed. It opposed Irish participation in the IMF and the World Bank until the late 1950s and was very reluctant to be involved in the Marshall Plan. McElligott even wanted the money to be used to pay off the national debt rather than investing it in anything. They also clung to the link with sterling, even though the breaking of that link was one of the policies of Sean MacBride and Clann na Poblachta in the 1948 election. Even though he became Minister for External Affairs in the Coalition Cabinet, MacBride had a considerable impact on financial policy because he insisted that all transactions with foreign governments must be through his department. This gave him control over the Marshall Aid negotiations. But the continuing conservatism of ministers is seen in the decision to invest this money in land drainage and reforestation rather than in industrial investment or infrastructure improvement. One of the strange things about this period is the almost fatalistic belief in both ministers and civil servants that Ireland was destined to be always an agricultural country and that any attempt to industrialise was to try to reach above our station. However, the years of the First Coalition do see the beginning of the change in economic policy, which culminate in the First Programme for Economic Recovery. One reason is that for the first time since independence, economic issues began to be debated at elections. The old issues – the Treaty, relations with Britain, the reality of independence – were dead by 1945, killed by de Valera’s ’30s policies and by neutrality. The 1949 declaration of the Republic merely put the seal on what was already a reality. As a result, politicians had nothing to appeal to the people on except the quality of their economic promises and performances. The late John Healy said that the 1948 election was the first “pork barrel” election in which economic issues took centre stage. Another sign of the change is a speech made in November 1949 by John A. Costello. Amazingly, it was the first speech by a head of state since 1922, which dealt exclusively with economic issues and in it he spoke enthusiastically of Keynes’s ideas. The tangible proof of a new outlook came soon after, in the 1950 budget, by the Coalition Minister of Finance, Patrick McGilligan. In it he introduce the first capital budget in history, a necessary preliminary to Keynesian economic management. McGilligan is often presented as a conservative, but in fact he was quite willing to stand up to Finance officials when he disagreed with them and to try new ideas if he could be persuaded of the need for them. But these signs of change were to prove illusory. The main reason was the balance of payments problem. The investments in electricity, in hospitals and in housing in the late ’40s all created employment. The improved economic climate sucked in imports but the exports did not keep pace. In fact they were declining. In 1949 Irish exports, which were mainly cattle and beer, paid for less than 50 per cent of Irish imports compared with over 60 per cent in 1939. Invisible earnings like remittances from emigrants, tourism and earnings from foreign investments made up some of the difference but that could not continue. McGilligan made some adjustments and in 1952 his Fianna Fail successor, Sean McEntee brought in a very harsh budget to cut consumer spending. It worked, but unfortunately this policy was continued over the next four years, with disastrous results in terms of job losses and huge emigration. The scale of the disaster, when people could talk seriously of the vanishing Irish, was one of the things that forced a rethink. But there were other forces at work in favour of change and one of them was the passing of the older generation. This is usually seen in terms of politicians. Through the ’50s the men who had led the country since independence stepped aside one by one. The culminating moment came in the 1959 when de Valera moved to the Park, leaving active politics for the first time since 1917, and when both Richard Mulcahy and John A Costello retired from Fine Gael. But of equal significance was the change in 1953 when Brennan at last stood down from the Central Bank governorship and McElligott took his place. His immediate successor was another man of the old school, but in 1956 the Second Coalition’s Minister appointed T K Whitaker, who was only in his mid forties, to the job.T.K.-Whitiker This appointment was of crucial importance, for Whitaker was more in tune with the new post war world of declining protection, declining economic nationalism, and growing international economic co-operation through bodies like the GATT, the World Bank and the European Common Market, than his predecessors who had so admired the British system. In Lemass, Whitaker also met a minister who shared his views. Lemass had pushed for a more Keynesian approach to economic planning at the end of the war but had lost out to the vested interests that the years of protection had built up, especially among Fianna Fail voters. In the early ’50s his health was bad and his influence declined in the Cabinet that de Valera formed in 1951. De Valera, who was always out of his depth on economic issues, supported the economic conservatism of Sean McEntee, against Lemass. But the disaster of 1956, which led to the Fianna Fail victory in the 1957 election, proved that a new policy was necessary and this time McEntee lost the battle. The result was the First Programme and the rest is history. M. E. (Elma) Collins Lecture to Galway History Teachers February, 1994 Additional reading: Ronan Fanning, The Irish Department of Finance 1922-58, (Dublin 1978) Mary E. Daly, Industrial Development and Irish National Identity, 1922-39 (Gill and Macmillan 1992) J. J. Lee, Modern Ireland 1912-1985 (Cambridge University Press 1989) John Horgan, Sean Lemass (Gill and Macmillan, 1997) David Johnson, The Interwar Economy in Ireland; Studies in Irish Economic and Social History, 4, (Dundalk 1985)