William Ewart Gladstone - Chancellor of The Exchequer (1859–1866)

Chancellor of The Exchequer (1859–1866)

In 1859, Lord Palmerston formed a new mixed government with Radicals included, and Gladstone again joined the government as Chancellor of the Exchequer (with most of the other remaining Peelites) to become part of the new Liberal Party.

Gladstone inherited an unpleasant financial situation, with a deficit of nearly five millions and the income tax at 5d. Like Peel, Gladstone dismissed the idea of borrowing to cover the deficit. Gladstone argued that "In time of peace nothing but dire necessity should induce us to borrow". Most of the money needed was acquired through raising the income tax to 9d. Usually not more than two-thirds of a tax imposed could be collected in a financial year so Gladstone therefore imposed the extra four pence at a rate of 8d. during the first half of the year so that he could obtain the additional revenue in one year. Gladstone's dividing line set up in 1853 had been abolished in 1858 but Gladstone revived it, with lower incomes to pay 6½d. instead of 9d. For the first half of the year the lower incomes paid 8d. and the higher incomes paid 13d. in income tax.

On 12 September 1859 the Radical MP Richard Cobden visited Gladstone, with Gladstone recording in his diary: "...further conv. with Mr. Cobden on Tariffs & relations with France. We are closely & warmly agreed". Cobden was sent as Britain's representative to the negotiations with France's Michel Chevalier for a free trade treaty between the two countries. Gladstone wrote to Cobden: "...the great aim—the moral and political significance of the act, and its probable and desired fruit in binding the two countries together by interest and affection. Neither you nor I attach for the moment any superlative value to this Treaty for the sake of the extension of British trade...What I look to is the social good, the benefit to the relations of the two countries, and the effect on the peace of Europe".

Gladstone's budget of 1860 was introduced on 10 February along with the Cobden-Chevalier Treaty between Britain and France that would reduce tariffs between the two countries. This budget "marked the final adoption of the Free Trade principle, that taxation should be levied for Revenue purposes alone, and that every protective, differential, or discriminating duty...should be dislodged". At the beginning of 1859, there were 419 duties in existence. The 1860 budget reduced the number of duties to 48, with 15 duties constituting the majority of the revenue. To finance these reductions in indirect taxation, the income tax, instead of being abolished, was raised to 10d. for incomes above £150 and at 7d. for incomes above £100.

Some of the duties Gladstone intended to abolish in 1860 were the duties on paper, a controversial policy because the duties had traditionally inflated the costs of publishing and thus hindered the dissemination of radical working class ideas. Although Palmerston supported continuation of the duties, using them and income tax revenues to make armament purchases, a majority of his Cabinet supported Gladstone. The Bill to abolish duties on paper narrowly passed Commons but was rejected by the House of Lords. As no money bill had been rejected by Lords for over two hundred years, a furore arose over this vote. The next year, Gladstone included the abolition of paper duties in a consolidated Finance Bill (the first ever) in order to force the Lords to accept it, and accept it they did.

Significantly, Gladstone succeeded in steadily reducing the income tax over the course of his tenure as Chancellor. In 1861 the tax was reduced to ninepence (£0-0s–9d); in 1863 to sevenpence; in 1864 to fivepence; and in 1865 to fourpence. Gladstone believed that government was extravagant and wasteful with taxpayers' money and so sought to let money "fructify in the pockets of the people" by keeping taxation levels down through "peace and retrenchment". Gladstone wrote in 1859 to his brother who was a member of the Financial Reform Association at Liverpool: "Economy is the first and great article (economy such as I understand it) in my financial creed. The controversy between direct and indirect taxation holds a minor, though important place". He wrote to his wife on 14 January 1860: "I am certain, from experience, of the immense advantage of strict account-keeping in early life. It is just like learning the grammar then, which when once learned need not be referred to afterwards".

The Austrian economist, Joseph Schumpeter, described Gladstonian finance in his History of Economic Analysis:

...there was one man who not only united high ability with unparalleled opportunity but also knew how to turn budgets into political triumphs and who stands in history as the greatest English financier of economic liberalism, Gladstone...The greatest feature of Gladstonian finance...was that it expressed with ideal adequacy both the whole civilisation and the needs of the time, ex visu of the conditions of the country to which it was to apply; or, to put it slightly differently, that it translated a social, political, and economic vision, which was comprehensive as well as historically correct, into the clauses of a set of co-ordinated fiscal measures...Gladstonian finance was the finance of the system of 'natural liberty,' laissez-faire, and free trade...the most important thing was to remove fiscal obstructions to private activity. And for this, in turn, it was necessary to keep public expenditure low. Retrenchment was the victorious slogan of the day...it means the reduction of the functions of the state to a minimum...retrenchment means rationalisation of the remaining functions of the state, which among other things implies as small a military establishment as possible. The resulting economic development would in addition, so it was believed, make social expenditures largely superfluous...Equally important was it...to raise the revenue that would still have to be raised in such a way as to deflect economic behaviour as little as possible from what it would have been in the absence of all taxation ('taxation for revenue only'). And since the profit motive and the propensity to save were considered of paramount importance for the economic progress of all classes, this meant in particular that taxation should as little as possible interfere with the net earnings of business...As regards indirect taxes, the principle of least interference was interpreted by Gladstone to mean that taxation should be concentrated on a few important articles, leaving the rest free...Last, but not least, we have the principle of the balanced budget.

Due to his actions as Chancellor, Gladstone earned the reputation as the liberator of British trade and the working man's breakfast table, the man responsible for the emancipation of the popular press from "taxes upon knowledge" and for placing a duty on the succession of the estates of the rich. Gladstone's popularity rested on his taxation policies which meant to his supporters balance, social equity and political justice. The most significant expression of working class opinion was at Northumberland in 1862 when Gladstone visited. George Holyoake recalled in 1865:

When Mr Gladstone visited the North, you well remember when word passed from the newspaper to the workman that it circulated through mines and mills, factories and workshops, and they came out to greet the only British minister who ever gave the English people a right because it was just they should have it...and when he went down the Tyne, all the country heard how twenty miles of banks were lined with people who came to greet him. Men stood in the blaze of chimneys; the roofs of factories were crowded; colliers came up from the mines; women held up their children on the banks that it might be said in after life that they had seen the Chancellor of the People go by. The river was covered like the land. Every man who could ply an oar pulled up to give Mr Gladstone a cheer. When Lord Palmerston went to Bradford the streets were still, and working men imposed silence upon themselves. When Mr Gladstone appeared on the Tyne he heard cheer no other English minister ever heard...the people were grateful to him, and rough pitmen who never approached a public man before, pressed round his carriage by thousands...and thousands of arms were stretched out at once, to shake hands with Mr Gladstone as one of themselves.

When Gladstone first joined Palmerston's government in 1859, he opposed further electoral reform, but he changed his position during Palmerston's last premiership, and by 1865 he was firmly in favour of enfranchising the working classes in towns. This latter policy created friction with Palmerston, who strongly opposed enfranchisement. At the beginning of each session, Gladstone would passionately urge the Cabinet to adopt new policies, while Palmerston would fixedly stare at a paper before him. At a lull in Gladstone's speech, Palmerston would smile, rap the table with his knuckles, and interject pointedly, "Now, my Lords and gentlemen, let us go to business".

As Chancellor, Gladstone made a speech at Newcastle on 7 October 1862 in which he supported the independence of the Confederate States of America in the American Civil War, claiming that Jefferson Davis had "made a nation". Great Britain was officially neutral at the time, and Gladstone later regretted the Newcastle speech. In May 1864 Gladstone said that he saw no reason in principle why all mentally able men could not be enfranchised, but admitted that this would only come about once the working-classes themselves showed more interest in the subject. Queen Victoria was not pleased with this statement, and an outraged Palmerston considered it seditious incitement to agitation. .

Gladstone's support for electoral reform and disestablishment of the Anglican Church in Ireland had alienated him from his constituents in his Oxford University seat, and he lost it in the 1865 general election. A month later, however, he stood as a candidate in South Lancashire, where he was elected third MP (South Lancashire at this time elected three MPs). Palmerston campaigned for Gladstone in Oxford because he believed that his constituents would keep him "partially muzzled", because many Oxford graduates were Anglican clergymen at that time. A victorious Gladstone told his new constituency, "At last, my friends, I am come among you; and I am come—to use an expression which has become very famous and is not likely to be forgotten—I am come 'unmuzzled'."

On Palmerston's death in October, Earl Russell formed his second ministry. Russell & Gladstone (now the senior Liberal in the House of Commons) attempted to pass a reform bill, which was defeated in the House of Commons because of the refusal of the "Adullamite" Whigs, led by Robert Lowe, to support it. The Conservatives then formed a ministry, in which after long Parliamentary debate Disraeli passed the Second Reform Act of 1867, more far-reaching than Gladstone's proposed bill had been.

Lord Russell retired in 1867 and Gladstone became leader of the Liberal Party. in 1868 Gladstone proposed the Irish Church Resolutions to reunite the Liberal Party for government (on the issue of disestablishment of the Church of Ireland – this would be done during Gladstone's First Government in 1869 and meant that Irish Roman Catholics did not need to pay their tithes to the Anglican Church of Ireland). When these passed the House of Commons Disraeli called a General Election.