Patrick McGilligan introduced Ireland’s first capital budget in May 1950, declaring:
One of the primary responsibilities of a Government is to promote, by an enlightened budgetary and investment policy, the continuous and efficient use of national resources in men and materials.1
Described by Patrick Lynch as the first explicit expression of Keynes in an Irish budget, and drafted by Lynch in association with Alexis Fitzgerald, the budget sought to allocate a certain part of the nation’s finances to public purposes, and to ensure that the nation’s resources were utilised to advance the interests of the community as a whole. Lynch – very much influenced by the Swedish and Norwegian systems – saw the capital budget purely as a matter of capital investment. He argued that the only way in which the repatriation of sterling assets could be achieved would be by a deficit in the current Government budget; the proceeds would go into productive investment.
McGilligan had undergone what could be described as a Pauline conversion from his very conservative, ‘reactionary even’ days of the late 1920s, from which the ‘Irish people might have to starve’ comment continued to hang albatross-like around his neck.2Lynch put this conversion down to the fact that McGilligan was a man of wide reading; he had read Keynes and was influenced by him. Keynes’ comments during the Finlay Lecture (at University College, Dublin) of 1933 – during which he argued that if he was an Irishman, he would see very great merit in the policy being pursued by the Fianna Fáil Government that had just taken office – ‘undoubtedly influenced a thinking man like McGilligan’. Thus, by the time he became Minister for Finance in 1948, McGilligan was very receptive to Lynch’s advice – much more so than anybody in Finance with the exception of T.K. Whitaker and one or two other young officials.3Whitaker had taken the traditional Finance line on social spending, but was an official with a remarkably adept mind and someone not willing to simply sit still. While he continued to display conservative sympathies at this stage, he was looking to other countries to see how they pursued economic development. He studied in detail the 1942 Beveridge Report in Britain, and closely analysed the performance of the Tennessee Valley Authority during Franklin Roosevelt’s New Deal of the 1930s. He was also influenced by the Monet Plan in France and the Vanoni Plan in Italy after the Second World War. Thus, Whitaker was no dogmatic or doctrinaire economist rigidly adhering to a particular theory, but, rather, one who was receptive to advice and willing to look to other jurisdictions to procure economic security and advance for the Irish state.
The first Inter-Party Government’s economic policy was outlined by John A. Costello in a speech to the Institute of Bankers in Ireland. Written by Lynch and Fitzgerald, it argued that only by large-scale investment could the national wealth of the country be increased. Costello’s address was unique in that it was the first time in the history of the state that the head of Government had devoted a major speech exclusively to the principles underlying his Government’s economic policy. Lynch believed that Costello’s Government had an unrivalled opportunity to install Keynesian principles firmly at the heart of Irish economic-policy formulation.4 What ultimately distinguished the Inter-Party Government from Fianna Fáil, according to Lynch, was ‘a belief that capital investment by the state based on the theories of John Maynard Keynes could best solve the basic Irish economic problem of providing jobs for the thousands who were unemployed or who emigrated’.5McGilligan outlined the Government’s policy in a letter to Joseph Brennan, of the Central Bank:
It is the intention of the Government to draw a more strict line of demarcation than that hitherto followed between capital and non-capital services. The need for this arises from the greatly expanded programme of capital development which we have in hand. Our intentions were announced as long as last November when the Taoiseach made a pronouncement on the subject at the annual dinner of the Institute of Bankers.6
Keynesianism under fire
The main opposition to this shift to Keynesianism came from Finance. Most of its senior officials, led by McElligott, vehemently opposed Costello’s speech and the Government’s economic stance. McGilligan, however, was an impressive proponent of a moderate Keynesianism adapted to Irish circumstances, and had actively approved of Costello’s speech. The first Finance minister who could match McElligott intellectually and a formidable exponent of whatever viewpoint he chose to represent, McGilligan could not be brought into line by traditional Finance thinking.7With McGilligan driving this new shift in Government thinking, bureaucratic opposition to his policy came from the Central Bank. In its 1949–50 annual report, the bank implicitly criticised the inflationary potential of Government policy and expressed serious concerns regarding the monetary consequences of the ‘extensive programme of capital works on which the state is engaged’.8
The 1950–51 annual report contained a scathing attack by Joseph Brennan on the whole thrust of Government policy, causing political uproar. Published in October after the Costello Government had lost office – and after Marshall Aid had come to an end and the Government was faced with an acute balance-of-payments crisis – it incensed incumbent ministers, among them Lemass, and ex-ministers, particularly McGilligan and MacBride. The report expressed grave misgivings about the financial state of the nation, uncertainties that were shared by the majority of senior officials in Finance. It claimed the nation was living beyond its means, and criticised increased Government expenditure, especially on public works and subsidies. It urged fiscal measures to curb inflation, balance the budget and restrict improvident spending. It called for restraint in wage policy and restriction of bank credit.9The report starkly illustrated the deep conflict of opinion between those who sincerely believed that Ireland could be stirred out of economic stagnation only by massive public investment – for which adequate resources could be found solely by borrowing – and those in the Central Bank and elsewhere who believed with equal sincerity that such a policy would eventually defeat its own purpose.10
Reaction to the report varied. The Irish Press stated that the in-dependent monetary authority had confirmed the warnings of Fianna Fáil ministers, and the paper condemned policies that were particularly associated with the preceding Government.11The Government published a White Paper in 1951 entitled Trend of External Trade and Payments – just before the Central Bank’s report – in an effort to show that the Government and the bank were united in their attempts to enforce conservative economic policies.12Lemass, however, distanced himself from the Central Bank report. In the Dáil, he declared that the report was not a statement of the Government’s views on economic policy. He pointed out that the bank had emphasised the facts of the economic situation and had alerted the public to the fact that there was a problem to be solved. He added that the Government nevertheless intended to follow a policy that was ‘diametrically opposite to that which the Central Bank suggests’.13The Government’s solution, according to Lemass, was to increase production, not cut down consumption. The Dáil and the country would have to choose between two sources of finance – borrowing or additional taxation – to pay for such increased production. To the extent that it could not borrow the money, stated Lemass, the Government thought it worthwhile to get it by increased taxation. Thus, the Central Bank report had been publicly repudiated by the Tanaiste – other than de Valera, the most senior member of the Government.
MacEntee – who later clashed bitterly with Lemass on economic policy – defended the Central Bank’s independent position and its responsibility for the safeguarding of the national currency. As Minister for Finance, MacEntee wholeheartedly endorsed the views of McElligott and Brennan, and pursued a conservative approach, making a mockery of Lemass’ promises in the process.
The response from the opposition was typically scathing. MacBride – an enthusiastic advocate of a large-scale investment policy – criticised Brennan for advising the Government to pursue a policy that opposed national development and that could only result in increased emigration and a lowering of living conditions.14Dillon and McGilligan were equally harsh. Dillon charged that Brennan’s investment policy had been responsible for more than half of the external deficit of 1950, and that ‘if the report was accepted, the wisest thing young people could do would be to fly the country as quickly as possible’.15
Beyond the Dáil, the ITUC rejected the report’s proposals, claiming that they would result in higher unemployment, a cut in consumption, lower real wages, increased taxation, removal or reduction of subsidies, a restriction of the capital-investment programme and a standstill on wages. It asserted that building work being carried out under the public-works programme was of vital importance and should not be singled out as affording considerable scope for retrenchment in the economy, as the report had stated. On the whole, the ITUC declared, deflation would exacerbate the nation’s problems, not solve them.16
A letter from McElligott to McGilligan in February 1951 illustrates the worries the conservative group had regarding the financial situation. In it, McElligott claimed that he had repeatedly drawn attention to the:
… progressive deterioration in our public finances, the rapid growth in public expenditure and in public debt and the inadequate degree of taxation resulting in a series of budget deficits, the growth of which has been camouflaged by deductions for so-called ‘capital’ services, by capitalising subsidies for housing and rural electrification and charging as capital many recurrent items on various votes of a totally unproductive character such as various public works and buildings, harbour grants, airports, employment and emergency schemes, works under the Local Authorities Works Acts and others.17
For McElligott, removing services from the category of capital services was the only way of securing a realistic approach to what was one of the nation’s more intractable problems. That year – 1950 – saw a deficit in the balance of payments for the fourth year in succession, and Finance forecast that it would continue over the following three years unless remedial actions were instituted. The minimum requirement, according to McElligott, was:
… a considerable increase in taxation if the present scale of expansion is to be maintained. There seems no prospect of reducing the latter. Indeed all the indications are for an increase. We have already, in my opinion, allowed the situation to drift too far without taking proper financial measures, but we cannot delay any longer except at great peril to our national economy.18
Brennan and McElligott had by this time become legendary for their adamant refusal to contemplate Government intervention in the market, and were staunch believers in a low-taxation, low-spending economy. A month later they were using an OEEC report on the Irish economy, which had made the point that the Irish state was not using enough resources for capital purposes but was instead putting too much money into day to day spending, to implore the Government to change its course of economic action. A memorandum for the Government prepared by McElligott on this report suggests that McGilligan had come around to the thinking of his secretary and that of the governor of the Central Bank:
Too much money is being devoted to consumption and too little is being saved for capital purposes. The corrective measures are rightly stated to be such as would reduce the consumption (primarily of non-essentials) and expand current savings … The Minister for External Affairs does not consider that the present level of consumption reflects an unduly high standard of living. Neither does the Minister for Finance. But like the European Recovery Programme committee, he cannot evade the evidence that as a nation we are at present living beyond our current income, that is our standard of living is higher than we can afford. Of this the heavy external disinvestment for consumption purposes is living proof.19
Thus, McGilligan could not see how consumption could remain at its prevailing level unless there was a great increase in production – which was unlikely – if, at the same time, the Government desired to expand domestic investment by the promotion of savings. Savings, he argued, inevitably entailed abstention from consumption.
While one can only speculate as to whether McGilligan would have gone down the more conservative road if the Inter-Party Government had continued in office, the comment of Noël Browne, Minister for Health in that Government, suggests the affirmative; according to Browne, McGilligan was a traditionalist in matters of finance: ‘Balance the books, pay your way, cut capital expenditure, prime the private enterprise pump and all will be well’.20Although McGilligan could be a formidable advocate of Keynesianism in the Irish context, and was genuinely disposed to a more expansionary financial approach, it does seem that he was willing to revert to a more cautious outlook on financial policy when, early in 1951, McElligott finally persuaded him of the merits of this approach to economic policy. Seán Cromien suggests that McGilligan – in part because of poor health and in part because he was not enamoured of MacBride’s constant interference in matters that were entirely economic – was not entirely happy in Finance, and talks of him avoiding meetings with McElligott in particular, and generally keeping a very low profile.21This supports Browne’s theory that:
[Once] it came to the end of the financial year, and the budget approached, he [McGilligan] appeared to melt into an orgy of inaction and self-pity, skipping Cabinet meetings or arriving late. He clearly dreaded the ‘loaves and fishes’ job of trying to reconcile our many conflicting claims in such a multi-party Government.22
This was one of the kinder comments from the Cabinet-portraits section of Browne’s autobiography, from which McGilligan is one of but two politicians to emerge with any credit.23
There were, indeed, many conflicting claims within this Government, with powerful figures like Dillon and MacBride urging their own views on McGilligan. There is little doubt that McGilligan’s ‘shrewd, critical, questioning approach was hampered by the tensions of the Inter-Party Government’.24Of the ministers in charge of the main spending departments, all had different agendas to that of McGilligan. While in essence it appears that he was not willing to follow an expansionary policy simply for the sake of it, and took the view that it had to pay its way, the demands made upon him from all sides would inevitably put a strain on the Government. Of the important spending ministries in the Government, William Norton, James Everett and T.J. Murphy of the Labour Party were Ministers of Social Welfare, Posts and Telegraphs, and Local Government, respectively; Dan Morrissey – a member of Fine Gael at this stage but formally of Labour – held Industry and Commerce; and James Dillon – not at this stage a formal member of Fine Gael – held Agriculture. As Ronan Fanning points out, none could be accounted party colleagues of McGilligan’s in the fullest sense.25McGilligan was not as radical, and did not go as far as some of his colleagues – most particularly MacBride – would have liked in curbing the extreme caution of his department. Yet his period as minister was the first in which Finance was subjected to a questioning political master who was not afraid to challenge its orthodoxy. In the cautious atmosphere of administrative Ireland, that was an achievement in itself.
‘We shall rely on our own people’
By the time Fianna Fáil regained power in June 1951, Finance had identified the three problems it considered to be at the root of the financial crisis: primarily, the Government was not covering ‘even the current outlay of spending by taxation’; secondly, the inflationary effect of this was accentuated by the fact that capital expenditure by the Government was not being met to any adequate extent from current savings, and was predominantly of an unproductive character; finally, money incomes in the country were being raised ‘not only irrespective of increases in output but even faster in many cases than corresponding increases in Britain, notwithstanding that taxation and living conditions are better here’.26The restoration of Fianna Fáil to Government and the balance-of-payments crisis that accompanied the party’s return gave the mandarins in Finance the opportunity to revert to the virtuous way of economic orthodoxy. Seán MacEntee, back at Finance, was only too willing to help.
MacEntee’s sympathies are aptly demonstrated by the infamous 1952 budget – introduced on 2 April, up to then the earliest in the history of the state. The budget removed subsidies on bread, butter, tea, sugar, alcohol and petrol, and raised income tax by a shilling in the pound. Price increases ranged from 28 per cent for butter to 63 per cent for sugar, and even Maurice Moynihan, official historian of the Central Bank, called it a budget of ‘unusual severity’.27MacEntee justified the budget by pointing to the balance-of-payments situation. In the Dáil, he estimated that in the absence of corrective measures, a deficit of £50 million could be expected in 1952. He argued that:
[There] was no reason to think that the balance of payments will right itself spontaneously. The opening months of this year showed virtually no improvement … and it seems clear that, without an improvement in personal savings and a reduction in inflationary Government finance, the deficit in the balance of payments will remain excessive.28
In the Seanad, he further argued that the possibility of a very severe slump could not be ruled out.29Yet the economy was already in recession when the budget was introduced, and budgetary policy undoubtedly worsened the position. Indeed, current expenditure rose only slightly, while current revenue increased considerably. Furthermore, the balance on the Government’s current account went from a deficit of £4.7 million in 1951 to a surplus of £5.3 million in 1952, while the borrowing requirement fell from £35.5 million in 1951 to £32.2 million in 1952.
Budgetary policy had set out to reduce the current balance-of-payments deficit; in this, it succeeded and by the time of the 1953 budget, the balance-of-payments situation had been rectified. The economy was ready for a period of expansion, but the deflationists in the policy arena were not ready to change direction. There would be no somersault to an expansionary regime. MacEntee ended his budget statement with a note of what Tom Feeney calls ‘almost Churchillian confidence in the Irish people’:
We shall rely on our own people to provide by their industry and thrift the capital necessary to build up the nation. We relied on them before during stringent and terrible days. They did not fail us then and they will not fail us now.30
Reading it more than fifty years after its delivery, it invites comparison with Brian Lenihan’s concluding remarks during his October 2008 budgetary speech:
This Budget serves no vested interest. Rather, it provides an opportunity for us all to pull together and play our part according to our means so that we can secure the gains which have been the achievement of the men and women of this country. It is, a Cheann Comhairle, no less than a call to patriotic action.31
The 1952 budget is remembered for its removal of subsidies on food. An interdepartmental committee on food subsidies set up in October 1951 concluded that:
[They were] nothing more than a general supplement to incomes provided out of general taxation; they are a costly social service in which, however, the entire community shares without regard to individual income or need. There is no real justification for continuing this policy and in principle it would be desirable to abolish the food subsidies, provided arrangements are made to ensure that the weakest sections of the community do not suffer as a consequence.32
The abolition of food subsidies offered numerous advantages, according to the committee. In the first instance, the difficulty of financing exchequer commitments would be greatly eased by relief from ‘the enormous burden of food subsidies’. It would also restore more normal trading conditions, would foster efficiency, and help to ‘remove economic rigidity’. By allowing real costs of production and distribution to be reflected by prices to the consumer, a more normal price structure and pattern of consumption would be created. The committee further argued that the abolition of food subsidies would help to counteract the inflationary effects of any wage increases granted in the public and private sectors. MacEntee subsequently used the committee’s recommendations in a New Year’s Eve memorandum to the Government, which he concluded by stating that:
It is essential that the budgetary problems of 1952, already grave enough on the basis of existing expenditure, should not be further aggravated by allowing new commitments to develop. The Minister is very conscious of the difficult problems which he will be called upon to face … and he desires that every possible step should be taken to lighten his task in advance.33
Brennan, however, was not convinced that the Government was taking the financial position seriously enough, and contemplated retirement. After seeing MacEntee early in March, he wrote that:
[The minister] seemed to imply no intention on the part of the Govern-ment to arrest budgetary expansion of purchasing power. He said his budget would throw fresh light on the estimates which were meant to give the public a shock. When leaving I told him that I thought it would be far better to have someone else at the Central Bank … Met de Valera at 5.15 who talked about the political difficulties of handling of economic situation and about need of avoiding unemployment. I said inflation would not cure unemployment but make it worse.34
There is no record in Brennan’s personal papers of a specific response to the budget, but there can be little doubt that he approved of most of MacEntee’s final budgetary package, as did the official principally involved in the drafting of the budget – T.K. Whitaker – who wrote to MacEntee, at a time when MacEntee was ill, stating:
I could not let this opportunity pass without expressing my great admiration for the courage behind the 1952 budget and for your unsparing devotion to public duty when everyone would have had you executed.35
Tom Feeney – in his very fine biography of MacEntee (2009) – notes that the relationship between MacEntee and his officials in Finance was particularly strong, and makes the case that the quality of advice proffered to him ‘does not bear an overtly dissimilar philosophy to that underpinning the much lauded Economic Development six years later’.36Feeney also quotes Whitaker as noting that while MacEntee intended the budget of 1952 to be severe, ‘he did take on board the draft prepared for him’.37The final draft, however, met with almost unanimous disapproval from across the political spectrum, newspaper commentary and interest groups, all of whom held MacEntee very much responsible. The Leader initially saw it as ‘a bombshell’, and predicted that its after-effects would continue to dominate policy for the months ahead. Even more importantly, it saw Lemass as having been ‘sidelined’ in the economic policy debate that was being fought out within the party at the time.38Some months later, The Leader expressed its disenchantment with Government policy:
An economy with such a history of defeat as ours needs the stimulus for enterprise of material progress, and private capital investment suffers if this is not given while measures adopted to reduce the standard of living incidentally tend to frighten away external capital.39
The Statist was also unhappy with the budget, but claimed that all was not doom and gloom, noting that there was great scope for industrial advancement, especially in the field of light secondary industries based on agriculture. Agricultural output, it asserted, was far from its potential maximum, and, furthermore, the manpower was available to run profitable industries. There was a sting in the tail for the Government, however, when The Statist proclaimed that:
For British industrialists, with the capital to sink in new enterprises and the technical knowledge to run them, there would appear to be great opportunities for establishing themselves in Ireland to the mutual benefit of both countries.40
This was hardly a ringing endorsement of state policy in setting up indigenous industry.
A spanner in the machine
The budget enraged both the employers and the unions. Senator E.A. McGuire – president of the FUE – complained that though nobody liked food subsidies, the point was that they should only be abolished when it was possible to do so with the least possible upset to the social and economic life of the country. While the object of the removal of food subsidies was to lift a weight from the exchequer, he argued that it should be done in such a way that the burden was passed on to the consumer at a time when consumers were earning more wages or receiving direct reliefs from the exchequer approximating to what they had lost by the removal of the subsidies. While the budget was likely to go some way to solving the financial woes of the country, he said, it was socially undesirable, and he argued that the economy could be improved by an increase in wages that raised the purchasing power of workers:
Instead of siphoning purchasing power and drying it up, we should try to maintain and, if possible, increase purchasing power, I mean purchasing power on the part of the public. It is necessary to retain as much money as possible in circulation so as to develop and expand business, so as to create employment and keep our economy strong.41
MacEntee’s reasoning was that curtailing domestic demand – leading to a possible reduction in prices – would boost exports. He was acting on the assumption that earnings had outstripped the cost of living; consequently, it was believed, there would be no demand for wage increases as a result of the removal of food subsidies. This most definitely was not the case. McGuire believed that the Government had failed to get its economic policy right, and had left the employers to pick up the pieces of its failed policies:
What has happened is that the whole problem of the Budget has been thrown to the employers and into the arena of industrial relations generally at a time when we are already occupied with bad trade, unemployment, rising costs and higher prices … This is the problem that has been thrown to industry. It represents a very big spanner in the economic and industrial machine at the moment when employers are … preoccupied with keeping the business and trade of the country going.42
The trade unions were equally embittered by the budget. They claimed that there had been a 10.5 per cent rise in the cost of living in the past year, from 102 to 114 on the consumer price index. With the removal of food subsidies, the total rise would be 18 per cent. The ITUC calculated that if the rise in the cost of tobacco, alcohol and other commodities were included, the figure would be 25 per cent. It argued that since there was already a definite trend towards deflationary fiscal policy, it was essential that the budget should not accentuate this trend but, on the contrary, attempt to counteract and reverse it. MacEntee’s budget did, however, slash purchasing power, and followed almost religiously the policy advocated by the Central Bank in its 1951–52 report. Inevitably, the reduction in purchasing power hit the working classes hardest. The mirroring of the Central Bank report by MacEntee was noted by the opposition: James Larkin of the Labour Party declared ‘it was no unfair criticism to say that if the board of the Central Bank had … presented the budget, instead of the present Minister of Finance, there would hardly have been a comma changed’.43The ITUC was more vitriolic in its assessment:
A policy that results in increased unemployment is nationally suicidal and socially criminal. Yet this is precisely what will follow from the budget proposals. It may be that the Minister of Finance considers this preferable to running a deficit in our Balance of Payments and using up our external assets. If so we might remind him that all that needs to be done to wipe out the deficit entirely is to proceed to slash living standards still more savagely, it is as simple as that.44
The ITUC further argued that there was no reason why a Government budget deficit should have been completely ruled out, notwithstanding MacEntee’s assumption that it was ‘common ground’ that the current budget must be balanced. The running of a budget deficit was justifiable in a deflationary situation such as existed in this period, particularly when there was a threat of more serious deflation and given that the Irish economy was susceptible to external economic movements and trends. Ultimately, it was the contention of the unions that the greater part of the additional taxation required to rectify the balance-of-payments difficulties could have been raised in other ways. They proposed, for example, a combination of tax on profits, higher rates of surtax and estate duties, and a purchase tax on luxuries. These, they maintained, would have spread the burden of taxation more equitably. Dismissing MacEntee’s arguments, they insisted that:
Deflation, far from solving our problems, will aggravate them. Experience has taught us that a policy of deflation once initiated is self perpetuating being uncontrollable by politicians and bankers, and leading to slump and depression and endless misery.45
Finance rejected the ITUC’s arguments, stating that its case ignored the special benefits wage-earners derived from the Government’s policy in regard to social services, subsidies and housing. It did acknowledge ‘that even when a fall in the national standard of living is inevitable, certain classes in the community may be able to protect their own position or even better it at the expense of other classes’.46
Finance was extremely worried at any proposed wage increase, which it reckoned would add millions to personal expenditure, including expenditure on imports, thus making it impossible to check inflationary pressures, and which in the long run could only lead to a rise in unemployment. While this may have been true, this policy of deflation undoubtedly led to stagnation in the economy because the concern with maintaining external reserves took precedence over concern about unemployment and development.
The Central Bank maintained that the Government was on the correct financial track, and endorsed – albeit grudgingly – MacEntee’s actions, and urged him to continue in the same vein.47This brought the bank some unwanted and trenchant criticism. The Standard, in an editorial entitled ‘The Central Bank (mis) reports to you’, accused the bank of going beyond its remit:
It is difficult to avoid the view that the commentary has been given an emphasis which renders it largely political. Perhaps the most disquieting feature … is its political trend. The political party has come to be the supreme unit for consideration in the state, not excluding the family, and the Central Bank has insured its own continued overlordship in the state’s economy by the success it has achieved in setting off one political party against the other – divide and rule.48
There can be no doubt that Brennan was apolitical, and that his support of MacEntee’s deflationary budgetary was based on economic consider-ations. Denis Gwynn, writing in the Cork Examiner after Brennan’s retirement, offered what is surely the most perceptive interpretation: that Brennan and McElligott together ‘have presided with shrewd judgement and highly trained experience over the management of Irish public finance without regard to party politics’.49The Leader, in a profile of Brennan, aptly summed up his relationship with politicians:
He conceived it to be the special function of the civil servant to guard the professional politician against himself and his friends and, at the same time, to protect the interests of the people against both … Brennan is one who has served his country more than usually well.50
In the Central Bank report, Brennan stated that the views expressed in the previous year’s report had ‘lost none of their appositeness and indeed have been reinforced in urgency by the heavy deficit in the balance of payments’.51The fact that the report for 1950–51 had criticised so outspokenly the Inter-Party Government’s budgetary strategy while that for 1951–52 had supported Fianna Fáil policy does not reinforce The Standard’s position. No political party would ever have Brennan’s unqualified support, as he distrusted them all. The report, however, came in for criticism from newspapers around the country. The Cork Examiner noted that the report ‘seems to have been drawn up by or under the inspiration of a pessimist’, and argued that the ‘note of alarm in the report will not excite the Community, and not a few will hold that it has been overdone’, while the Evening Herald commented that even though there was a mild recession in the autumn and winter of 1951, ‘the industrial and commercial parts of the economy required careful nursing. Instead of which they have received very drastic treatment.’52In a political sense, de Valera during the 1954 general election campaign felt a need to publicly defend the aims of the 1952 budget, declaring that ‘our aim … was the simple one of making ends meet – of balancing current expenditure by current revenue, as any prudent person would do in his own private affairs’.53
By March 1953 Brennan patently had enough of all Governments – Inter-Party or Fianna Fáil – and decided to resign. He wrote to E.C. Fussell of the Reserve Bank of New Zealand, with whom he was in regular correspondence, outlining his position:
I have been in fundamental disagreement with our Governments for some time past on matters of monetary and financial policy and as there has been no sign of improvement but rather the contrary, I felt … reluctantly to go out at the end of the financial year. My board has consistently supported my views and both the board and the Finance minister pressed me to stay on but I felt unable to retain any responsibility in the circumstances.54
There is little doubt that Brennan’s resignation was felt deeply by his board. James Meenan, appointed in February 1949, considered Brennan’s retirement ‘a great loss to the public service, which, just now, has very few standards to judge policy by. But it is traditionally an ungrateful task to provide such standards’.55Brennan had intimated to the board and the Government in early 1953 that he wanted to step down. He told de Valera about his desire to resign. Both MacEntee and de Valera attempted to change his mind. MacEntee wrote to Brennan on the latter’s meeting with de Valera telling him the prospect of resignation was ‘as unwelcome to him [de Valera] as it is to me’.56
Brennan’s resignation was a watershed. The Central Bank had become indelibly associated with him. Those on the conservative side of the economic fence saw his departure as inflicting a mortal blow against their own side. Lord Glenavy pleaded with him not to go:
Even now I beg you to reconsider … to try to persuade you against what the members of the board consider will be a disastrous blow to the cause of monetary wisdom … The Central Bank is your creation. I do not think it would survive your going under present conditions. It may survive but it would have a long and maybe hopeless task in trying to recover from the blow of your departure. Two more years under you as Governor would make all the difference – knowing as well as you do what is involved can you not make the sacrifice of those years?57
Brennan, however, could not be dissuaded from his intended course of action. Once he perceived that his advice to Government was being disregarded, he felt he had no choice but to exit the public arena, and duly resigned on 31 March 1953. He was replaced by McElligott, with Owen Redmond becoming secretary of the Department of Finance.
Notwithstanding Brennan’s departure, economic policy remained conservative in orientation. McElligott and MacEntee were kindred spirits. McElligott paid him the highest compliment a senior civil servant could possibly accord an active politician when he wrote to MacEntee, then recovering from illness, in 1954:
You carry now as always my respect for your ingenuity and courage and my admiration for the single-minded manner in which you have served your country ever since I came to know you, nigh forty years ago and in different circumstances. If all Ireland’s sons were so devoted to her service how different would be her recent history.58
‘The glories of Puerto Rico’
While MacEntee may have earned the plaudits of similar-minded conservatives, Lemass took a somewhat different route. After the 1950–51 Central Bank report, he had attempted to distance himself and the Government from the bank.59MacEntee supported the thrust of Central Bank policy, as it was in accord with his own economic sympathies, and he managed to isolate Lemass. Prior to the budget, Lemass cautioned the Dáil about the possible dangers of pursuing deflationary policies, claiming that all developed countries were worried about the possibility of deflation:
Almost every country in the world which, like ourselves, was concerned at the beginning of this year or towards the end of last year, at the danger of the inflationary forces, which were then active, are now no longer worried, any more than we are, about the danger of runaway inflation. They are beginning to get much more worried about the possibility of deflation, of the downward spiral beginning to move.60
The dominance of MacEntee’s restrictive economic policy marginalised Lemass. This affected his role with the unions, as they and his urban constituents had to face a disproportionate burden of the belt-tightening impact of the budget. During the Fianna Fáil Government of 1951–54, Lemass and MacEntee fought out a battle within Cabinet to direct Government economic policy. There was a fundamental difference in their economic philosophies: MacEntee was an ardent conservative preoccupied with the idea of sound money; Lemass was an expansionist who believed in using the power of the state to encourage demand and investment. In September 1952 they argued about the possibility of raising a national loan to be used to encourage investment in the country. In reply to Lemass’ promptings on the necessity for such a loan, MacEntee asserted that his thesis lacked a sound basis: its premise was that Irish resources would support a much greater capital investment in Ireland if only the banks and other Irish institutions desisted from channelling them into British investments:
This is a misconception, beloved of propagandists to which the Stacy May Report has given spurious respectability. It is absolutely absurd as a basis for policy. First it is not true that Irish resources, in the form of current savings, are adequate to support present levels of investment in Ireland. The fact that we have had to draw so heavily on external resources for years is proof of that.61
The Stacy May report to which MacEntee referred was produced by the IBEC Technical Services Corporation, which was favourable to Irish industrial policy and to the setting up of the IDA in particular, but which was also very hostile towards agricultural and especially fiscal policy.62It advocated that policies to attract foreign industry and build up native industry should be pursued, notwithstanding costing criticisms by Finance and the Central Bank. As to the former, the report suggested that the Government should attempt to attract US capital in particular, and drew specific attention to the approach adopted by Puerto Rico. The impact of this report on subsequent industrial policy has been criticised by some who were involved in the Department of Industry and Commerce:
While the report put forward phrases like rifle selectivity rather than shotgun diffusiveness and held out the glories of Puerto Rico, where is Puerto Rico now? But everyone went for it. All you had to do was set up a suitable tax regime and foreign industries would come flooding in.63
While the expansion of native industry was stressed, in reality this aspect took a back seat to attracting foreign industry within the department. The attitude of ‘get the foreigners in to give us the jobs, while protecting our own’ became widespread. Stacy May, as the Economist pointed out in an article entitled ‘The Irish troubles’, noted:
… the astonishing degree of state control in the economy … this is due as much to the failure of private enterprise as to ministerial ambitions. A review of the principal groups of Irish industries allows them in general a greater degree of efficiency than they usually get credit for though the yardstick of comparison with the United States hardly seems helpful.64
Whilst the Economist might have thought that Irish industry was somewhat hard done by in the Stacy May report, the Department of Finance was appalled at the whole thrust of the document:
Although the report contains some helpful comments on financial matters it also contains quite a number of statements based on misconceptions and misinterpretations. In particular, the allegation is repeated several times in the report that the Irish banking systems (and the Government) are channelling Irish savings into the British Capital market in preference to retaining them in Ireland for domestic investment. It is obviously undesirable that this fallacy should be given a spurious respectability and a renewed currency by publication of the Stacy May report.65
The Department of Finance demanded that the report not be published, but de Valera overruled its objections. It was a rare example of the ‘Chief’ allowing what amounted to hostile criticism of something indigenously Irish. He did not have to look into his heart to see that the industrial fabric of the country was not in a healthy state. De Valera famously wished that his people could live off the land, and lead happy, frugal lives – something he still seemed to believe was possible in the Ireland of the early 1950s. In 1951 he was adamant that:
Work is available at home, and in conditions infinitely better from the point of view of both health and morals … There is no doubt that many of those who emigrate could find better employment at home at as good, or better, wages – and with living conditions far better – than they find it Britain.66
Yet he must have realised that industrial development was a necessity if his country was to have any chance of keeping its place among the nations of the earth. That is the only possible explanation for his willingness to have the report issued. IBEC had drawn attention to the low productivity of Irish industry, and attributed this to the low level of investment in plant and machinery. The mandarins in Finance and their acerbic minister were not convinced.
This lack of conviction when it came to any type of capital spending was vividly on show in 1953 when Lemass put proposals before the Government to pursue an expanded capital programme by means of a national development fund of £5 million, to be replenished in each financial year. Finance was horrified. MacEntee’s response shows him to have been in typical balanced-budget mode. As guardian of the nation’s money, he was not willing to fund industrial development if it meant that his achievements of stability in prices and money values were to be sacrificed at the altar of capital investment:
There is reason to fear that the decision of the cabinet committee in the field of expenditure have given rise to the belief that the ‘lid is off’ and that the economy is no longer to be seriously thought of in connection with existing services or with proposals for new ones. Such an attitude can only encourage avoidable spending. In the absence of increased tax, the additions of the current items in the £5 million, together with the interest charges for borrowing, makes it virtually certain that the 1953 budget will be in deficit. In any event, if next year’s budget is to be balanced, additional taxation will be inevitable for the current items and to service the borrowing, including the carry over of temporary borrowing from this year. For all these reasons, the Minister for Finance views with the utmost anxiety the proposal to add £5 million to the borrowing programme.67
The Central Bank was equally upset by the proposals: ‘is not the whole situation being approached from the wrong angle?’ it asked. ‘Government expenditure is no cure for unemployment. The lesson of past history is that the private sector of the economy is depressed by high rates and taxes.’ The bank insisted that there was already evidence of inflation in the economy, and that the new proposals would add to inflationary pressures: ‘the effect of new expenditure on employment is transitory but a dead weight debt and taxation are added too for a long time’.68
Lemass saw the national development fund operating within the protective sphere for Irish industry. As the architect of the Irish protective system set up in the 1930s, he was not yet willing to commit himself fully to completely abandoning it in favour of a policy of free trade. While he did realise the need for export-led growth, for the immediate future it would have to be within a protectionist framework. Furthermore, there was nobody in the Department of Industry and Commerce who was willing to question the very essence of protection. MacEntee, however, objected to the commitment to protection on the grounds that it prevented Irish industry from seeking export markets, and he believed that Lemass was mistaken in his view that Ireland could generate growth to absorb the unemployed. As we have seen, however, Irish industry in the early 1950s was not exactly excited by the option of aggressively pursuing export markets. Moreover, MacEntee did not put forward an alternative strategy for providing employment other than to call for low inflation, low taxation and low public spending in order to foster an enterprise culture. An injection of new money, he argued, would not be the cure for the country’s economic ills. Ultimately, the Department of Finance and the Central Bank still saw agricultural exports as the mainstay of the Irish economy. What was needed, they argued, was an expansion of real production, particularly of agricultural produce that could be exported at competitive prices. The development fund, they protested, would only defeat the very purpose it was designed to serve.69The growth of capital expenditure, they believed, would have serious implications for the stability of the agricultural sector. Despite these strenuous objections, de Valera and the Government sided with Lemass and accepted the need for such a fund. It came into operation in December 1953, and lasted until March 1957.
The disagreement over the development fund was just one of a number of disputes over economic policy in the lifetime of the Fianna Fáil Government. In late 1952 Deputy Michael Moran urged that a ‘special meeting be held in the near future for a full discussion of Government policy’.70A meeting of the full Fianna Fáil parliamentary party in January 1953 was consequently devoted entirely to economic policy. During the course of the discussion, de Valera explained that the policy of the Government was ‘to pay its way and that any additional services called for by the people could only be paid for by taxation’, and he stressed that ‘increased production – principally from the land – was the remedy for most of our problems’.71While this was quintessential Fianna Fáil policy, it did not satisfy all within the party, and within six months a motion sponsored by twenty deputies was put before the parliamentary party; it declared:
The party is of the opinion that in present circumstances a policy of financial austerity is no longer justified, and requests the Government to frame a progressive policy suited to the altered situation, with a view especially to putting an end to the undue restriction of credit by the banks, and making low interest loans available for farmers and house purchasers.72
The debate that followed this motion lasted through July, and – no decision having been reached – was postponed until after the summer recess. The topic, however, was not discussed again until January 1954. The minutes of this particular meeting are brief, simply declaring that:
After a number of teachtaí had contributed to the debate, the acting Minister for Finance, Proinsias Mac Aogain, replied and An Taoiseach made a comprehensive statement on the party’s general financial and economic policy, Deputy Carter withdrew the motion on behalf of the teachtaí who signed it.73
The minutes do not indicate whether Lemass was involved in backing the motion. What is clear, however, is that it echoed what he had been arguing since Fianna Fáil regained power in 1951. The development fund was a rare victory for Lemass during this period.
There is no record in the Fianna Fáil parliamentary party minutes of further discussion regarding economic policy until January 1957, by which time the second Inter-Party Government had almost run its course. The attempts by some deputies to place Government economic policy on an expansive footing did not succeed, as financial policy continued to be restrictive, notwithstanding the launching of the development fund.
Recession? What recession?
As Lemass attempted to regain some of the policy initiative within Fianna Fáil – through the fund – he also set about rebuilding his relationship with the unions, which had taken a beating of sorts following MacEntee’s 1952 budget. In July 1953 he and de Valera held a meeting with the ITUC and the Labour Party at which Lemass denied that Ireland faced a recession. He did, however, use the occasion to recommend to the Government the need for significantly increased public expenditure. His policy objectives in employment were strikingly similar to those of both the ITUC and the CIU, as was his preferred means of achieving them: massive state intervention.74For the next four years, Lemass – in opposition for most of them – was to retain his commitment to state-led economic intervention. Calling for a new expansionist programme that would challenge the Irish banking system to play a greater role in the economy, he offered a critique of restrictive practices and protectionism, and – most significantly – urged foreign capital to invest in Ireland. The latter was something that both the unions and the employers were calling for. Aodogan O’Rahilly, a major industrialist of the time, maintains that the aim of economic policy in the 1950s should have been to encourage all manufacturing enterprise, both Irish and foreign, and contends that Lemass-type inducements to outside investments could have been started earlier.75While some investment incentives had been put in place, at the domestic level Irish businessmen were still very reluctant to attempt anything new in either production or marketing terms. The files of the Department of Industry and Commerce are full of applications for more state protection and higher tariffs on imported goods up to the early 1960s.76Between 1952 and 1957, An Foras Tionscal received only 249 applications, of which seventy-five were approved and thirty-nine fully realised. It has been estimated that 1,700 jobs were created at an estimated cost of £460 per head.77
Throughout the 1950s, the IDA encountered considerable difficulty in encouraging foreign companies to locate in Ireland. Most of these companies had not considered the possibility of setting up in Ireland, while those who had were frequently discouraged by the Control of Manufactures Acts.78The IDA did, however, see that export-led growth in an increasingly competitive world was the only way to expand and develop the Irish economy. Lemass in opposition had, as we have seen, recognised this, but he also acknowledged the constraints that were placed on those trying to develop Irish industry; thus, he began to reformulate his ideas once back in Government in 1951. As Seán Cromien points out:
Irish industrialists of the 1950s really were not very dynamic. They had low taxation, and at the slightest hint of competition they came back looking for a higher tariff. So there was a worry that these were not the type of people who were going to revitalise the Irish economy. That is why there was such an emphasis on bringing in investment from outside. There was quite a change of heart on the part of Lemass, who had been the architect of protection but who had quickly come to realise that it was necessary to allow foreign industry in to participate in and own Irish industry.79
Yet state-led enterprise was not something the employers viewed with any great enthusiasm. It was valid that efforts be made to attract industry, but any infringement on private enterprise was to be avoided. As E.A. McGuire, writing in 1951, asserted:
All efforts of Government should be directed to a widespread distribution of private ownership, and nothing should be done by the state that will unnecessarily penalise or discourage the ideal of large numbers of persons being engaged in small business, or individual enterprises of any kind … it is essential that state control and interference be limited to the minimum, and that the fullest encouragement should be given to the formation of vocational groups in the community which will be urged to take an active part in the carrying on of the life of the nation.80
Whether any Government – be it Fianna Fáil or Inter-Party – would involve the various groups remained to be seen, yet it is noticeable that an economic realignment of sorts was being encouraged by industrialists such as McGuire. It would take some time for this idea to find its way into the mainstream of Irish political discourse, but it would have its day towards the end of the 1950s, when the Irish body politic grappled with yet another economic crisis.
1 Dáil Debates, vol. 120, col. 1629, 3 May 1950.
2 Lynch interview.
3 Lynch interview. Keynes’ Finlay lecture is reprinted as John Maynard Keynes, ‘National self-sufficiency’, Studies, vol. xxii, no. 86 (June 1933), pp. 177–93.
4 Fanning, Department of Finance, pp. 457–8; also Lynch interview.
5 Lynch, ‘Irish economy’, p. 187.
6 NLI, Brennan papers, MS 26 383, McGilligan to Brennan, n.d., but by context c. mid-1950.
7 J.J. Lee, Ireland 1912–1985, pp. 312–13.
8 NLI, Brennan papers, MS 26 240, annual report of the Central Bank, 1949–50.
9 NLI, Brennan papers, MS 26 240, annual report of the Central Bank, 1950–51.
10 For a vivid account of both views, see Moynihan, Currency and Central Banking, pp. 374–85.
11 Irish Press, 24 Oct. 1951.
12 NLI, Brennan papers, MS 26 240, trend of external trade and payments 1951, 23 Oct. 1951. MacEntee maintained that the Government paper showed the correctness of the Central Bank’s position.
13 Dáil Debates, vol. 127, col. 300, 7 Nov. 1951.
14 MacBride went public with his protest, writing to the Irish Independent on the folly of the Government’s position; see his letter of 25 Oct. 1951.
15 Dillon is quoted in the Sunday Independent, 28 Oct. 1951.
16 The ITUC’s response is given in Moynihan, Currency and Central Banking in Ireland, pp. 379–80.
17 NLI, Brennan papers, MS 26 241, McElligott to McGilligan, 17 Feb. 1951.
18 Ibid.
19 Ibid., memorandum for the Government, third report of the OEEC, 15 Mar. 1951.
20 Noël Browne, Against the Tide (Dublin, 1986), p. 200.
21 Cromien interview.
22 Browne, Against the Tide, p. 200.
23 John Horgan, Noël Browne: Passionate Outsider (Dublin, 2000), p. 285.
24 T.K. Whitaker, quoted in Fanning, Department of Finance, p. 458.
25 Ibid., p. 459.
26 NLI, Brennan papers, MS 26 241, memorandum for the Government, financial policy, 16 Oct. 1951.
27 Moynihan, Currency and Central Banking in Ireland, p. 390. Moynihan was a director of the Central Bank from 1953 to 1960, and governor from 1961 to 1969. From 1937 to 1960 he was secretary to the Government, and is historically regarded as a fiscal and social conservative.
28 Dáil Debates, vol. 130, col. 1123, 2 Apr. 1952.
29 Seanad Debates, vol. 40, col. 1648, 19 June 1952.
30 Tom Feeney, Seán MacEntee: A Political Life (Dublin, 2009), p. 186; Dáil Debates, vol. 130, col. 1155, 2 Apr. 1952.
32 Interdepartmental committee on food subsidies to Minister for Industry and Commerce, n.d., but by context early 1952, NLI, Brennan papers, MS 26 428. This committee consisted of chairman J. Williams (Industry and Commerce), T.J. Barrington (Local Government), P.J. Keady (Social Welfare), M.D. McCarthy (Central Statistics Office), J.C. Nagle (Agriculture), T.K. Whitaker (Finance) and secretary to the committee, M. Morton.
33 NLI, Brennan papers, MS 26 428, memorandum for the Government, food subsidies, 1952–53, 31 Dec. 1951.
34 Ibid., MS 26 040(1), untitled file dated 3 Mar. 1952.
35 UCDA, MacEntee papers, P67/227, Whitaker to MacEntee, 2 June 1954.
36 Feeney, MacEntee, pp. 179–80.
37 Ibid., p. 180.
38 The Leader, 12 Apr. 1952.
39 The Leader, 2 Aug. 1952.
40 The Statist, 19 Apr. 1952.
41 Seanad Debates, vol. 40, col. 1628, 19 June 1952.
42 Dáil Debates, vol. 130, col. 1315, 3 Apr. 1952.
43 Ibid.
44 NAI, Irish Congress of Trade Unions Archive, box 33 (part 1) 7222, statement on budget issued by National Executive, 21 Apr. 1952.
45 Ibid.
46 Quoted in Fanning, Department of Finance, p. 485.
47 NLI, Brennan papers, MS 26 435, annual report of the Central Bank, 1951–52.
48 The Standard, 28 Nov. 1952.
49 Cork Examiner, 3 Apr. 1953.
50 The Leader, 5 July 1952.
51 NLI, Brennan papers, MS 26 435, annual report of the Central Bank, 1951–52.
52 Cork Examiner, 20 Nov. 1952; Evening Herald, 20 Nov. 1952.
53 Eamon de Valera, ‘An election broadcast’ (14 May 1954) in Maurice Moynihan (ed.), Speeches and Statements of Eamon de Valera (Dublin, 1980), p. 567.
54 NLI, Brennan papers, MS 26 041, Brennan to Fussell, 22 Mar. 1953.
55 Ibid., Meenan to Brennan, 21 Apr. 1953.
56 Ibid., MacEntee to Brennan, 6 Jan. 1953.
57 Ibid., Glenavy to Brennan, 7 Jan. 1953.
58 UCDA, MacEntee papers, P67/224, McElligott to MacEntee, 11 Mar. 1954.
59 See his speech to the Dáil on the report: Dáil Debates, vol. 127, cols. 298–316, 7 Nov. 1951.
60 Dáil Debates, vol. 130, cols. 241–2, 21 Mar. 1952.
61 NLI, Brennan papers, MS 26 040 (2), MacEntee to Lemass, 27 Sept. 1952. Feeney, MacEntee, p. 191 states that the Stacy May reported was submitted to the Government in 1952, but judging by this letter in late September, there is the possibility that the Government may have seen some sight of it earlier than that.
62 IBEC Technical Services Corporation, An Appraisal of Ireland’s Industrial Potential (Dublin and New York, 1952).
63 Confidential source.
64 Economist, 6 Dec. 1952.
65 NAI, DT, S.15389, Finance to Industry and Commerce, 27 Oct. 1952.
66 De Valera is quoted in Diarmaid Ferriter, Judging Dev: A Reassessment of the Life and Legacy of Eamon de Valera (Dublin, 2007), p. 285.
67 UCDA, MacEntee papers, P67/221, Department of Finance observations on establishment of a National Development Fund, 25 Aug. 1953.
68 UCDA, MacEntee papers P67/221(3), observations of Central Bank on National Development Fund, 24 Aug. 1953.
69 Ibid.
70 UCDA, P167, Fianna Fáil parliamentary-party minutes, 441/A, 26 Nov. 1952.
71 Ibid., 14 Jan. 1953.
72 Ibid., 22 July 1953.
73 Ibid., 27 Jan. 1954.
74 NAI, DT, S.13101C/1, report of meeting between ITUC, the Labour Party and the Taoiseach and Tanaiste, 4 July 1953.
75 O’Rahilly interview.
76 The TID 2600 file series of the department shows manufacturers of a wide range of products inundating the department with applications for increases in tariffs on imported opposition. The TID 1207 ‘Control of Manufactures Acts’ files has in its index over sixty pages of files on questions from various manufacturers on how any removal of duties would affect their businesses.
77 Girvin, Between Two Worlds, p. 180.
78 The Control of Manufactures Acts, 1932–34 attempted to ensure that companies established behind the increasing tariff barriers of the 1930s and the numerous quota and licensing restrictions would remain under Irish control by requiring that more than half the equity of new firms should be Irish-owned. For a detailed analysis of the Acts, see Mary Daly, ‘An Irish Ireland for business? The Control of Manufactures Acts, 1932 and 1934’, Irish Historical Studies, vol. xxiv, no. 94, Nov. 1984.
79 Cromien interview.
80 E.A. McGuire, ‘Private enterprise or socialism?’, Irish Monthly, Oct. 1951, pp. 424–5.