Sins of the Father (19 page)

I am not of the opinion that the whole agricultural problem of this State can be met by credit, but I am of the opinion that the question of credit is one of the problems we have in connection with agriculture, and it must be dealt with amongst other problems which the commission has to deal with.
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The motion was defeated, but the doubts about the interests of the commission remained. In the words of a farmer at a rally in Tullamore, the Banking Commission ‘was purely a commission of bankers’.
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The commission held its first meeting on 9 March 1926 and on 16 April it produced its first interim report. It had heard from less than a dozen witnesses.
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In September, it presented the second, third and fourth interim reports to the government, although these were not published until December. In January 1927, the main findings, including a majority and minority report, were finally released. ‘The general public will be relieved to find that the majority report contains no revolutionary proposals,’ wrote
The Irish Times
. ‘A new currency system is recommended but the commissioners lay the upmost stress on the necessity of an unequivocal basis in British sterling.’
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The commissioners took nine months to release a report, the conclusions of which had been reached after less than six weeks. They had been able to do so, they said, because of the personnel who sat on the commission. ‘Our body included within its members several bankers of long and tried experience, thoroughly familiar with local conditions, in close touch with banking and financial interests, and hence able to assure us of the view of that element of the community.’ This meant that the commissioners were ‘obviated [of the] necessity of lengthy hearings which might otherwise have been needful with a view to ascertaining the actual state of opinion among bankers’.
¹⁰
The commissioners, it turned out, already had all the answers. There was no need to investigate. As with Éamon de Valera, who famously said that he need only to look into his own heart to know what the Irish want, the commissioners only needed to search their own hearts to investigate Irish banking. And that’s exactly what they did.

The report was quick to outline what it saw as the main strength of the Free State’s currency – namely the parity link with sterling:

In every newly organised state the fundamental problem of exchange which must be dealt with is that of a monetary or currency standard. The Saorstát has encountered no difficulties on this score … as its monetary basis has been identical with that of Great Britain [which] has been since the close of the war by far the most sound and stable nation, speaking in a financial and monetary sense, in the European world.

The commissioners recommended the installation of a new currency in the Free State, but one which ‘shall be stated in terms of sterling, thus accepting the British standard of value for Saorstát Éireann, and that it shall be convertible at par into British sterling’. It made the argument that parity was essential ‘in order that there may be no interruption to the comparatively free interchange of money and notes between the two countries, and no shock to the present system of inter-communication between the two, upon a uniform currency basis or standard’.

According to the commissioners, the State had the option of tying the Irish currency to the gold standard, but this was in no way desirable because of the level of trade between the Free State and the UK:

The Saorstát is now, and will undoubtedly long continue to be, an integral part of the economic system at the head of which stands Great Britain. As the result both of centuries of parallel development and of the natural division of labour between an area predominantly agricultural and an area predominantly industrial, the Saorstát will undoubtedly continue for an indefinite period to find the great bulk of its market for exports in Great Britain.

Today more than 95 per cent of its export trade is with British territory, and while the proportion of its business going to other parts of the world will undoubtedly increase, as it should, many years must elapse before it can have with any other part of the world, or with all combined, an economic relationship at all comparable to that which it at present has with respect to Great Britain.

As we saw with the history of cattle breeding as an industry in Ireland, there was nothing ‘natural’ about the division of labour between industrial Britain and the agricultural Free State. Nor was sterling a particularly secure or safe currency, having been tied to the gold standard in 1925 at an overvalued rate. In May 1926 the UK experienced a ten-day general strike – the first in its history – which was caused in part by the government’s moves to deflate the economy via wage restrictions on the back of the gold standard measure.

The commissioners said that the reasons to maintain parity with sterling ‘need but little exposition’. There is little, if anything, in this world, however, which does not need explanation. All too often, appeals to ‘common sense’ or the ‘self-evident’ nature of an argument are simply covers for the status quo. The commissioners were reluctant to explain their reasons because it suited Irish banks with deposits in London to have an expensive currency to sell. It did not suit the national economy of a newly formed state. And the Banking Commission was supposed to have the interests of the State at heart, not just its bankers. Its recommendation to tie the Irish currency at a 1:1 ratio to the wealth creation of a foreign country, not to the wealth creation of the State, was to have serious implications for the economic development of the State over the next forty years.

The 1:1 ratio had already forced a series of deflationary budgets. The move to cut the old age pension and public sector wages in 1925 was influenced in part by monetary policy – the Banking Commission’s recommendations were for a continuation of policy, after all, not innovation. In 1927, the government announced that it had accepted the commission’s proposals and that year it set up a Currency Commission which was mandated to administer the parity of the Irish pound with sterling. Deflation, poverty, and emigration followed in the wake of that decision.

In 1931, less than four years after the Banking Commission had tied the Irish pound to ‘The most sound and stable nation’ in Europe, the UK broke from the gold standard and devalued its currency. It was not the only country to undertake such a measure during this period – Sweden, Norway, Denmark and India all abandoned the gold standard around this time. However, because of the parity link, the Free State was forced to follow sterling to its new value, regardless of the financial realities in Ireland at the time.

The leader of the Irish government, William Cosgrave, responded to the financial crisis not by disentangling the Irish pound from sterling, but by appealing to patriotism and calling on the Irish people to purchase Irish goods. ‘Let us see to it that our courage and our energy are not wanting in the time of national necessity,’ he told a civic carnival banquet in Limerick in October 1931, ‘to keep the name of our country in the forefront for being able to meet whatever demands may be made on us in difficult times.’
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The increase in tariffs undertaken by the government at this time was in direct response to similar moves by Britain. In order to avoid the Free State becoming a dumping ground for British goods, it needed to put a marker on imports. In 1933 the World Monetary and Economic Conference in London passed a resolution which called on the establishment of independent central banks with powers to carry out currency and credit policy in developed countries where they did not already exist. It was becoming clear that the Free State’s avoidance of a central bank was out of step with the rest of the developed world.

On 26 October 1934, the Minister for Finance, Sean McEntee, announced the appointment of a commission to inquire into banking, currency, and related matters in the Irish Free State. Its personnel represented a wide range of Irish society, ‘There were five university professors, five civil servants, three bankers, two trade unionists, two agriculturists, two representatives of general business and trade interests, one Roman Catholic bishop and one foreign expert.’
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It held over 200 meetings and took four years to produce its report. It was finally released in October 1938 and found that while a central bank should be established, parity with sterling should also be maintained, and government borrowing should be curtailed. It also rejected the suggestion that a nationalised bank should be established to provide credit for the expansion of the economy. The commission took four years to conclude that the status quo offered the best solution to the problems facing the Irish economy.

The commission also produced a minority report, which was signed by Professor O’Rahilly and the two trade union representatives, William O’Brien and Sean Campbell. They stated that they could not:

… acquiesce in the extraordinary view that this country, alone amongst the responsible entities of the world, should not ever have the power to make decisions, and that no apparatus or mechanism for controlling the volume and direction of credit should ever be brought into existence … We need an organ for the issue and control of developmental credit … That is our fundamental conclusion, and the only thing startling about it is that it was not accepted sixteen years ago.
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It was testimony to the power of the banks in the Free State that, after sixteen years, two commissions, and one international financial crisis, their ability to dictate the pace and direction of Irish economic growth to suit their own business agenda to the detriment of almost all other aspects of Irish economic and social life remained undaunted.

One of the main recommendations of the Second Banking Commission – the establishment of a central bank – was not implemented until 1943. A central bank, the commissioners said, ‘has to ensure the maintenance of external stability, to take care of the monetary reserves of gold and foreign exchange, and have certain means of influencing the currency and credit position within the country’.
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It undertakes these responsibilities in order to assist the development of the economy, and to act as a stabiliser between the right of banks to sell credit, and the right of businesses to trade. As far as the developed world was concerned, a central bank was not seen as a luxury but as an essential element of monetary policy. The failure of Fianna Fáil to establish a central bank led to accusations that the banks, rather than the government, were setting economic policy. ‘It is all nonsense to say that we are merely creatures of the banks,’ said de Valera in 1939. ‘We can pass a law at any time to control the banks or to sever parity with sterling. We can do all these things. It is merely a question of whether it is wise or unwise to do them.’
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Three years and the outbreak of a world war later, the Central Bank Bill was brought before the Dáil.

The board of the Central Bank of Ireland met for the first time on 1 February 1943. The chairman was Joseph Brennan, who was the chairman of the Currency Commission prior to its disbandment. One of the few surprises was the appointment of William O’Brien to the board. O’Brien, who had signed the minority report in 1937, was also a member of the Labour Party, which had been severely critical of the legislation which established the Central Bank. Within the year, O’Brien left the Labour Party and helped form the breakaway National Labour Party – the resulting split a boon to Fianna Fáil’s electoral fortunes in 1944.

The Central Bank was given the responsibility of protecting the purchasing power of the Irish pound and regulating the issue of credit in the interests of the nation. The board made it clear that there would be no change in monetary policy. On 18 September 1949, sterling was devalued by 30 per cent. In 1951 the Ibec Report, which had provided such a succinct and devastating analysis of Irish trade, also looked at the State’s monetary policy. As with the cattle trade, it found the practices of the Central Bank difficult to fathom.

The decision by the Central Bank in 1943 to continue with the policy of investing the State’s currency ‘primarily in British exchequer bills, with the rest of the 100 per cent coverage provided by gold bullion’ was heavily criticised by Ibec.
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It said that ‘The fact that the Central Bank has made no use of its statutory power to invest its legal tender reserves in Irish government securities has handicapped the development of an active domestic capital market in Ireland which is one of the country’s primary needs.’ This emphasis on the purchase of sterling notes didn’t make any commercial sense. Ibec noted that were the Central Bank to purchase British government securities as opposed to exchequer bills, the higher yield in interest payments afforded by the former would yield at least £500,000 a year in revenue. ‘The commercial banking system of Ireland, as well, has shown a similar tendency to operate in a fashion that channels Irish deposit funds into the British market rather than retaining them in Ireland for domestic use.’
¹⁷
Ireland needed to boost its means of increasing its volume of physical capital formation. ‘Unless this is done,’ wrote Ibec, ‘it is difficult to see how any development of Irish industry and agriculture sufficiently vigorous to keep pace with outside competition can take place.’ Not only did Ireland need to increase capital formation, it had to ensure that such capital went on productive enterprises. (It may be recalled that Ireland had spent the bulk of its grants and loans from the Marshall Plan on land reclamation, rather than on specialist cattle breeding, or an expansion of indigenous export-led industry. More grazing for Shorthorns. That was the essence of the plan.)

As far as Irish banking was concerned, the move to bring foreign industry to Ireland helped to kill two birds with one stone. It would allow the economy to expand, but without any need to change monetary policy. This was because the much-needed capital formation would not come from the Irish pound. Any move to expand Irish credit on a level needed to develop the economy would put pressure on the parity link, as such capital formation would weaken the ‘value’ of the Irish pound. This is a necessary procedure in order to expand an economy; credit is used to develop productive enterprises which in turn will create more value than that initially provided by the credit. However, such a move would mean the end of an expensive, and groggy, Irish pound – a sluggish currency that creaked under the weight of its sterling link.