In Search of the Promised Land

by Gary Murphy

  Consequently, when the first Inter-Party Government took office, it endeavoured to do too much too soon. According to Patrick Lynch:

  If dissatisfaction about the cost of living appeared to be the cause of the defeat of the Fianna Fáil Government in 1948, the fate of its successor, the Inter-Party Government, in 1951, was also to be associated with problems of rising prices resulting from inflation. No doubt, Mr de Valera might have made the distinction, with which I would agree, that in 1951 the Inter-Party Government was to be the victim of its own inflation, whereas the inflation between 1946 and 1948 had been imported at a time when the Fianna Fáil Government had little choice in the matter.22

  Or, as the first Inter-Party Government’s Minister for Finance, Patrick McGilligan, noted in 1956:

  Most of the difficulties of the recent past are due to Governments in 1948–51 and since 1954 trying to do too quickly what could and should have been done leisurely and safely over a 20 year stretch.23

  The Inter-Party Government was comprised of elements with sharply diverse views, ranging from the more interventionist, left-wing perspective of Labour, National Labour and Clann na Poblachta, to the rural emphasis of Clann na Talmhan, and the economic liberalist and middle-class outlook of James Dillon and Fine Gael. Taoiseach John A. Costello appointed Patrick McGilligan as Minister for Finance – a man famous for his 1924 remark in the Dáil that: ‘There are certain limited funds at our disposal. People may have to die in this country and may have to die through starvation’.24

  McGilligan had to deal with an economy with major deficiencies in its social and infrastructural facilities. Savings, which had been relatively high during the war because of the shortage of consumer goods, had declined considerably; in 1947 total savings amounted to only 4.5 per cent of gross national product (GNP), and personal savings in the same year were virtually zero. Manufacturing industry accounted for less than 20 per cent of total employment, and much of this owed its existence to the protectionist policies of the 1930s. Furthermore, most industry had not yet sought export opportunities.25Adding to this problem was the fact that there was comparatively little overt tradition of entrepreneurship, and that prospective capitalists faced considerable difficulties in raising capital. A businessman who began his career in the 1940s sums up the situation:

  There just were not many businessmen with the entrepreneurial drive who were willing to take a chance. Capital was difficult enough to raise, but people just did not think of going into industry to make a big profit. Protectionism was so complete, with no danger from outside, that if you had a market, you had it tied up completely. Yet there just were not many big businessmen with the get-up-and-go mentality. By the 1950s industry was still being promoted on the basis of the old Sinn Féin policy that we had to be independent and we could only be independent if we had our own industries, and it was more that than any thought of being able to develop large companies that we have now. This applied to politicians as well as businessmen.26

  In essence, very few of the firms created since independence could survive without the protectionism that had brought them into existence. They were relatively small, unsophisticated and based on local markets. Within this protected sphere, ‘profitability and wages were high, inefficiencies endemic’.27Ireland did, however, have important assets from a developmental viewpoint, most notably a large supply of labour and a sizable accumulation of external reserves that had been built up during the war. In these circumstances, there was a case for an expansionary fiscal policy and a direct state contribution to raising the investment rate. This was not how the mandarins in the Department of Finance saw the situation. A week before John A. Costello was appointed Taoiseach, J.J. McElligott, the imposing secretary of the Department of Finance, wrote to the outgoing Minister for Finance, Frank Aiken, outlining the bleak economic situation:

  The position regarding state debt and capital outlay gives ground for anxiety. The state debt already large and for the greater part non-productive is undergoing rapid increase. The heavy new commitments which are being constantly added will necessitate a further rise in taxation which has already reached an intolerable height. The resultant budgetary difficulties are accentuated by the charging of an unduly low rate of interest to such capital works as are productive. Our serious balance of payments position is bound to be worsened as a result of heavy imports for state capital projects which do nothing to raise our alarmingly low export capacity.28

  For the Department of Finance, this capital expenditure entailed not only an immediate but also a continuing outlay on hard-currency imports. Capital commitments were being undertaken at a rate greatly in excess of the current savings of the community, and were thus a strong reinforcement of inflationary pressures. McElligott argued that through their effect on domestic purchasing power, these commitments aggravated Ireland’s tendency as a nation to spend beyond its means, and that the situation would be a lot worse but for the existence of sterling assets upon which the country was drawing to meet its excessive expenditure on imports of consumer goods. Domestic production – which in the view of the Department of Finance was the ultimate measure of the country’s capacity to consume and to undertake capital investment – was below its 1939 level both in agriculture and industry as a whole, including building, and the prospects for improvement were not encouraging.

  Yet the new Inter-Party Government did not quite see the financial position in the same light. Lord Glenavy, governor of the Bank of Ireland and a member of the board of the Central Bank, and James Dillon, Minister for Agriculture, communicated regularly throughout the first Inter-Party Government’s period in office, and their correspondence regarding the state of the economy is illuminating. Although Dillon was something of a maverick within the Government, he had a definite view on the way economic policy should be shaped, and argued his case trenchantly both within the Cabinet and beyond. A letter from Dillon regarding the Central Bank report of 1948 shows how the Government viewed the situation; the bank, according to Dillon, had implied that the Government was both ‘ignorant and incompetent’, but he felt the ‘boot was on the other foot’:

  The net surplus of external assets cannot be much less than twice as great as they were in 1939. Our national debt is trivial compared with that of any other nation in the world. We are almost alone outside of the United States in meeting our requirements from our own purse. We have virtually no damage to capital assets to restore. In fact we are in a state of disgusting affluence and our principal danger is that instead of spending wisely we may either squander our resources or scrooge-like gather our seedy rags around us and count our wretched chattels as deflationary poverty gradually settles in gloom around us.29

  Dillon disliked both options, and claimed that the Government would adopt neither. Nevertheless, he stated that if he had to choose between the two, he would prefer to ‘go down with my flags flying and the band playing rather than to sink in dismal dereliction so dear to the hearts of the Central Bank’.30In response, Glenavy argued that to believe that the Second World War had brought the country affluence was delusional. Net sterling assets were nominally twice as great as in 1939, but since prices had doubled, ‘they are worth no more than in 1939, a time when representations were being made to the Government that they had fallen to an undesirably low level’. Monetary authorities, he insisted, ‘are bound to indicate pitfalls, the primrose path needs no pilot’.31

  Sterling: asset or hindrance?

  The question of sterling assets was a particularly thorny one. Patrick Lynch, who was appointed personal advisor on economic issues to Costello on the recommendation of McElligott, was a critic of the Central Bank’s policy on the issue:

  Here we were building up a great quantity of sterling assets, a much bigger quantity than the banks needed at a time when the value of sterling was progressively decreasing. There was a very strong case therefore for the repatriation of sterling assets to counteract the chronic under-investment in Ireland. There was immense scope fo
r very useful investment and I was using Keynesian arguments to support my own arguments for investment in the Irish economy which had been so under-developed because of the conditions left by the war.32

  Naturally, Clann na Poblachta – whose economic policy included a demand for the repatriation of external assets – was also severely critical. Its acerbic leader, Seán MacBride – who had a very keen interest in economic policy – was most outspoken. At a meeting of the Cork city branch of Clann na Poblachta in September 1949, he declared that:

  If even a fraction of the money which had been poured down the drain of sterling assets and thus irretrievably lost had been utilised at home, the economic life of this country could have been transformed. The fundamental problem of the Irish economy is one of under-development and under-employment due to chronic under-investment at home. We are the only country in the world that exports both people and money to create wealth somewhere else.33

  In essence, MacBride wanted to break the link with sterling and move away from the fixed-parity relationship. The Central Bank and the Department of Finance took the view that, notwithstanding the fact that the British economy and sterling were facing great dangers and uncertainties, parity between the Irish currency and sterling should be maintained, and the country should stick to the practice of keeping the bulk of its external assets in Britain. Disagreement between the Central Bank and the Department of Finance on the one hand and some members of the Government on the other became more pronounced when the Government was forced to follow the British line and devalue against the dollar by 30.5 per cent in September 1949, thus enabling the Irish pound to continue to be exchangeable with the pound sterling.34

  For MacBride, the inextricable link with sterling was the ultimate cause of the morass the country and the economy found itself in. In March 1950 he declared that:

  In national economics we have behaved like misers who have kept their money in the bank instead of utilising it to develop our own business. Every available statistic establishes that the country suffers from gross chronic under-investment, while at the same time we boast of having 400 million in sterling assets. More fantastic still, over 50 million of the sterling assets are held by the Central Bank and bring in an income of slightly over one per cent.35

  The Department of Finance’s attitude towards devaluation can be seen in a memorandum penned after the Inter-Party Government had lost power, where it countered MacBride’s views by claiming that if parity was abandoned, there were three alternatives to be considered: the Irish pound would remain at par, which entailed no change; it would appreciate, for which there was no prospect as increasing deficits in the balance of payments and the higher wage structure in Ireland indicated that the pound was already overvalued in relation to sterling, and any enlargement of the programme of public works would weaken it further; or it would devalue, which in the circumstances was the only real alternative:

  It would be a grave error to look upon this as a solution to our economic and financial problems. Leaving aside the practical and political objections to abandoning the parity relationship and the repercussions in public confidence in our currency, a depreciation which nobody would be convinced was final would have serious effects on the cost of living particularly at a time when import prices were still rising. Nothing less than a 25 per cent reduction in the external value of our currency would have even the appearance of finality and seeing that imports enter so largely into domestic consumption, the effect of raising import prices by 33 ⅓ per cent would obviously be very great.36

  For the Department of Finance, the temporary stimulus to exports normally associated with depreciation would misfire in this case because Ireland’s export surplus derived from a stagnant agricultural output and was therefore incapable of immediate expansion. Finance further argued that nothing more than a short-term curtailment of imports could be expected because of the pressure for increased money incomes ‘to compensate for the rise in the cost of living that would be exerted by the trade unions and all classes of the working population. Depreciation of the currency is evidently an evil to be shunned’.37

  The thrust of financial thinking as pursued by the Central Bank and the Department of Finance has been defended by Seán Cromien, a former secretary of the department, who worked in the economic forecasting branch between 1952 and 1960. Cromien has argued that, to some extent, the conservative policies pursued were justified as the institutions were creatures of their times. Keynesianism had not yet taken a grip on Irish financial thinking, and it is questionable as to what success it might have had, had it been implemented:

  We had to watch very carefully what we were doing. We were part of the sterling area and no substantial foreign exchange was earned other than sterling. We had to use that to gain foreign dollars from the dollar pool through the British sterling area. That limited our freedom very much to do things. We had to show the British that we were keeping our economy under control, that we were not extravagant spenders … Thus the effort was on maintaining external reserves. There was a feeling that you did not get involved with foreign borrowing, a feeling that you were quite constrained by what people were prepared to save at home. You watched what they were saving, watched their level of consumption and watched the level of foreign reserves. So in a sense while it was very conservative, it probably was understandable in the conditions of the time.38

  This policy undoubtedly had some success, as by 1949 personal savings had risen to 7.1 per cent of personal disposable income from virtually zero in 1947. Furthermore, the balance-of-payments deficit fell from £30 million in 1947 to £9.7 million in 1949, and unemployment was down to 8.3 per cent by the end of 1949, compared to 9.6 per cent in the first quarter of 1947.39

  Mastermind planners

  Ultimately, it was economic ideology that determined the various solutions proposed for solving Ireland’s economic problems. In the late 1940s two distinct coalitions had emerged from within the Irish bureaucracy. One – as we have seen – centred on the mandarins of the Department of Finance and the Central Bank, and promulgated conservative action – the standard answer to any economic problem. This faction feared both inflation and the establishment of bureaucratic bodies that would lie beyond their control. The ideological underpinning of this faction was based on the contention that the country’s problems could only be solved by reducing the role of Government spending in favour of monetary or credit instruments. The second group consisted of a number of influential politicians and outside interests, but also contained an administrative base within the Department of Industry and Commerce. In essence, they wanted to encourage export-oriented investments and state direction of industry in order to make it more efficient.40This was not achieved. The conservatives opposed both options: the first would have inflationary consequences, while the second would unjustly extend Government control over private enterprise. Virtually all policy-makers, politicians and other interest groups believed that private enterprise was the bedrock upon which the Irish economy was based.41

  Nevertheless, some politicians began to identify protected Irish capital as a major problem in the post-war economy. Seán Lemass made many proposals for the overhaul of the Irish economy, and in 1945 put forward elaborate and ambitious plans to generate full employment after the war. The Industrial Relations Act of 1946, which established the Labour Court, was a further attempt to co-ordinate the economy and its various interest groups.42Moreover, Lemass also proposed a drastic shake-up of trade policy, a change that would have increased state involvement in the exporting sector of the economy. A final measure – undoubtedly the most radical – was the introduction of the Control of Prices and Promotion of Industrial Efficiency Bill of 1947, which, if passed, would have given the Government unprecedented control over the running of the economy. This was an attempt by Lemass – the progenitor of protectionism in the 1930s – to create an industrial-efficiency bureau that would combat excess profit-making and restrictive trade practices in protected indust
ries, thereby bringing a semblance of competitive practices to these sectors. It was an early illustration of his belief that the country would be better served by the Government playing a more active role within the economy – not to perpetuate protectionism but to lay the foundations for a more competitive economy that would include free trade.

  Lemass was defeated by the more conservative forces in society. The industrial-efficiency proposals, in particular, drew a hostile reaction. Lemass’ envisaged bureau was to have unprecedented powers to ensure reasonable standards of efficiency that, according to the Department of Industry and Commerce, were lacking in ‘those industries which enjoy the benefits of tariff or quota instruments on imports’.43At first, the bureau was to be a ‘friendly advisor’ with some price-control powers. But for those companies that did not respond adequately, a court of inquiry would be set up to subpoena documents on quality, price, methods of management, labour recruitment and training, materials used, marketing, overhead charges, capital structure and other such matters. If such businesses did not then comply with the bureau’s directives, the state would be empowered to stop the distribution of profits, fix prices, fix maximum profit limits, confiscate excess profits, and – for some, most seriously of all – remove protection.44Tadhg Ó Cearbhaill – who at this time was private secretary to Lemass – said that the bill had two aims: