ABSTRACT
SIR ROBERT GIFFEN expressed the opinion that Gladstone was preparing for another great coup in the series of Budgets from 1863 to 1866. 1 The annual expenditure had been reduced from £72,792,000 in 1861 to £65,914,000 in 1866. The income tax stood at 4d. in the pound, and the duties on tea and sugar were moderate. Still the revenue was proving elastic and further surpluses seemed certain. What was to be the next step ? Would Gladstone take the favourable opportunity to consign the income tax to the “ reserve ” of which he had spoken in 1853 ? Or would he retain it in order to effect reforms in the taxational system ? It was clear enough that the policy of reduction of direct and indirect taxes would reach a point when it would be necessary to adopt a more positive course. A comprehensive survey and consolidation of the existing taxes was a task which would have made a peculiar appeal to Gladstone. But the coup which Giffen surmises was in contemplation was not to be brought off at this juncture. The years from 1863 to 1866, with their remarkable surpluses, did not prove to be the inauguration of a new period. They were in many ways highly exceptional. The Chancellor had a real passion for economy, and public opinion had rallied to his support. A wave of prosperity was passing over the country and the public revenue was 140rising. Appearances might well encourage the hope that Gladstone would attain the object he had set before himself in 1853. The year 1866, however, dispelled the illusion. It was not only that the Government resigned in June— though the breach in continuity was important. Gladstone had been able to accomplish so much because he had been at the Exchequer for eight years ; his successor could hardly be expected to have the same grasp of details. But, altogether apart from personal considerations, 1866 was a critical year. The prosperity of the previous years had stimulated speculation to a dangerous extent. Recent legislation had also contributed to assist in the inflation of credit. In 1862 the amended Companies Act had facilitated the formation of joint stock enterprises with limited liability. Immediate advantage was taken of this law to found a great variety of new companies as well as to reconstruct old companies on the new basis. In order to dispose of the stock issued by these companies the practice of “ financing “ was generally adopted, i.e., instead of waiting until its stock was placed among subscribers a new company would hand its securities over to a finance company which would make an acceptance in its favour. It was then possible to raise money at once on the credit of the finance company. The finance companies themselves obtained their funds by placing their shares at high prices. This arrangement had considerable advantages (for instance, a railway company could begin construction at once), but it obviously depended on the sound management of the finance company and the ultimate success oí the enterprises which they were backing. The real question was that of their ability to meet their acceptances when they fell due. One of the most important of the finance houses was that of Overend, Gurney & Co. It financed railways in Great Britain, cotton in the United States, and also had investments in India. Such was the confidence in its operations that money was pressed on it by the public and, as long as the speculative mania continued, it had little difficulty in finding outlets for it. The crash came on May 10th, 1866, when Overend, Gurney & Co. suspended payment with liabilities amounting to nearly £19,000,000. It was a failure on an 141unprecedented scale and led to a collapse of confidence. On May nth—” Black Friday”—there was a general run on the banks, and conditions of complete panic prevailed. The Bank of England did what it could by advancing £4,000,000 in the course of the day. 1 But its reserve was so depleted that it had to intimate the position to the Government. The suspension of the Bank Charter Act was authorised with the proviso that the Bank was to maintain the rate of discount at 10 per cent. The announcement of this decision allayed the panic and the Bank did not require to exceed the legal limit of its note issue. But the crisis left an acute feeling of uneasiness and the money market was slow in recovering from its consequences. The damage to trade and industry, however, was not serious, because it had been essentially a credit crisis. Unfortunately it coincided with the visitation of the rinderpest, which caused the loss of farm stock of the estimated value of £3,000,000, as well as the temporary intermission of the cattle trade. The harvest also proved unsatisfactory. In these circumstances the revenue lost that elasticity which had characterised the past few years.
