THE ECONOMIC POLICIES OF LORD LIVERPOOL.

• Author: Hutchinson, Martin

Robert Banks Jenkinson, 2nd Earl of Liverpool ("Liverpool," 1770-1828) was UK prime minister over the period 1812-1827. His achievements were remarkable. He designed the financial attrition strategy that defeated Napoleon; led the United Kingdom through tire turbulence of the takeoff stage of the industrial revolution; inherited a daunting fiscal situation that included a debt/GDP ratio of well over 200 percent, and implanted the austerity measures needed to put this ratio onto the path that led to later Victorian levels; reformed the currency; pushed through the return to the gold standard; promoted both the Com Laws and free trade; successfully managed the 1825 financial crisis, the worst in over a century; and pushed through subsequent reforms that put the UK banking system onto a stable trajectory that lasted into the late 20th century.

Liverpool had a strong economics training from his father Charles Jenkinson, 1st Earl of Liverpool ("Jenkinson"), a leading Tory statesman in the late 18th century and best known to American audiences as the author of the Stamp Act. (1) Jenkinson sent his son to Charterhouse, whose education was broader than that of Eton, and insisted that he read widely in political economy and current politics. While at Oxford, Liverpool engaged in the traditional "Grand Tour," which took him to Pails in July 1789 where he witnessed the storming of the Bastille.

Liverpool entered the House of Commons at the election of 1790 and was a front bench spokesman on economic matters by 1794. His first senior office was Master of the Mint in 1799, sponsored by his father, a leading expert on coinage. (2) There he planned a major coinage restructuring, which he was to carry out as Prime Minister in 1816-1817. However, it was Jenkinson's influence as much as his own merit that got him into Addington's Cabinet as Foreign Secretary in 1801.

War Finance

From late 1809, Liverpool was Secretary of State for War and the Colonies, overseeing Wellington's campaign in the Iberian Peninsula. He outlined his preferred strategy to Wellington in September 1810:

The question, in short, must come to this. We must make an option between a steady and continued exertion on a moderate scale, and a great and extraordinary effort for a limited time, which neither our means, military or financial, will enable us to maintain permanently. If it could be hoped that the latter would bring the contest to a speedy and successful conclusion, it would certainly be the wisest course; but unfortunately, the experience of the last fifteen years is not encouraging in this respect. (3)

It was this central realization that made Liverpool a more successful strategist than Pitt; he understood that the growing strength of the UK economy and its superior financial system gave the UK government a major advantage over Napoleon's financially unstable regime.

A combination of stronger government finances, sustained financial attrition, and moderate but persistent military pressure would eventually win the war. When the war came to a head in 1813-1814, Liverpool pushed the British economy and taxation base to its limits and achieved his objective, but it was the earlier sustained pressure that had led to this point. By comparison, Pitt's coalitions, maintained for short periods and based on exceptional strains to the British economy and government finance, had all failed, as did the Fifth Coalition of 1809.

Finance underpinned Britain's strategic position. Public spending had peaked at 24.8 percent of GDP in 1801, the last full year of the French Revolutionary War, and revenues were only 14.8 percent of GDP. Spending then rose further to peak at 25.1 percent of GDP in 1809, a level that could be sustained but hardly increased. The deficit at 3.8 percent of GDP in 1809 had been better controlled than under Pitt--an average of 4.0 percent of GDP in 1803-1810 compared with an average 8.9 percent of GDP in 1793-1801 and a fiscally horrifying 15.9 percent of GDP in the year to October 1797 (Mitchell 2011: 581, 587, 822).

Government deficits at this period were financed by two means. One was short-term Exchequer Bills, bought by die public market or the Bank of England as backstop, and bearing interest at typically just under 5 percent per annum. Long-term financing consisted primarily of Consols, perpetual bonds mostly bearing a typical 3 percent annual interest rate but issued at a deep discount in wartime when interest rates were higher.

This system of financing brought important benefits. The prices of 3 percent Consols were low during wars, generally between 50 percent and 60 percent of par, giving a yield in the .5-6 percent range. When peace returned, their prices would rise. Since government debt was the people's principal investment asset, representing around 260 percent of GDP at its peak in 1819, the "wealth effect" of this price rise was considerable. More dian 70 percent ol GDP was added to bondholders' wealth in this way between the price nadir ol 1813 and the postwar peak of 1824, providing much of the finance underpinning the "take-off" stage of the Industrial Revolution (see Hutchinson and Dowd 2018).

Throughout the remainder of the war Liverpool steered a careful path allowing a substantial and increasing war effort to be financed without jeopardizing government credit. After 1812 as Prime Minister, he had the able Nicholas Vansittart to assist him as Chancellor of the Exchequer, It was a close-run thing; Britain's budget deficit in 1812 was 8.1 percent of GDP, rising to 12.1 percent in 1813 (Mitchell 2011). In 1813, the government's needs were especially difficult to finance, and Liverpool and Vansittart were repeatedly forced to beg the Bank of England for credit. Fortunately, news of Wellington's victory at the Battle ol Vitoria arrived in early July, and thereafter improved market confidence made it easier to finance growing government borrowing, much of which was used to subsidize continental allies.

There was one final bout of financial difficulty after Napoleon returned from Elba in March 1815. Vansittart raised two loans to meet the emergency, one of 18 million [pounds sterling] proceeds and a second of 27 million [pounds sterling], the largest financing ever attempted to that date, undertaken on June 14, four days before Waterloo. By contrast, Napoleon had raised less than 3 percent as much.

Agriculture and Trade

A pressing problem facing Liverpool as the war ended was how British agriculture should transition from war to peace. During the war, Britain had been forced into agricultural self-sufficiency, most notably during Napoleon's 1807-1812 Milan Decrees. This agricultural policy had required planting much inferior agricultural land. Com prices were unprecedentedly high, and there was much hardship for the poor, especially in dearth years. With British agricultural wages higher than in Europe, he was concerned that a policy of zero protection would undermine British agriculture, which would not recover for a very long time and leave the country dangerously vulnerable to blockade in any future war. He was also concerned about balance across different taxes and tariffs: woolen, cotton, pottery, and other industries were all subject to a high protective tariff, so agriculture should be similarly protected. Even if agricultural protection raised the cost of manufacturing labor, he doubted this would cause emigration or hinder manufacturing, since British wages were relatively high compared to those of other countries and manufacturers testifying to Parliament had con firmed that cheapness of capital, credit, and fuel were far more important advantages to British manufacturing than cheap labor. In general, Liverpool believed that the balance of economic advantage for Britain lay with dearer com and higher wages, rather than attempting to achieve rock-bottom labor...