As chancellor Rishi Sunak grapples with the enormous debt created by Covid-19, it might be useful to look back at previous times, when other politicians had substantial government debt to deal with.
One of these was Robert Jenkinson, second Earl of Liverpool, Britain’s most economically savvy prime minister.
After the Napoleonic wars, there were three major economic problems facing Lord Liverpool, who as prime minister made full use of Britain’s borrowing capacity to help defeat Napoleon.
Government debt was roughly 250 per cent of GDP, and the great French economist Jean-Baptiste Say thought the taxes needed to cover it would make British products hopelessly uncompetitive.
The pound was unanchored, its value governed largely by the Bank of England’s note issues; Lord Liverpool believed the country should return to gold.
Agriculture had been over-expanded during the war, with marginal lands planted; Lord Liverpool believed some protection was necessary, to ensure maximum food self-sufficiency in any future war.
Lord Liverpool addressed the agriculture problem first, with the 1815 Corn Laws. This prohibited corn imports when the price was below 80 shillings a quarter and allowed them freely when corn prices were above this level.
This encouraged corn growing in Ireland, which since 1806 could export to the rest of the UK duty-free.
Corn prices averaged just under 80 shillings a quarter until 1820, then fell sharply, producing a severe agricultural depression by 1822-23.
Given the political consensus behind it the main difficulty with a return to gold at the pre-1797 parity was deflation.
Prices in 1815 were far above the 1792 peacetime level, so the return to gold caused a 40 per cent deflation by 1824, harming over-borrowed farmers and the over-borrowed Treasury.
However, Lord Liverpool believed that a return to gold was vital to assure markets of Britain’s creditworthiness.
The return to gold was combined with the management of Britain’s huge debt, requiring a lengthy period of rigorous austerity.
Lord Liverpool and Nicholas Vansittart reduced non-debt-service public spending by 69 per cent in 1814-17, running a budget surplus in 1818 and maintaining that surplus, raising taxes in 1819 to accompany the return to gold.
Even as late as 1822, they reduced public sector salaries by a further 10 per cent. The process worked; by Lord Liverpool’s departure in 1827, debt was less than 200 per cent of GDP and it continued to decline.
The return to gold was legislated in 1819 and took place in 1821. It indeed caused deflation, but the economic effect of that was offset by the wealth effect of a massive capital gain for holders of consols – British government securities – some 70 per cent of GDP between 1815 and 1824.
As a result, the early 1820s, instead of being depressed, were the most prosperous years Britain had ever seen, with the Industrial Revolution moving into high gear.
Lord Liverpool’s next major economic initiative came in a House of Lords speech in May 1820, in which he set out a new policy by which Britain would remove trade restrictions and move towards free trade.