by Conor McCabe
Telesis began its review in September 1980 and finished in March 1981. Over the previous thirty years, Ireland had been engaged in a huge effort to industrialise, and had chosen foreign investment as the main impetus and stimulus for growth – a policy that Telesis saw as modestly successful. GNP had almost tripled, for example, and living standards had risen. At the same time, it wrote, ‘The income gap between [Ireland] and most other industrialised countries has seriously widened over the past twenty years; the economy has become increasingly dependent on foreign corporations for its industrial jobs; the net trade balance has deteriorated [and] the cost of State aids to industry has risen rapidly’.113 The key finding of the Telesis Report was that in order for incomes to rise, there had to be an expansion of export-led industry that was indigenous to Ireland. The reason for this was that ‘successful indigenously owned industry is, in the long run, essential for a high-income country. No country has successfully achieved high incomes without a strong base of indigenously owned resource or manufacturing companies in traded businesses.’114 Ireland needed to expand its traded sectors – i.e. its exports – but in order to have sustainable economic growth those exports needed to be Irish made and Irish sourced.
Irish manufacture underwent a significant change in the 1970s. From 1973 to 1980, over 10,000 jobs were lost in the textiles, clothing and footwear sectors. These were offset by gains of around 12,000 in metals and engineering, food, cement and glass, and printing and packaging. And while these structural changes in manufacture ‘might be interpreted as showing the successful replacement of employment in the “old” protected sectors by a generation of companies in new growth sectors’ – that is, the replacement of low-wage protected industries with modern industrial engineering – the reality was somewhat different. Telesis found that in terms of indigenous manufacture, ‘most traded [or export-orientated] industries have fallen from their 1973 employment levels, with some noticeable exceptions in glassware and agricultural machinery’. It went on to say that ‘almost all non-traded [or domestic-orientated] industries … have enjoyed net employment increases, e.g. packaging, cement and metal fabrication’.115 Overall, ‘The indigenous sector (defined as companies owned in majority by Irish interests) represented two-thirds of manufacturing in 1980, down from three-quarters in 1973, [while] employment in indigenous manufacturing industry grew by only 2,000’.116 Ireland’s indigenous industrial sector in the 1970s had actually moved away from export-orientated employment and towards domestic-orientated employment, with the housing and office construction sectors the dominant components. And as Telesis noted, ‘growth generated by the development of non-traded opportunities can only provide a limited source of income due to the size limitation of domestic demand’.117
The mantra of every party in government since the 1950s had been that exports were the key to Ireland’s prosperity. However, the development of exports and export markets came a very distant second to government policy of enticing exporters to the country, with the resultant need for construction on greenfield sites a powerful boost to the domestic building industry. There were 1,262 new Irish companies formed between 1973 and 1980, with a total employment figure in 1980 of 21,850. ‘Most of this growth has been in non-traded businesses,’ reported Telesis, ‘stimulated by plant construction, agricultural investments and infrastructure expenditure.’118 The divorce of indigenous industrial growth from the export sector was underlined by Telesis when it found that ‘few of the newly created [Irish] businesses serve the sub-supply needs of the foreign firms in Ireland’. In fact, only ‘8 per cent of the components and sub-assemblies used by the largest foreign sector, engineering, were sourced in Ireland in 1976’.119 This was a serious structural problem, one that was not entirely down to the kind of multinational operations which had come to Ireland. Overseas companies which were interviewed by Telesis ‘frequently complained of difficulties in sourcing products in Ireland, either because of poor quality or lack of cost competitiveness’. Manufacturing companies were importing ‘precision iron castings and precision moulded plastic parts due to the shortage of high-quality producers in Ireland’.120 Meanwhile the government gave tax incentives and grants for housing and office construction, and gave away mineral, oil and gas rights with little or no concern for the working dynamics of the wider economy. The need to build had become a much more important part of government policy than the need to export.
The Telesis Report highlighted the problems with such an approach, and offered viable solutions to help the Irish economy grow on a solid, sustainable, level. And just like the Ibec Report of 1951, and Kenny Report of 1974, the findings and suggestions offered by Telesis were greeted with fanfare and followed with silence. The next innovation in Irish economic policy would not arrive until 1987, when the government decided to extend the country’s corporation tax benefits to the financial sector. The era of the Irish Financial Services Sector was about to begin.
4
FINANCE
There is a continuous tension between banks and businesses over the value of money. Banks make their money through credit; businesses through trade. For banks, money is a product; for businesses, money is a lubricant. It fuels transactions, enabling products to move from seller to buyer, and it is through this activity that businesses make money and, hopefully, profit. For banks, it is a different process. Money is the product. There are internal contradictions here, integral to money itself. Banks and businesses both need each other to survive, but there is a constant tension present as both use money in different ways and for different and incompatible reasons. These tensions between business and banks, between how and why they use money, have never been resolved. The fault lines lie within the system itself.
In 1927, the Irish Free State decided to hand over monetary policy to the banks, who decided, not surprisingly, that the future of Ireland lay with a strong, value-laden, currency. Yet, this strength would not be drawn from the economic dynamics of the State, but from the Irish pound’s link with sterling at parity. The government had the option to link the punt to sterling in a way that would have allowed the punt to rise or fall in value in accordance with the realities of the economy, but it did not take it. The maintenance of the parity link with sterling was kept in place regardless of the cost to the wider economy. Each time sterling devalued – such as in 1931, 1939, 1949 and 1967 – the Irish punt had to follow, with significant consequences for the State’s economy. There was no central bank until 1943, and even then it declined to use the powers associated with such an institution – namely the management of the national currency. Ireland did not have an independent currency until 1979, when the country joined the European Monetary System (EMS), some fifty-seven years after independence and while sitting on a credit bubble. The parity link played no small part in the decades of poverty and emigration which were inflicted on the majority of the population.
The effect of having an economy which lacked an industrial export base, as was the case with Ireland for much of its existence, was that it gave the banks free reign to dictate monetary policy. The normal tension between banks and industry over the value and function of money was weak – so weak, in fact, that the value of the Irish pound was set at such a disproportionately high rate that it became a significant hurdle in the development of indigenous Irish industry. The move to import foreign industry to Ireland in the 1950s was influenced in part by monetary policy. The alternative – affordable credit to boost indigenous growth but a weaker Irish pound – was strenuously opposed by both Irish banks and the Department of Finance.
By the mid-1980s job growth by way of FDI had stalled. The next idea was to extend Ireland’s corporation tax rate to financial businesses. This was given a boost in 1987 when the leader of the opposition, Charles Haughey, announced a proposal to establish a low-tax zone for the international financial services in Ireland. The plan was to create a designated area within the State where qualifying companies would be able ‘to undertake any business in the fina
ncial services area they choose and subject to new legislation specifically passed for the centre’.1 It would lead, he said, to 7,500 jobs over a five-year period. In the election of that year, Haughey was returned as Taoiseach and one of his first acts was to establish a committee to offer advice on the financial services centre. By the end of the year the Dublin docklands area the Irish Financial Services Centre, or IFSC, was born.
From the start, the IFSC courted controversy. Although it was envisaged as an aid to foreign investment and job growth, one of the first occupants was Allied Irish Banks (AIB). The resources given to the project were completely out of proportion to the jobs it created.
In terms of the development and dynamics of the Irish economy, however, the IFSC was not an exception. It arose from the way Irish business operated, from the lopsided attention given to the facilitation of foreign investment, be it via tax breaks or simply handing over the rights to the State’s oil, gas and minerals. The sectors which benefited from the park – construction, rentiers, the financial sector, accounting and legal services – were the sectors which had benefited from industrial policy since the 1950s. Similarly, the ability of the banking sector to direct economic policy according to its needs, rather than the needs of the economy, did not arise overnight. Once again, the roots run deep.
THE FIRST BANKING COMMISSION
On 3 February 1926, the Minister for Finance, Ernest Blythe, announced to the Dáil the establishment of a commission to study the situation of banking in the Irish Free State. The terms of reference, as outlined by the Minister, stated that it was ‘to consider and to report to the Minister for Finance what changes, if any, in the law relative to banking and note issue are necessary or desirable, regard being had to the altered circumstances arising from the establishment of Saorstát Éireann’.2
Political independence had not led to monetary independence from Britain, and although Irish banks issued their own notes, they were treated and accepted as sterling by both businesses and the public. The value of money in the Free State was dependent on the strengths and weaknesses of what was now a foreign currency. Not only that, the majority of deposits in Irish banks were held in Britain, as they had been prior to independence. This gave rise to serious issues regarding the issuing of credit and the financial tools the State had at its disposal in order to develop the economy. The government also needed to regulate the supply of legal tender within its jurisdiction, and it was under these concerns that the commission was formed.
The commission was top-heavy with bankers and financiers – six out of a total of nine members. They were joined by two representatives of the Department of Finance and by Professor Henry Parker-Willis of Columbia University, USA, who was also the chairman.3 The leader of the opposition, Tom Johnson, queried the appointments. ‘Is it not the case that a commission dealing with the possible evils of the banking system and composed of people interested in the banking system is likely to lead to a curious development?’ he asked. Mr Blythe replied that ‘it was not thought that inexpert opinion should be appointed to the commission’ and that the appointees ‘represent different interests, and it will be for them to consider any recommendations that come before them’. The idea that the government was serious about tackling the issue of banking and credit was greeted with cynicism. On 12 February 1926, Mr Michael Richard Heffernan of the Farmers’ Party tabled a motion to the Dáil, which was ‘of the opinion that agricultural interests in the Saorstát should have been given direct representation on the Banking Commission and that the Terms of Reference should have specifically provided for an examination of the agricultural credit problems of the Saorstát’.4 The Dáil adjourned for two weeks, but on its return Mr Blythe assured the deputy that ‘The Commission will have to keep its eye open to the whole agricultural position’.5 Mr Heffernan was not so optimistic:
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.6
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’.7
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.8 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.’9
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 w
as 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.