No. 358 NAI DT S4730A

Memorandum by Joseph Brennan on Article 5 of the Anglo-Irish Treaty

DUBLIN, 30 November 1925

(Important Note. The following comments do not pretend to be anything more than a very hasty, rough and partial statement of some of the leading points which should probably be used in an argument on behalf of the case of the Irish Free State in the event of an arbitration taking place on Article 5. Until data and arguments have been collected and sifted much further than has been possible up to the present, it is unsafe to assume that the best ultimate presentation of our case should necessarily follow the lines indicated by the preliminary ideas set out below. If, therefore, the case of Article 5 is to be discussed at the present stage with the British Government formally as a financial problem, it would be undesirable that the arguments given below under the various heads should be put on record in any way as a considered and final exposition of the Free State contention. If, however, references at the present stage to our position under Article 5 are merely incidental to the discussion of other political problems, some of the points below can perhaps be used in a loose way with advantage, but in that case it would be preferable that the written statement should not be put in British hands and that it should be clearly understood that such arguments as were being advanced were mentioned entirely without prejudice).

1. The British claim under Article 5 as formulated in April 1923 gave figures of £7,840 millions and £850 millions for the capital amount of public debt and war pensions respectively as at the date of the Treaty. On the basis of the comparative yield of direct taxes in the two countries the British claim that we were liable for 1.5 per cent. of these amounts, that is, for £117 millions in respect of public debt and £12 millions in respect of war pensions. They proposed to add a further amount of £27 millions as compound interest on these amounts at 5 per cent. during the four years following the Treaty. Thus the actual total of the British claim is £157 millions. A claim was also made in respect of certain other matters not mentioned in Article 5 but subsequently agreed to be dealt with as part of the ultimate financial settlement. The main items in the latter category were liability for bonus and Excess Land Stock and Liability for charges under the Irish Railway (Settlement of Claims) Act, 1921.

2. Of the debt figure mentioned an amount of more than £2,000 millions was incurred for the purpose of making advances to Dominion and Allied Governments and those Governments are under a corresponding liability for repayment. The chief items of this nature were as follows:-

(Circa December 1921) -

  Dominions 150,000,000
  France 584,000,000
  Russia 655,000,000
  Italy 503,000,000.

There is not the least reason why the Irish Free State should be expected to bear a burden in order to relieve other British Dominions in this connection and it is obviously very much a matter of question how far the Free State should be expected to accept a burden by reason of any default that may occur on the part of any of the Allied Governments. A settlement for repayment of the French debt has already been approved in principle by the French Government and it appears to be expected that a settlement on a similar basis is about to be effected in respect of the Italian debt. The Russian item will, no doubt, be irrecoverable at least to a large extent.

If the £2,000 millions here referred to is deducted from the total figure put forward by the British Government under the head of public debt, the latter becomes reduced to £5,840 millions and the resulting British claim against us becomes reduced from 157 millions to £121 millions.

3. In considering the proportions in which a given debt charge should be allocated between two different territories one of the factors requiring special attention is the extent to which the securities representing the debt are held in the two areas. It is evident that the debt charge on the people of either territory taken in itself and as a whole will be lighter or heavier according as citizens of that territory do or do not hold a high proportion of the securities. The great bulk of the public debt for the present purpose is represented by securities owned by citizens of Great Britain. The payment of the debt charge in the main, therefore, represents a mere transfer by the process of taxation of income from some members of the British community, who pay taxes, to others who receive the dividends. Diminution of the British National Income as a whole is not involved. Assuming that citizens of the Free State in proportion to their number do not possess as large holdings of British Government securities as British citizens, it will be found that a charge met by the Free State in respect of British public debt, while set off to some extent by dividends on British Government securities held in the Free State, will to a large extent not be set off in this way but will constitute a definite drain from Free State income to meet a foreign charge. The Free State is entitled to claim credit in this connection either by modification of the total debt figure for the purpose of calculating our fraction thereof or by modification in our favour of the fraction itself in so far as the method of computing the fraction may not already have allowed for this consideration.

4. It is certain that the pressure of taxation upon the National Income of the Irish Free State is at present so severe that any increase of this burden is likely to have serious economic consequences for the country. This applies more particularly to any increase that would be necessary for the purpose of meeting a British claim under Article 5, as a foreign drain would thereby be involved. The exchange position of this country has already begun to disclose very disquieting symptoms and we can confidently urge that this factor must play a large part in determining the measure of what is fair and equitable for the purpose of Article 5.

Some indication of the trend of the exchange position can be gleaned from recent statistics of the imports and exports of the Irish Free State, which may be summarised as follows:-

Full year 1924
First seven months 1924
First seven months 1925
   Exports & re-exports
   Adverse Trade balance

After making full allowance for correction to some extent of the deficits here revealed by a favourable balance, probably of small amount, in respect of invisible factors' of a normal kind, there remains a final adverse trend of serious extent in our general exchange position in recent times. Evidence of a drain of capital is found in the fact that whereas the holdings of cash and British Government securities by eight banks doing business in the Irish Free State amounted to £124 millions at the end of 1922 the corresponding figure a t the end of 1924 was lower by £12 millions. During the same two years a sum of £4 millions was withdrawn by individuals in the Free State from the British Savings Bank or British Savings Certificates.

The heavy payments (nearly £3 millions per annum) being made by the Free State to Great Britain in respect of Land Purchase Annuities are already a serious factor in our exchange position and this probably applies also to a large portion of the heavy annual charge of £1 millions borne by the Free State in respect of R.I.C. pensions.

5. The British test of relative yield of direct taxes as a standard of relative taxable capacity for the present purpose is unquestionably fallacious. There are not many tests of taxable capacity which have received any general measure of assent and the whole subject bristles with difficulty and controversy but it is at least well recognised that one cannot determine in the abstract a quantitative measure of taxable capacity for any country without enquiring at the same time into the nature of the purposes for which the taxation is applied. It is quite obvious that a country might bear extremely heavy taxes for certain purposes more easily than a much lighter scale of taxation for different purposes, e.g., in particular when the latter purposes involve payments abroad.

6. The primary factor in this connection is the excess of national income over the subsistence provision necessary to produce such income and scarcely of less importance is the manner of distribution of national income between individual citizens. The immensely greater taxable capacity of Great Britain relatively to the Free State in the light of these considerations requires no argument. There is one point, however, peculiarly affecting the Free State in this connection which it is important not to overlook. British income is derived largely from an immense and varied trade both with a large internal population and with all the great countries of the world. Different branches of this trade have their ups and downs from time to time but on the whole the Nation enjoys a large steady income which has been increasing for generations and is likely to continue doing so in the future. In the Free State, on the other hand, the national income is of a much more precarious kind and is largely derived from agriculture. Owing to its dependence upon the weather etc., the income from agriculture is a decidedly unstable quantity and this consideration has to be guarded against in measuring any important State charge which would entail a burden over a period of years.

7. The actual figure of 1.5% used by the British in their claim is, apart from its basis, clearly excessive from other points of view. The figure represents almost exactly the proportion in which Southern Ireland should have made an Imperial contribution under the Government of Ireland Act according to the calculation in the British White Papers used as the basis of that Act. Even for that purpose the figure was grossly excessive and the corresponding figure for Northern Ireland has since been reduced drastically. Moreover, the figure was based upon revenue figures of a period when war profits had put an unusual amount of money into circulation in Ireland and when consequently the yield of taxes was heavier and the burden of them proportionately much lighter than at the present time.

In addition, however, the fundamental position under the Act of 1920 was very much different from that of the present case seeing that the Act of 1920 contemplated that the Land Purchase Annuities collected in Southern Ireland would not be payable to Great Britain but would pass as revenue to the Irish Exchequer. In this light the present payments of Land Purchase Annuities to Great Britain can be said to take the place of a net contribution under Article 5.

8. It may be urged again that after the introduction of Old Age Pensions in 1908, Ireland, according to the Treasury, ceased to have any surplus of revenue over expenditure and became a definite net charge on the Imperial Exchequer. It was not until the heavy war taxation began to produce its effect that Irish revenue again began to exceed expenditure. There is little doubt that if there had been no Government of Ireland Act nor Treaty this country would now again be well on the way, if it had not already reached that stage, of becoming a financial burden on the British Government. It would, therefore, be in the nature of a windfall for the British Government if they were now to effect an arrangement under Article 5 which would assure them of a future profit at the cost of the Irish Free State. In this connection it should be noted that according to the general economic trend up to the time of the Treaty it was quite clear that our taxable capacity was steadily diminishing in comparison with that of Great Britain. Our population was falling steadily throughout the Nineteenth Century, the figure for the whole of Ireland representing 32 % of that of the United Kingdom in 1821 and only 9.51% by 1914. The same tendency was indicated in many of the other figures by which the relative economic progress of countries is usually measured. Even as between Northern Ireland and the Free State the same trend was evident. Taking, for example, the valuation of hereditaments other than agricultural land, we find that between 1864 and 1925 the figure for the Free State had increased from £2,714,287 to £4,218,835, that is 55.4%, whereas in Northern Ireland the figures were £1,009,209 in 1864 and £3,159,238 in 1925, showing an increase of 187.4%. This result is all the more remarkable seeing that Dublin was revalued as recently as 1916.

9. In determining what contribution, if any, the Free State could in future reasonably pay to Great Britain it is necessary to make allowance for the fact that the events leading up to the Treaty and attending its enforcement made it necessary for this country to incur large compensation and military charges, the meeting of which constitutes an obligation of somewhat similar character to any that would arise under Article 5. This obligation however, must in the circumstances take priority over any British claim. A similar point arises as regards the external and internal Dáil Loans which will probably entail an eventual charge of at least £2 millions.

10. Analyses of the British claim in the light of the foregoing arguments and after making due allowance for the minimum necessary expenditure of the Irish Free State in the future might well result in persuading a neutral tribunal that it would not be fair or equitable to impose any contribution on the Free State in respect of public debt and war tax. Nothing, however, has yet been allowed in respect of possible items of counter claim and when this is taken into account it appears to be quite clear that the British cannot hope to get anything from us. Leaving aside matters which do not easily lend themselves to quantitative measurement, there is one counter claim of considerable weight to which the labours of the Childers Commission have given a claim to recognition, namely, the counter claim in respect of over taxation. There is one point at least on which such a counter claim on our part would appear to be fairly entitled to acceptance. It is now generally recognised that the principle of graduation is one of the necessary features of an equitable fiscal system. This principle is capable of application only in the case of direct taxes. During the Nineteenth Century taxation was very largely indirect and it necessarily followed that the poorer members of the community bore an undue share of the public burdens. It followed, of course, that any given area of the United Kingdom which had a greater proportion of poor people than the remaining area bore as a whole an unfair share of taxation and it is obvious that the area of the Irish Free State was in that position. In this respect it will be seen that there is a radical fallacy in the argument sometimes put forward that an indiscriminate system of taxation applied to two countries is fair as between the two countries.

[initialled] S. ÓB

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