Chancellor of the Exchequer (1859–1866)
In 1859, Lord Palmerston formed a new mixed government with Radicals included, and Gladstone again joined the government (with most of the other remaining Peelites) as Chancellor of the Exchequer, to become part of the new Liberal Party.
Gladstone inherited a deficit of nearly £5,000,000, with income tax now set at 5d (fivepence). Like Peel, Gladstone dismissed the idea of borrowing to cover the deficit. Gladstone argued that "In time of peace nothing but dire necessity should induce us to borrow". Most of the money needed was acquired through raising the income tax to 9d. Usually, not more than two-thirds of a tax imposed could be collected in a financial year so Gladstone therefore imposed the extra four pence at a rate of 8d. during the first half of the year so that he could obtain the additional revenue in one year. Gladstone's dividing line set up in 1853 had been abolished in 1858 but Gladstone revived it, with lower incomes to pay 6½d. instead of 9d. For the first half of the year, the lower incomes paid 8d. and the higher incomes paid 13d. in income tax.
On 12 September 1859 the Radical MP Richard Cobden visited Gladstone, who recorded it in his diary: "... further conv. with Mr. Cobden on Tariffs & relations with France. We are closely & warmly agreed". Cobden was sent as Britain's representative to the negotiations with France's Michel Chevalier for a free trade treaty between the two countries. Gladstone wrote to Cobden:
... the great aim – the moral and political significance of the act, and its probable and desired fruit in binding the two countries together by interest and affection. Neither you nor I attach for the moment any superlative value to this Treaty for the sake of the extension of British trade. ... What I look to is the social good, the benefit to the relations of the two countries, and the effect on the peace of Europe.
Gladstone's budget of 1860 was introduced on 10 February along with the Cobden–Chevalier Treaty between Britain and France that would reduce tariffs between the two countries. This budget "marked the final adoption of the Free Trade principle, that taxation should be levied for Revenue purposes alone, and that every protective, differential, or discriminating duty ... should be dislodged". At the beginning of 1859, there were 419 duties in existence. The 1860 budget reduced the number of duties to 48, with 15 duties constituting the majority of the revenue. To finance these reductions in indirect taxation, the income tax, instead of being abolished, was raised to 10d. for incomes above £150 and at 7d. for incomes above £100.
In 1860 Gladstone intended to abolish the duty on paper – a controversial policy – because the duty traditionally inflated the cost of publishing and hindered the dissemination of radical working-class ideas. Although Palmerston supported the continuation of the duty, using it and income tax revenue to buy arms, a majority of his Cabinet supported Gladstone. The Bill to abolish duties on paper narrowly passed the Commons but was rejected by the House of Lords. No money bill had been rejected by the Lords for more than 200 years, and a furore arose over this vote. The next year, Gladstone included the abolition of paper duty in a consolidated Finance Bill (the first ever) to force the Lords to accept it and accept it they did. The proposal in the Commons of one bill only per session for the national finances was a precedent uniformly followed from that date until 1910, and it has been ever since the rule.
Gladstone steadily reduced Income tax over the course of his tenure as Chancellor. In 1861 the tax was reduced to ninepence (£0–0s–9d), in 1863 to sevenpence, in 1864 to fivepence and in 1865 to fourpence. Gladstone believed that government was extravagant and wasteful with taxpayers' money and so sought to let money "fructify in the pockets of the people" by keeping taxation levels down through "peace and retrenchment". In 1859 he wrote to his brother, who was a member of the Financial Reform Association at Liverpool: "Economy is the first and great article (economy such as I understand it) in my financial creed. The controversy between direct and indirect taxation holds a minor, though important place". He wrote to his wife on 14 January 1860: "I am certain, from experience, of the immense advantage of strict account-keeping in early life. It is just like learning the grammar then, which when once learned need not be referred to afterwards".
Because of his actions as Chancellor, Gladstone earned the reputation as the liberator of British trade and the working man's breakfast table, the man responsible for the emancipation of the popular press from "taxes upon knowledge" and for placing a duty on the succession of the estates of the rich. Gladstone's popularity rested on his taxation policies which meant to his supporters balance, social equity and political justice. The most significant expression of working-class opinion was at Northumberland in 1862 when Gladstone visited. George Holyoake recalled in 1865:
When Mr Gladstone visited the North, you well remember when word passed from the newspaper to the workman that it circulated through mines and mills, factories and workshops, and they came out to greet the only British minister who ever gave the English people a right because it was just they should have it ... and when he went down the Tyne, all the country heard how twenty miles of banks were lined with people who came to greet him. Men stood in the blaze of chimneys; the roofs of factories were crowded; colliers came up from the mines; women held up their children on the banks that it might be said in after life that they had seen the Chancellor of the People go by. The river was covered like the land. Every man who could ply an oar pulled up to give Mr Gladstone a cheer. When Lord Palmerston went to Bradford the streets were still, and working men imposed silence upon themselves. When Mr Gladstone appeared on the Tyne he heard cheer no other English minister ever heard ... the people were grateful to him, and rough pitmen who never approached a public man before, pressed round his carriage by thousands ... and thousands of arms were stretched out at once, to shake hands with Mr Gladstone as one of themselves.
When Gladstone first joined Palmerston's government in 1859, he had opposed further electoral reform, but he changed his position during Palmerston's last premiership, and by 1865 he was firmly in favour of enfranchising the working classes in towns. The policy caused friction with Palmerston, who strongly opposed enfranchisement. At the beginning of each session, Gladstone would passionately urge the Cabinet to adopt new policies, while Palmerston would fixedly stare at a paper before him. At a lull in Gladstone's speech, Palmerston would smile, rap the table with his knuckles, and interject pointedly, "Now, my Lords and gentlemen, let us go to business". Although he personally was not a Nonconformist, and rather disliked them in person, he formed a coalition with the Nonconformists that gave the Liberals a powerful base of support.
