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Before 1932, the Irish Free State and Britain were close trading partners.

90 per cent of all Irish agricultural exports went to Britain and Ireland was dependent on British coal.

However, in 1932, the Irish Free State and Britain began what became known as the Economic War.

It was to have far-reaching consequences for both countries - and for Northern Ireland.

An important reason for the dispute was Éamon de Valera’s refusal to send land annuities to Britain.

They were worth £5 million per year.

In June 1932, de Valera stopped the payments - made by the Dublin Government since 1922 - because:

• Fianna Fáil had promised to do this in its election manifesto.
• They were a drain on the Free State's limited resources at a time of world economic depression.
• He wanted to use the savings to revive the weak economy.
• In 1925, Northern Ireland had been allowed to retain its annuities and de Valera felt that the Irish Free State should be treated the same.

In addition, de Valera refused to continue to pay the pensions of retired Royal Irish Constabulary (RIC) officers and former British civil servants.

Angry that de Valera had broken previous financial agreements, London took steps to recover the lost money by imposing a 20 per cent import duty on all goods from the Free State.

It later imposed quotas for livestock.

The Free State retaliated by imposing import duties on goods from Britain and Northern Ireland, including coal, cement, electrical goods, machinery, iron and steel.

De Valera also called a snap election in January 1933 to show the British that the people of the Free State supported his action.

Having won an overall majority, he launched a propaganda campaign aimed at increasing support for the actions he was taking to increase the Free State’s independence.

While de Valera knew the economic war would cause financial problems, he hoped it would also bring benefits.

1. He thought it might lead to self-sufficiency(for example, by producing enough wheat and sugar beet in Ireland to fulfil the Irish market) and diversity in agriculture.
2. He wanted to encourage entrepreneurs.
3. If the price of British goods in the Free State increased it might encourage the Irish to open their own businesses to compete with British industry.
4. He saw the economic war as part of his political campaign against continued British control.

As 90 per cent of Irish exports went to Britain, the Economic War had a massive impact and the Irish Free State's economy almost collapsed.

Overall, the Economic War cost the Free State about £48 million.

This was because:

• The cattle industry, the lifeblood of the economy, was nearly destroyed. A 35 per cent reduction in cattle exports (from 1929 levels), declining prices for beef in Ireland (due to there now being too much of it) and no new export markets being available, meant that many Irish farmers went bankrupt.
• In spite of government subsidies to encourage Irish farmers to grow new crops, there was limited agricultural diversification because only the larger farms were able to make the switch and there were no markets for new goods.
• De Valera hoped that taxing British goods would encourage the development of Irish industries.

However, this did not really happen due to a lack of investment.

Any new companies set up were not really geared towards exports and as a result:

• Unemployment increased from 29,000 in 1931 to 138,000 in 1935.
• The trade deficit increased as exports declined from £750,000 to £500,000 per year.
• The cost of living increased and the standard of living fell.
• There was a chronic shortage of coal.
• There were cutbacks in electricity generation and rail transport.
• Emigration increased.
• There were very few new industries due to lack of investment.

At the same time, the lack of coal coming from Britain led to a period of growth in the local peat industry and small-scale farmers were helped by the reduction in land annuities payments.

Additionally, new cement factories were established, whilst the government spent £1 million on improving bridges and rural cottages.

• Its share of the Irish Free State market fell from 76 per cent in 1932 to 54 per cent in 1935.
• There was a shortage of imported Irish beef and dairy products.
• There is some evidence that unemployment increased in Britain as a result of the Economic War.

Britain had other markets to rely on, but Northern Ireland did not, and as much of its economic prosperity was based on cross-border trade, the economy was severely affected.

• Britain’s prosperity depended on cross-border trade with the Irish Free State and when this was disrupted, Northern Ireland struggled to find new markets for its goods.
• Its farmers were hurt by the retaliatory duty imposed by de Valera and the cross-border boycott.
• Smuggling increased.

At the same time, Northern Ireland’s farmers benefited because they provided Britain with goods that were no longer being supplied by the Irish Free State.

In 1935, Britain and the Irish Free State signed the Coal-Cattle Pact which eased some of the economic pressures.

However, financial problems continued which had a negative impact on political relations.

British Prime Minister, Neville Chamberlain, wanted to improve relations with Dublin.

To make this happen he decided to:

• Bring the Economic War to an end.
• Resolve the issue of the treaty ports. Chamberlain realised their strategic importance, but he also knew that they were out of date and he felt that good relations with Britain’s nearest neighbour were more important.

Chamberlain hoped that if these matters were dealt with, Anglo-Irish relations would improve and Éire would assist Britain if a war broke out.

From de Valera’s point of view, getting the treaty ports back would make it easier to declare the country neutral in the event of a war.

In January 1938, therefore, negotiation began.

In April 1938, three Anglo-Irish Agreements were signed which ended the Economic War and settled a number of old grievances.

The terms of the Anglo-Irish Agreements, 1938 covered finance, trade and defence.

Finance

Land annuities were ended.

Éire made a one-off payment of £10 million to Britain in settlement of all claims, instead of the £78 million owed.

Trade

Britain and Éire removed all duties which had been placed on each other’s goods during the previous five years.

Both countries guaranteed better treatment of each other’s exports for three years, although some quotas and tariffs still existed.

Éire was allowed to impose duties on a number of imports from Britain to protect its new industries.

Defence

Britain returned the treaty ports to Éire without conditions.

Whilst the Anglo-Irish Agreements, 1938 were not a complete success for everyone, most people responded favourably because Anglo-Irish relations improved and the Economic War ended.

Britain gained financially from the Agreements, but lost out in terms of defence because Éire did not allow Britain to use the treaty ports during World War Two.

Winston Churchill, a senior British politician who would later become Prime Minister, had warned that this might happen, but Chamberlain had acted on the advice of his military chiefs.

Chamberlain was disappointed when de Valera responded to the return of the treaty ports by asking for a declaration against partition, which the British refused to give.

Anglo-Irish relations improved.

The one-off land annuities payment of £10 million to Britain meant there was an extra £5 million per year to spend in Éire.

The return of the treaty ports removed another link to Britain.

This increased Éire’s independence and made neutrality during World War Two possible.

However, the continuation of partition was a severe disappointment.

De Valera called a general election in which the voters showed their approval of the Agreements by returning Fianna Fáil to power with a comfortable majority.

Relations between Northern Ireland and Éire worsened and partition was strengthened because the dispute increased unionist suspicion, hostility and fears.

Unionists felt the return of the treaty ports weakened the security of the British Isles and they feared the next step would be the reunification of Ireland.

Chamberlain tried to calm Craigavon by making concessions on agricultural subsidies and with the promise of an increased share of weapons manufacture.

The Agreements did not end the cross-border boycott.

Northern nationalists were disappointed that the talks between Chamberlain and de Valera did not result in an end to partition.