The two chief items of the ministerial parliamentary programme were the extension of the new Education Act to London and Mr Wyndham's Irish Land Purchase Act, by which the British exchequer should advance the capital for enabling the tenants in Ireland to buy out the landlords. Moreover, the budget was certain to show a surplus and taxation could be remitted. As events proved, it was the budget which was to provide a cause of dissension, bringing a new political movement into being, and an issue overriding all the legislative interest of the session. Mr Ritchie's remission of the shilling import-duty on corn led to Mr Chamberlain's crusade in favour of tariff reform and colonial preference, and as the session proceeded the rift grew in the Unionist ranks.
In the separate article on Mr Chamberlain the progress of this movement is sufficiently narrated. From this moment it is only necessary here to realize Mr Balfour's position. He had always admitted the onesidedness of the English free-trade system, and had supported the desirability of retaliating against unfair competition and "dumping" by foreign countries. But Mr Chamberlain's new programme for a general tariff, with new taxes on food arranged so as to give a preference to colonial products, involved a radical alteration of the established fiscal system, and such out-and-out Unionist free-traders in the cabinet as Mr Ritchie and Lord George Hamilton, and outside it, like Lord Hugh Cecil and Mr Arthur Elliot (secretary to the treasury), were entirely opposed to this. Mr Balfour was anxious to avoid a rupture, doubtful of the feeling of the country, uncertain of the details by which Mr Chamberlain's scheme could be worked out. As leader of the party and responsible for the maintenance of so great a political engine, he was anxious not to be precipitate. He was neither for nor against the new movement, and professed to hold "no settled convictions" on the subject.
Mr Chamberlain rested his case largely on the alleged diminution in British trade, and the statistics therefore required investigation before the government could adopt any such programme. From the middle of May, when Mr Chamberlain began to press the matter, Mr Balfour had a difficult hand to play, so long as it was uncertain how the party would follow the new lead. The Board of Trade was asked to supply full figures, and while its report was awaited the uncertainty of attitude on the part of the government afforded grateful opportunity for opposition mischief-making, since the Liberal party had now the chance of acting as the conservative champions of orthodox economics. Another opportunity for making political capital was provided by the publication of the report of the royal commission on the Boer War under Lord Elgin's chairmanship, which horrified the country by its disclosures (August 26th) as to the political and military muddling which had gone on, and the want of any efficient system of organization.
The session ended in August without any definite action on the fiscal question, but in the cabinet the discussions continued. On the 16th of September Mr Balfour published a pamphlet on "Insular Free Trade," and on the 18th it was announced that Lord George Hamilton and Mr Ritchie had resigned, Lord Balfour of Burleigh and Mr Arthur Elliot following a day or two later. These were the strait free-traders, but at the same time Mr Chamberlain resigned also. The correspondence between Mr Chamberlain and Mr Balfour (September 9th and 16th) was published, and presented the latter in the light of a sympathizer with some form of fiscal union with the colonies, if practicable, and in favour of retaliatory duties, but unable to believe that the country was yet ready to agree to the taxation of food required for a preferential tariff, and therefore unwilling to support that scheme; at the same time he encouraged Mr Chamberlain to test the feeling of the public and to convert them by his missionary efforts outside the government.
Mr Chamberlain on his side emphasized his own parliamentary loyalty to Mr Balfour. In his pamphlet on "Insular Free Trade" the prime minister reviewed the economic history since Cobden's time, pointed to the falsification of the promises of the early free-traders, and to the fact that England was still the only free-importing country, and insisted that he was "in harmony with the true spirit of free-trade" when he pleaded for "freedom to negotiate that freedom of exchange may be increased." This manifesto was at first taken, not only as the platform of the government, but also as that from which its resigning free-trade members had dissented; and the country was puzzled by a statement from Lord George Hamilton that Mr Balfour had circulated among his colleagues a second and different document, in fuller agreement with Mr Chamberlain. The situation was confused by personal suspicion and distrust as well as by economic difficulties. But the public noted that the duke of Devonshire, whose orthodoxy was considered typical, remained in the cabinet.
The crisis, however, soon developed further, owing to explanations between the free-trade Unionists. On October 1st Mr Balfour spoke at Sheffield, reiterating his views as to free-trade and retaliation, insisting that he "intended to lead," and declaring that he was prepared at all events to reverse the traditional fiscal policy by doing away with the axiom that import duties should only be levied for revenue purposes. The speech was enthusiastically received by the National Union of Conservative Associations, who had year by year flirted with protectionist resolutions, and who were known to be predominantly in sympathy with Mr Chamberlain. But the free-traders did not like Mr Balfour's formula as to reversing the traditional fiscal policy of import taxes for revenue only. Next day the duke of Devonshire resigned, a step somewhat bitterly resented by Mr Balfour, who clearly thought that his sacrifices in order to conciliate the duke had now been made in vain. During this critical fortnight the duke had apparently acquiesced in Mr Balfour's compromise, and had co-operated in reconstituting the ministry; his nephew and heir had been made financial secretary to the treasury, while Mr Alfred Lyttelton was appointed colonial secretary, Mr Austen Chamberlain chancellor of the exchequer, Mr Brodrick secretary for India, Mr H. O. Arnold-Forster war minister, Lord Stanley postmaster-general and Mr Graham Murray secretary for Scotland. Lord Londonderry now became president of the council, Lord Lansdowne leader of the House of Lords, and Lord Salisbury, son of the late premier, who as Lord Cranborne had for three years been under-secretary for foreign affairs, was included in the cabinet as lord privy seal.