http://orcid.org/0000-0002-8777-9664
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ABSTRACT
Using newly declassified documents from the British Public Records Office, we argue that the finance-dependent growth regime that typified the UK economy in the period up to the Great Crash of 2008 has much deeper roots than is commonly realised. We use these documents to demonstrate that the growth of finance was integral to the Thatcher revolution, tying together mortgage markets, household debt, and boom-bust cycles as early as the mid-1980s. We also show how policy-makers in this period were aware of all the weaknesses of this growth model, to the point that they effectively diagnosed what would happened in 2008, back in 1987. We argue that selecting for a finance-led growth model as the preferred growth model so early effectively rendered other possible growth models for the UK unattainable. The result was the shift from an economy characterised by ‘stop-go’ cycles in the post-war period to an economy characterised by recurrent ‘boom-slump-austerity-reset’ cycles in the Thatcher and post Thatcher periods. The 2008 crisis did not change this highly unstable mode of accumulation.
Acknowledgements
The authors wish to thank the reviewers of New Political Economy for their helpful suggestions.
Disclosure statement
No potential conflict of interest was reported by the authors.
Notes on contributors
Tami Oren is a lecturer in the department of Sociology, Political Science and Communication at the Open University of Israel. She works on constructivist-evolutionary approach to institutional change and Britain's political-economic history.
Mark Blyth is the Eastman Professor of Political Economy.
ORCID
Mark Blyth http://orcid.org/0000-0001-7782-6183
Notes
1. Queen Elizabeth asked this question of a group of economists about two months after the financial crash of September 2008 (The Daily Telegraph, 5 November 2008, on-line edition).
2. As a young generation of scholars showed (Craig Citation2015, Ban Citation2016, Oren Citation2016), this theoretical approach, largely led by the framework of ‘policy paradigm’, still lacks some of the tools needed for dealing with the complexity of institutional change.
3. Single capacity separated between brokers and jobbers and thereby eliminated conflicts of interest in equity markets.
4. Principals in LSE firms had to accept full liability for trading activities. In turn, they could trade with limited capital while still providing a high degree of assurance to investors (‘The Future of the Stock Exchange’ TNA T486/110).
5. There was a widening gap between the expansion of London’s international markets and the declining market share of the Exchange (Vogel Citation1996, p. 99). For example, new issues in the Eurobond market saw a five-fold increase between 1980 and 1985.
6. On 20 November 1978, a senior Treasury official, J.M. Bridgeman, suggested that ‘the increasing emphasis in recent years on the control of the growth of the money supply as a major weapon of macroeconomic policy … increased the importance of … active primary and secondary market for government securities’, both as ‘means of funding the government borrowing requirements, and as a means of influencing the market in the interests of monetary policy’ (TNA HF 183/428/01). Up to ‘Big Bang’, two firms controlled about 80% of the gilt-edged market and imposed relatively high borrowing costs on the Government (BoE 15A91/9, 21 June 1982).
7. The LSE claimed that removing fixed commissions meant also the abolishment of single capacity system, and saw this change as a threat to the interests of domestic brokers (LSE Public Relations Department, February 1979, HF183/428/02; Vogel Citation1996, p. 100).
8. Charles Goodison, the then Chairman of the LSE, had high hopes from the new government, and started negotiating with key Conservative MPs, including Cecil Parkinson, while still in opposition (PREM 19/1005, 10 November 1980).
9. In 1983, the market capitalisation of the large American financial groups was as follows; Merrill Lynch – $3.6bn, Phibro/Salomon – $4.336bn, EF Hutton – $1.11bn. The market capitalisation of the Japan’s Nomura – $4.830bn, Nikko Securities – $1.938bn, Daiwa – $1.803bn was also considerably much higher than that of the domestic financial groups (Exco – $410mn, Mercantile House – $430mn, RIT & Northern – $490mn, Warburg’s – $276mn, Kleinwort’s – $292mn). The LSE’s listed companies fared even worse (Aykroyd & Smithers – $85mn, Smith Bros – $10mn).
10. David Walker, the then Deputy Governor and one of Big Bang’s architects, claimed that without lifting LSE’s protections, there was no way to avoid the London market’s relegation to the 2nd or 3rd division of the world league (BoE Archive 15A91/1, 21 June 1982).
11. This was possible after an agreement between Cecil Parkinson, who has been appointed by Thatcher as Secretary of State for Trade, and Charles Goodison was reached in July 1983.
12. The Law came into force in April 1988.
13. A wide definition of ‘investment’, flexible enough to contain future innovation and distance the DTI from any direct involvement with the regulation of unexpected institutional mutations, was set as the basis of the new regulatory system (PREM 19/1461, 16 October 1985).
14. Any political involvement raised fierce opposition from the City as well. Richard Lambert of the FT, argued that any governmental involvement in regulation would be unambiguous proof that ‘everybody is completely, utterly, 100% mad’ (FT 13 March 1984 ‘Gower in the Real World’). Meanwhile, Sir Walter Salomon, chairman of Rea Brothers, claimed that ‘all economists not in the pay of special interests should be alert to the dangers of regulation’.
15. Similar to New-Labour’s ‘light-touch’ regulatory approach, the legislation set the duty of ‘skill care and diligence’ and the ‘duty of disclosure’ as the ‘high level principles’ on which the measurement of institutions’ solvency was based (Redwood PREM 19/1461, 18 September 1985).
16. Ahead of the second reading in Parliament, and in order to ease expected Labour opposition, this clause was added at the last moment to the Financial Services Bill.
17. Following the guidance of her policy unit, Thatcher claimed that computerised information systems, able to ensure the best execution of price, were ‘the best guarantee of investor protection’ (PREM 19/1461, 10 April 1984).
18. Their market share of less than 15% was much smaller than hoped (T486/137, January 1983; October 1985).
19. The Financial Bill 1983, for example, expanded BSs ability to use wholesale funding (Richardson BoE QB 1983, p. 217). Since ‘most mortgages deeds allow the BSs to assign the mortgage to anyone else’, there was no legal bar preventing them from raising funds from wholesale markets and expand their lending activity (T486/5, December 1982).
20. In 1985, the National Home Loan Corporation was established with the specific objective of purchasing loans from insurance companies and local authorities (HLG 118/4346, 10 October 1985).
21. More recently Kirkland (Citation2017, pp. 105–6) has pointed to both the Big Bang and the Right-to-Buy programme as laying foundations for the crisis of 2007. But he sees each of these policies as a separate policy field and fails to recognise the vicious cycle generated by the interdependencies the government created between them in the early 1980s.
22. This complex situation is encapsulated in a letter sent to Thatcher by Redwood where he asks ‘when [Lawson] comes to relax in order to stimulate output and jobs in time for next election, is his preferred mechanism to do it by monetary relaxation and lower interest rates … or … raised budget deficit?’ (30 March 1985, PREM 19/1457).
23. He also announced that when needed, tighter monetary conditions could be more effectively ‘achieved by bringing about a rise in short-term interest rates’ (Lawson Citation1985).
24. Compared to a year earlier, by mid-1985 lending to the energy sector and to non-bank financial institutions was up by 40% and 30% respectively. Leasing operators, insurance companies, and pension funds borrowing increased by 35–40%. Even lending to the manufacturing sector was 15.5% higher (Redwood in a letter sent to Thatcher on 10 July 1985, ‘The State of the Economy’).
25. This is a paraphrase on Colin Hay’s (Citation2009) insight regarding the distinction made by policy-makers during the 2000s between ‘bad’ inflation (rising RPI) and ‘good’ inflation (house price inflation). Both cases exemplify the scope for policy change opened by the re-interpretation of well-established economic ideas.
26. Nominal house prices, the object and subject of asset inflation, declined for the first time since the 1950s (Breedon and Joyce Citation1992, p. 173) and resulted in large volume of mortgage defaults and possessions.
27. The Competition and Credit Control Act 1971 led in 1972–3 to a property boom, which was followed by the collapse of the housing market and the fringe (secondary) banking crisis of 1974–5.
28. The Bank’s top priority was to attract US large houses. Creating a deregulated free Glass-Steagall zone was seen as the best way to do so (Walker T486/45, 5 December 1982).
29. John Kay, then a Daily Telegraph correspondent (quoted in Goodhart Citation1987) suggested that services provide less value added than manufacturers, and that trading in secondary markets, due to its weak connection with industry, is socially useless. In a 1984 paper published in the Lloyds Bank Review, James Tobin claimed that the high awards available in financial firms absorb resources – intelligent and managerial quality labour – and directs them away from other sectors. In a column published in The Mail on Sunday on 16 June 1988, Clive Wolman pointed at the higher commissions, charged by market-makers on all classes of shares, imposed on investors (BoE 15A91/1). As the Independent reported in 11 June 1988, private investors responded with the establishment of a new association (The Association of Private Investors/API) in order to protect their interests against the high costs and ‘poor service’ they get since Big Bang (11 June 1988, The Independent).
30. Bank’s officials also claimed that taxing secondary markets to make them more socially useful, as some have suggested, will send them off-shore and make UK less competitive, ‘which is where we started’ (Walker Citation1987, BoE 15A91/9).
31. Between 1997 and 2007, manufacturing sector made no contribution to real growth. From 2000 onward UK’s balance of trade was negative, ‘with many categories show[ing] a steady worsening over time’ (PWC Citation2009, p. 16).
32. By 2000 the UK savings ratio reached its lowest level since 1988, standing at 3% (Davey Citation2001, p. 91).
33. Between 1997 and 2000 an average increase of 6% and 10% in nominal mortgage debt and consumer credit debt, respectively, further boosted credit-led growth (Davey Citation2001, p. 92).
34. Cartensen and Matthijs (2017) suggest that after 2011 election, New-Labour’s policy had been fundamentally changed, as Blair and Brown expanded public expenditure, viewing social justice as a major goal of public policy. Yet, as we show in the following, the result of this expansion was, once again, growing dependency on finance-led growth.
35. By 2007, the services sector, led by the expansion of the financial sector, was responsible for 76% of UK total economic output (ONS Citation2014).
36. By 2008, the liabilities of UK ‘big four’ banks summed to 500% of GDP, with a consumer funding gap of £564bn (BoE Citation2007, pp. 31, 35) and a leverage ratio of between 1:25.8 (Lloyds TBS) and 1:41 (Barclays) (Buiter Citation2009).