Rowland’s methods made him plenty of enemies. As early as 1971, his banker Sir Siegmund Warburg, no shrinking violet himself, had decided that he could no longer represent Lonrho. Meanwhile some of the firm’s older directors were getting cold feet about Rowland’s buccaneering, autocratic style. At last, led by the former BOAC chairman Sir Basil Smallpeice, they tried to have him dismissed as Lonrho’s chief executive. The ensuing scandal dominated press headlines in May 1973, as Rowland first tried to get the High Court to restrain his adversaries, and then decided to take his case to a full shareholders’ meeting, hoping that Lonrho’s small shareholders, who had made large amounts of money under his guidance, would stay loyal. Since it was clear that Rowland had not only bribed African officials and defied international sanctions against Rhodesia, but had systematically hidden from his own board various other activities, including an annual $100,000 tax-free bribe to Duncan Sandys, the press was unanimous. ‘Mr Rowland Must Go,’ insisted a long Times leader just before the shareholders’ meeting, explaining that he could not be allowed ‘to run a major British public company as if it was still a personal fief’.29
For Heath, the Lonrho affair was yet another embarrassment. The problem was not just that it involved two well-known Conservatives in Sandys and du Cann, for the affair had come to symbolize a broader financial culture of irresponsibility, ruthlessness and greed, which the government itself was supposed to have encouraged. In the House of Commons on 15 May, the Labour backbencher Jack Ashley pointedly asked how Heath could ‘justify the double standard of constantly refusing to intervene in the great national scandals of big business … while he constantly intervenes and moralises about the legitimate wage claims of trade unions?’ Would he accept, added the Liberals’ Jo Grimond, that excesses on Lonrho’s scale were ‘fatal to the counter-inflationary policy’, and that ‘greed does not now seem to be a monopoly of the trade unions’? The questions gave Heath no choice, for as he later explained, Lonrho had ‘presented socialists with a marvellous propaganda coup. To have defended such behaviour would have been a disgraceful own goal.’ And what he said next guaranteed his place in the dictionary of quotations. Lonrho, he gloomily told the House, represented ‘the unpleasant and unacceptable face of capitalism’.30
It has since been suggested that Heath’s best-known saying was actually a mistake, and that his notes called for him to say ‘facet’ rather than ‘face’, which, if true, speaks volumes about his insensitivity to language. In his memoirs, however, he stuck by the famous formula. He never understood why the remark was seen as a mistake: it was ‘sheer stupidity’, he thought, for Conservatives to ‘fall into the trap of reflexively defending’ the excesses and defects of capitalism, and ‘no true friend of free enterprise could have said less’. But even he was taken aback by the way in which the phrase stuck, being brandished time and again by Labour MPs like some badge of victory. At a time when sub-Marxist ideas were proving enormously popular in academia and the arts, when the headlines were full of the ‘class war’ between the government and the unions, and when the property boom had drawn fresh attention to the economic inequalities in British society, Heath seemed to have scored a dreadful own goal. Even capitalism’s most eminent champion, it seemed, could not deny its ‘unpleasant and unacceptable’ face. Perhaps the remark would soon have been forgotten. But on the right of the Conservative Party, there was a growing sense that it was a Freudian slip, a mistake that revealed the crypto-socialist behind the mask of the self-made man. For by this stage Heath had left the ‘quiet revolution’ long behind, and to his Conservative critics, he was fast becoming more socialist than the socialists themselves.31
To many Tory activists, Heath’s government seemed to be losing conviction. On the left, Sir Gerald Nabarro leads a rebellion against the Maplin airport scheme. In the centre, Enoch Powell makes a typically lonely stand against the EEC. On the right, Heath himself denounces the ‘unacceptable face of capitalism’. Cummings in the Daily Express, 15 June 1973.
On New Year’s Day 1973, Britain finally became a member of the European Economic Community, fulfilling Edward Heath’s dearest dream. For the United Kingdom’s 55 million people, however, little seemed to have changed. On the front page of The Times, the main headline reported that Heath and Wilson had clashed over Britain’s future in Europe, the latter claiming that the government had accepted ‘utterly crippling’ terms in defiance of public opinion. Elsewhere, headlines announced that the Irish police had arrested ‘one of the most wanted men in Northern Ireland,’ the Provisional IRA’s Londonderry commander Martin McGuinness; that London’s gas workers were on an unofficial overtime ban, endangering gas supplies to almost a million people in the South-east; and that the Ugandan president Idi Amin had accused Britain of interfering in his plans for economic renewal. In other news, Jimmy Savile had been awarded the Variety Club’s award for showbusiness personality of the year, while Peter Cormack’s goal against Crystal Palace had taken Liverpool clear at the top of the First Division. On the letters page, the controversy over the Post Office’s admission that it had made a mess of Christmas deliveries still rumbled on. In the Women’s Advertisements, there were appeals for travel representatives in Majorca and Torremolinos, for ‘young ladies with personality’ to work as general assistants at the Richmond Arms Hotel, Goodwood, and for a ‘young attractive receptionist’ to work for a Chelsea estate agent. On Radio One, Tony Blackburn was in Luxembourg, of all places, to mark the big European day, while Jimmy Young was in Brussels and Dave Lee Travis in Cologne. That evening, television viewers could look forward to The Generation Game, Tarbuck’s Follies, Opportunity Knocks and Coronation Street. And in the charts, little Jimmy Osmond still held sway over the hearts and minds of Britain’s teenagers, thanks to his merciless rendition of ‘Long-Haired Lover From Liverpool’.32
Even as he celebrated Britain’s accession to the Common Market, Heath’s mind was on the next stage of his pay policy. On 17 January, flanked by Anthony Barber and Sir William Armstrong in the gilded splendour of Lancaster House, he unveiled Stage Two, which was scheduled to begin on the first day of April. Under the new regime, pay rises were to be limited to a flat £1 a week plus 4 per cent, with nobody’s annual increase allowed to exceed £250. There were strict controls on rents and dividends, and companies’ profits were not allowed to exceed the average of their best two years out of the last five. Meanwhile, there were two new government bodies to police the new arrangements: a Pay Board to examine all settlements involving more than 1,000 employees; and a Price Commission to scrutinize retail, wholesale and manufacturers’ prices, with manufacturers allowed to raise prices only in exceptional circumstances, as defined by a new Prices and Pay Code. All of this seemed a long way from Selsdon Man, and Heath insisted that it was merely a cruel necessity before the government could return to voluntary arrangements. But a strategy paper prepared for the Tory high command a few weeks later told a different story. ‘Few people are in the long term going to be prepared to leave it to the government to decide the remuneration appropriate to their work,’ the paper correctly noted, while a ‘large section of the middle class’ was bound to resent ‘the prodigious extension of the powers of the state’. But it was ‘unlikely’, the authors concluded, that Britain could return to free pay bargaining until there had been ‘some fundamental change in the techniques of economic management’ as well as a ‘completely new solution to the problem of cost-push inflation’ – and neither seemed likely to materialize any time soon.33
Not unpredictably, union leaders reacted furiously to the news of Stage Two. The general secretary of NUPE, Alan Fisher, colourfully claimed that Heath’s concern for the low paid had been exposed as ‘political pornography; it stimulates the desire but does not relieve the need’, a slightly strange formula given that, with the pornography trade booming, thousands of men clearly thought it did offer relief of a kind. In the weeks after the announcement, individual unions rushed to try to impose more generous settlement
s; by February, gasmen, teachers, hospital staff, train drivers and Ford car workers had all walked out, with the Civil Service staging its first ever one-day strike on 27 February. By the standards of the previous year, however, this was all fairly small-scale stuff. The NUM, for example, was divided, and in a strike ballot on 13 April the miners voted by almost two to one against striking for higher pay. This took much of the sting out of the TUC’s planned resistance, and although the unions called for a ‘day of national protest’ on 1 May, the result was a damp squib. While the railways, engineering firms and car factories suffered severe disruption, hundreds of thousands of workers defied their unions’ instructions. At British Leyland, eight out of ten workers reported for duty, more than a hundred NUM pits carried on as usual, and in London, most buses and tube trains ran as normal. Heath’s pay policy, it seemed, might just work: even the hawkish Economist predicted that inflation for 1973 should be around 8 per cent, less than half the figure for 1972. The government was well on the way, it said, to a ‘historic, if temporary, victory’.34
If Stage Two had genuinely worked to keep inflation down, then perhaps it would have been worth the gargantuan bureaucracy of Pay Boards and Price Commissions, which smacked of some Eastern European Ministry of Tractors rather than a government that talked endlessly about dynamism and competition. But although Heath had brought a temporary end to inflationary wage claims, rising prices meant that workers were bound to demand a pay rise eventually – and when that happened, the logic of the incomes policy meant that the government was legally bound to confront them. As the Financial Times’s columnist Samuel Brittan, an early cheerleader for monetarism, never ceased to point out, the only way to avoid a fight was to institute ‘a permanent system of [wage] regulation’, which rather defeated the point of a free economy. The real problem, though, was that the world economy was rapidly sliding into a new age of inflation, recession and instability. Across the industrialized world, productivity and output were slowing down after years of massive growth. Automation and computers were throwing millions out of work, and yet consumers’ enlarged expectations meant that inflationary pressures were greater than ever. Meanwhile, the end of the old colonial empires and the rise of the developing nations meant that world commodity prices were sharply increasing, most famously oil, which had begun to climb even before the emblematic shock of late 1973. The truth was that although many politicians – especially on the Labour benches – refused to face it, Britain was now part of a globalized economic system, and not even the most powerful Pay Board or Price Commission could hold back the tide of world inflation.35
It is often thought, quite wrongly, that the oil shock of late 1973 changed everything. In fact, global commodity prices were already rising by terrifying margins. According to The Economist’s authoritative indices, the cost of materials used in manufacturing almost doubled between September 1972 and September 1973, with the price of copper going up by 115 per cent, cotton by 127 per cent, cocoa by 173 per cent and zinc by a staggering 308 per cent. What was particularly bad news for Britain was that prices were going up at precisely the moment when the government had launched a domestic boom, so demand not just for commodities but also for imported consumer goods like cars and colour televisions was unusually high. With import prices up by 26 per cent, Britain spent an extra £2 billion on imports during 1973, plunging the balance of payments deep into the red. It was no wonder that the pound continued to drop on the international exchange markets (thereby making imports even more expensive); little wonder, either, that the markets were becoming seriously worried about the long-term prospects of the British economy. Within the walls of the City of London, panic was quietly setting in. Not even the most prestigious institutions were immune: when Cazenove’s, brokers to the Royal Family, sent a circular to its clients in February 1973 condemning ‘the general lack of respect for important values (ignored murders in Ulster, indiscipline and public exhibitions of filth)’, it was hard to miss the whiff of hysteria.36
As Heath was often the first to point out, there was not much he could do about the rise in global commodity prices, short of closing Britain’s borders to imports. But the Barber boom made a bad situation much worse. Not only did it stimulate demand for imports at the worst possible moment, it also sent the money supply rocketing far beyond the limits of good sense. With broad money (M3) growing at more than 25 per cent for two successive years, it did not take a dogmatic monetarist to see that there was an enormous risk of the economy tipping into rampant inflation.* Even in the City, where many people made vast amounts of money from the credit boom, there was considerable unease; in September 1972, the Banker ran a critical editorial entitled ‘Money Out of Control’, warning that the gigantic explosion in bank lending had gone not into industrial investment, but into inflating the price of ‘existing resources, such as houses, building land and shares’. In the second half of 1972, the price of new houses had gone up by 25 per cent and older properties by 18 per cent, a boom of unsustainable proportions. As the paper put it, this was ‘Keynesianism gone mad’. And by 1973, the economy was showing all the symptoms of dangerously overheating. In the first six months alone, Britain’s GDP soared by 6.1 per cent, well in advance of the government’s projections. To be sure, unemployment was falling, down from over a million to just over 500,000 in less than eighteen months. But already there were reports of companies suffering shortages of labour and parts, of construction firms overloaded by more business than they could possibly want, of more job vacancies than there were men to fill them – the classic signs of a boom that had run well out of control.37
At first, Barber stubbornly refused to take action before the boom turned inexorably to bust. Defying entreaties from the right to slash spending, his Budget on 6 March gave away a further £120 million, raising pensions and benefits and cutting National Insurance contributions. Given the circumstances, this was bold to say the least, but once again it owed more to Heath than to his Chancellor, who was privately becoming deeply ‘frustrated’, as he later put it, over the extravagant level of public spending. A few denounced him as criminally reckless: the Times’s economics editor Peter Jay, an early convert to monetarism, warned in May of ‘the most acute prospect of overheating on the back of the weakest balance of payments in the postwar period’, while the Spectator predicted that the atrocious trade figures would inevitably mean ‘radical and punishing deflation, probably later this year’. Yet still most commentators and Tory backbenchers remained wedded to the principle of breakneck expansion, seeing it as welcome relief after the unemployment of early 1972. Meanwhile, Labour even accused the government of being too timid, as did the TUC and, making an unlikely trinity, The Economist. Indeed, as pressure built over the summer, The Economist maintained that Britain was ‘two-thirds of the way to an economic miracle’, while The Times ran an editorial entitled ‘No Time to Moan and Weep’, urging the government to stick to ‘the policy of economic expansion’. This was no time, it said sternly, for a ‘squeeze’ in the money supply: the government must remain committed to a ‘large investment programme’, and ‘the British must not behave like a self-defeated and self-dividing nation of weaklings and cowards’.38
Not even this rather hysterical rhetoric, however, could blind Anthony Barber to the realities of economic life. With food and housing costs surging and the pound in free fall, he finally bowed to the inevitable, slashing £500 million from public spending in May 1973 and raising the Bank of England’s minimum lending rate to 11.5 per cent by the end of July, the highest level since the outbreak of the First World War. By the middle of August, building societies’ mortgage rates were up to 10 per cent, bursting the property bubble almost overnight, and on 12 September the Bank of England, alarmed at the prospect of a general liquidity crisis, imposed strict lending restrictions on the entire banking system, including curbs on personal credit and tighter rules for financial transactions. But even this was not enough. By 13 November, the Bank had raised the minimum lendin
g rate to 13 per cent, a record, and called in 2 per cent of the banks’ liabilities to be held as special deposits. But it was too late; hubris had long since given way to nemesis. In the last week of November, rumours began to circulate about the health of London & County Securities, one of the fringe banking groups that had done very well out of the credit boom by lending heavily on property. As luck would have it, it was known as ‘Thorpe’s bank’, after the charismatic Liberal leader, a non-executive director. But even Thorpe’s famous suavity could not withstand the news that, on the last day of November, London & County was on the brink of collapse, stretched to the limit by plummeting shares and massive liabilities. The age of the City buccaneers was over. The secondary banking crisis had begun.39
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