by Andrew Marr
Only in the side streets, however. For most investors the world of controls still applied. Sir Nicholas Goodison, later Chairman of the Stock Exchange in the Thatcher years, looked back on the mood by the late seventies: ‘We still had exchange controls. We had a Labour government intent on controlling everything, and no freedom of capital movement. British people were not allowed to take capital abroad; British institutions weren’t allowed to invest capital abroad except by special Treasury permissions…we were an insulated market.’ It was this world which was swept away on 23 October 1979 when Geoffrey Howe, to general shock, abolished exchange controls. Despite what she later said, Thatcher was wobbly and uncertain about the gamble. Howe himself likened it to walking off a cliff to see what happened. Bankers noted there was no planning for this revolution. Tony Benn said it showed that international capitalism had finally defeated democracy. What is certainly clear is that abolishing exchange controls made it inevitable that the core of the ‘old City’ would be exposed to the cultural revolution that the Eurodollar market-makers had already enjoyed in the side streets. The smaller merchant banks, Antony Gibbs, Keyser Ullman and others, were already disappearing; even the biggest London merchant banks such as Kleinwort Benson had profits of little more than a tenth of Japan’s Nomura and a seventh of Wall Street’s Merrill Lynch. For the huddled world of the traditional City, it was suddenly a choice between looking for big protective overseas partners or struggling to survive alone.
In 1982, another slice of American business life came to London in the multi-coloured jackets and raucous bear-pit atmosphere of the new international financial futures market, or LIFFE. Here the high-risk bets were made on the future value of commodities and currencies, in one of the older buildings of the City, the Royal Exchange. Inside its elegant shell roared an atmosphere borrowed straight from Chicago, likened by startled observers at the time to an ill-bred casino. LIFFE would turn out to be very profitable for the traders, the raucous ‘barrow boys’ pumped up on booze, cocaine and fear of failure who became such an emblem of eighties life, many retiring exhausted and vastly rich by their early thirties. It would also be the scene of broken dreams. It was in the derivatives market that old Barings Bank, one of the grander names of the traditional City, lost its money and died. And so to the next question for the City: for how long could the traditional distinction between brokers, dealing with the public, and the jobbers or wholesalers, dealing only with stockbrokers, be maintained? It had been seen as an essential barrier to protect the public, as important for the City as the division between barrister and solicitor was in English law courts. Yet in these new markets it was barely recognized.
The new Chancellor after the 1983 election, Nigel Lawson, a former financial journalist, and the new Trade Secretary, Cecil Parkinson, decided to do a deal with the increasingly archaic looking Stock Exchange. It was struggling with a long and wearisome court case brought by the Office of Fair Trading. The ministers promised the legal action would be dropped if the Stock Exchange reformed itself. This was the final piece of action which led to the ‘Big Bang’ of City deregulation, something which has a claim to be the single most significant change of the whole Thatcher era, on a par with confronting the unions or privatization. The situation in 1983-4 could be compared to an old market town high street, with its long-established specialist shops, the fishmonger and the drapers, old Mr Bunn at the bakery and Miss Manila the trusted postmistress, at just the moment when a huge new retail park opens on the outskirts. The supermarkets in it are the international financial service companies and the global-trading banks offering every financial service under one roof. Chase Manhattan and Merrill Lynch here play the role of Tesco and Walmart. The high street shops are the City firms, small and specialized but without the financial clout and scale to compete. What do they do? Some doggedly hang on, hoping their name, expertise and traditional customer base will see them through. Others negotiate with the supermarkets, trying to find a space under the roof to carry on trading. Others frantically merge, creating newer, bigger high street retailers.
This is what happened in the City when it became clear that the old rules were about to be abolished. During the winter of 1983-4 jobbers, brokers and bankers began to merge in an unprecedented explosion of defensive alliances. Old merchant banks opened talks with the US mega-banks. Scores of ancient names disappeared or were compressed into new assemblages of initials. In family firms such as N.M. Rothschild and Barings, there were family fights, with sons and brothers going different ways. The streets echoed to the sound of cultures clashing. Cricket and baseball were at war on the same pitch. With a new market for shares in smaller, riskier companies (the Unlisted Securities Market) and the creation of a new joint index of the shares of the hundred biggest companies on the Stock Exchange, the FTSE 100, or ‘Footsie’, there was a revolutionary mood in the air, a frenzy of optimism and activity which roared through 1984. Many noted the contrast with the devastation of Britain’s coal-mining industry as the strike dragged on during just the same time. Across the City big gleaming new dealing rooms were unveiled, filled with computers, edged with glass and marble. Paintings of venerable Jewish patriarchs from Edwardian days were rehung in bland new surroundings. Minimum commissions, bedrock of the old cartel, went overnight. Outsiders were at last ushered into the temple of temples, the Stock Exchange itself.
And then on 27 October 1986, this London Stock Exchange ceased to exist as the institution it had formerly been. Its makeover made it all but unrecognizable. The new screen-quoted system SEAQ finally came on stream, the moment remembered as the ‘Big Bang’ itself. A few months later the physical floor of the Stock Exchange, once heaving with life, was almost desolate as the deals were made by computer screen and phone. Scandals, shocks, crashes would follow but as the spring and summer of 1987 arrived, it was clear there would never be any way back to the cosy, particular, tradition-hallowed old high street of London’s City a few years before. Twenty years on, share deals which had taken quarter of an hour or longer to process were completed in a few seconds. The markets were opening two and a half hours earlier each morning, and closing a couple of hours later. The volume of trading was fifteen times higher than it had been in the early eighties. A country which had exported £2 billion of financial services a year before the Big Bang was exporting twelve times that amount. With only 330,000 people working there in City jobs, it was supporting the entire country’s overseas account. Though the City brought a super-rich class to Britain, whose vast salaries and staggering annual bonuses made a good swathe of the middle class feel ill over their breakfast newspapers when they were reported each year, and which pushed the more beautiful, well-placed and prestigious homes out of reach of hospital consultants, criminal lawyers, head-teachers and diplomats, the truth is that without the Big Bang, Britain’s books would be in much worse condition.
For millions of ordinary Britons who had only the haziest idea about the world of finance, the revolution in lending to buy their houses was as big a shock. Until the early eighties, most people’s experience of getting a mortgage involved a barrage of suspicious questions from a building society manager, followed by a long wait (for the loans were rationed) and eventually followed by a mortgage whose cost was fixed by the Building Societies’ Association. Generally speaking, the size of the low-cost loan, funded by deposits from building society members, would be limited to two and a half times the would-be homeowner’s annual salary. But by 1983 the ordinary clearing banks were muscling in on the business and this cartel began to go too. American and other mortgage lenders offered better deals. As Nigel Lawson later wrote, this happened in the new deregulated world ‘in which direct credit controls were out of the question; and the only checks on excess were the price of credit, which the Government remained able to control [it cannot do so now] and prudence, which it cannot.’ Three years later he responded to the clamour of building societies who felt unfairly hampered by their old status. He freed them to raise money in th
e capital markets, issue chequebooks and cheque guarantee cards, make other loans and indeed behave almost like banks. He also allowed them to convert themselves into banks if they got a sufficiently large majority of their members to agree. This duly happened, beginning with the Abbey National.
The effect of this was to suddenly take the brake off mortgage lending and to upend the old power relationship. Before, would-be borrowers limped along to the local building society and patiently endured many obstacles before they were allowed a mortgage. Now the building societies and banks started to ingratiate themselves with the public, thrusting credit at them. It became a good thing, a virtuous thing, to be a big-time borrower. People found themselves harangued in advertisements and junk mail to borrow more, to defect from one bank to another, to extend the mortgage rather than paying it off. The old rules about the maximum proportion of income began to dissolve – four times income began to be acceptable in some cases. House prices began to rise accordingly. (Today the average cost of a house in Britain is rising towards five times average income.)
In many cases banks and building societies began to lend people more than the total value of the house they were buying. The extra helped fuel a more general high-street splurge. The old system of checking people’s real financial status went out of the window. During 1986-8 a borrowing frenzy gripped the country, egged on by swaggering speeches about Britain’s economic miracle from the Chancellor and Prime Minister. The abolition of mortgage tax relief saw a rush of borrowing to meet the deadline. Lawson, not a man to underrate his achievements, acknowledged a critic who said ‘my real mistake as Chancellor was to create a climate of optimism that, in the end, encouraged borrowers to borrow more than they should and lenders to lend more than they should.’ All this would end in tears with the bust that followed and would be used for many years afterwards by Labour’s Gordon Brown as evidence of the Tory ‘boom-and-bust’ policies. But it was the consequence of a decisive break in the financial regulations governing City and everyday life, which changed Britain, probably for ever. It felt heady and exhilarating to millions. It was like getting properly drunk for the first time.
The Big Bang itself was thus only a moment in a longer process, rooted in the Eurodollar market of the sixties and given its most dramatic kick by Geoffrey Howe’s abolition of exchange controls, followed by the deregulation of lending. It meant that Britain for the first time in her history, and entirely willingly, gave up control over financial dealings done from her soil except as a neutral regulator. The State lost control over credit. In return the City gained a huge quantity of international financial business, the profits dripping down from some of the biggest deals in the world which might otherwise have gone to Berlin, Tokyo or (more likely) New York. The end of the age of controls and nationalistic finance meant also that British manufacturing lost any hope of the kind of long-term banking arrangements that German and French rivals had enjoyed. The asset-stripping habit, buying companies, dismantling them into component parts and selling them on, had become a controversial part of British business life in the seventies. The eighties’ financial revolution ensured it would remain so. There would be no room for old connections or long-term thinking in the new world.
For politics, the freeing of the City gave Margaret Thatcher and her ministers an entirely loyal and secure base of rich, articulate supporters who helped see her through some rough times. Rothschilds and other banks would spread the get-rich-quick prospect to millions of people in Britain through the privatization issues and the country would, for a time, come closer to the share-owning democracy Thatcher dreamed of. But all this came at a price – the crude and swaggering ‘loadsamoney’ years satirized by the comedian Harry Enfield and the culture of excess and conspicuous display that would percolate from the City through London, then the Home Counties, then much of southern England. For one generally sympathetic observer of the City in the mid-eighties it was worryingly infected with hype: ‘Febrile, driven by greed, pushing back the boundaries of acceptable behaviour, this was a brief, intense phase that in some ways was a rerun of the late 1920s, this time with added attitude.’
92
Sid Gets Lucky: the Privatization Years
There is a popular belief that the Thatcher governments never really intended to privatize very much, and that they stumbled upon an easy way of raising cash by selling off assets almost by accident. If so, it was one heck of a stumble. During the decade £29 bn was raised in sales of land and businesses and £18 bn from the sale to their tenants of 1.24 million council homes. The gas that cooked meals and warmed houses, oil coming ashore, aircraft taking businessmen and holiday-makers, and the airports they flew from, the phones and phone-lines used to communicate, cars, engines, steel and the water pipes and filtration systems bringing the British their baths and tea – all would be affected by the greatest shift of assets from the State to private companies and individuals in the history of this country. By the 1992 election, forty-six businesses had left the public sector, carrying with them 900,000 people. The notion that this was accidental is wrong. The Conservatives had promised to sell off council houses to their tenants from the mid-seventies. Privatization of state corporations had not featured much in the 1979 manifesto only because the party’s plans were still sketchy and partly because its leader did not want to scare off the voters. But privatization had been long discussed on the right. In his first Budget speech Howe said he wanted to reduce the size of the public sector, that ‘the scope for the sale of assets is substantial’ and that this was ‘an essential part of our long-term programme’.
So it would prove. One of the influential economic writers about the Thatcher years said that coining the word privatization was ‘a master-stroke of public relations’ by the government, which put it into worldwide circulation. Privatization would become the major idea exported from Britain in modern times, though as it happens the word was not one Mrs Thatcher liked or much used. (‘De-nationalization’ was even uglier, however, and inaccurate, since some of the corporations and assets sold had never been nationalized in the first place.) It started tentatively, with small steps in 1981-2 including shares in BP, the scientific corporation Amersham, half of Cable & Wireless and then the British National Oil Corporation, discussed elsewhere. The motives were mixed. Early on, with a horrendous public sector borrowing requirement to fund, simply raising cash was important. Yet this was neither the origin of the idea, nor its real point. Howe and Lawson were making clear from 1980 onwards that creating a large bulwark of new shareholders was essential to the Tories’ political vision. Lawson would cite the fears of extending voting in the nineteenth century, allowing political power to people who had no stake in the country: ‘But the remedy is not to restrict the franchise to those who own property: it is to extend the ownership of property to the largest possible majority of those who have the vote. The widespread ownership of private property is crucial to the survival of freedom and democracy.’
Another way of putting it was that this was one part of the one-way ratchet, pulling Britain away from socialism. If Labour had been accused of creating a giant state sector whose employees depended on high public spending and could therefore be expected to become loyal Labour voting-fodder, then the Tories were intent on creating a ‘property-owning democracy’ of voters whose interests were entirely different. The despair of Labour politicians as they watched it working was obvious. There was now to be a large and immovably pro-private sector Britain of share-owners and home-owners, probably working in private companies and increasingly un-unionized. The cost of renationalizing the industries made Labour pledges about it increasingly hollow. Twenty years later the idea of reversing privatization is something discussed only on the very margins of politics. The proportion of adults holding shares rose from 7 per cent when Labour left office, to 25 per cent when Thatcher did. Thanks to the ‘right to buy’ policy, more than a million families purchased their council houses, repainting and refurbishing them and watching t
heir value shoot up, particularly since they had been sold them at a discount of between 33 and 50 per cent. The proportion of owner-occupied homes rose from 55 per cent of the total in 1979 to 67 per cent a decade later. And people did indeed become much wealthier, overall, during the Tory years. In real terms, total personal wealth rose by 80 per cent in the eighties, entirely changing the terms of trade of ordinary politics. Old Labour was killed off not in the Commons but in the shopping centre and the estate agents’ office.
Yet if we look a little below the surface, the story is more blurred. Of that huge rise in wealth, relatively little was accounted for by shares. An increase in earnings and the first house-price boom were much more important. And the boom in shareholding was fuelled more by the prospect of a bargain than by any deep change in culture. Clearly, there was always a potential conflict between the government’s need to raise money quickly, and its hopes of spreading share ownership – both of them intensely political, since the former affected tax levels and the latter the size of the property-holding electorate. Again and again, from the grossly undervalued Amersham sale, to the later and greater privatizations, ministers erred on the side of getting the maximum spread of ownership, rather than the maximum price. The breakthrough privatization was that of 52 per cent of British Telecom in November 1984, which raised an unheard-of £3.9 bn. It was the first to be accompanied by a ballyhoo of television and press advertising. It was easily oversubscribed.