Margaret Thatcher: The Authorized Biography, Volume 2
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Nothing was settled, however, before the 1983 general election. Indeed, the confusion of policy in the corridors of power had become clear only in 1982 when Treasury officials and officials at the Department of Trade discovered that the evidence attacking the Stock Exchange which they proposed to submit to the OFT ran directly counter to the evidence prepared by the Bank of England, which defended it.147†
Once Mrs Thatcher had won her landslide victory, things moved very fast to stop the OFT case going beyond the point of no return. It was clear to Nicholas Goodison, and to the new Chancellor, Lawson, that, if the matter went to court, ‘the Stock Exchange would lose’.148 Goodison wrote in longhand to Cecil Parkinson, now at the Department of Trade and Industry (DTI), and asked him to prevent the court case in return for a promise by the Stock Exchange to reform.149 ‘I said I couldn’t guarantee the integrity of the market if the thing went to court.’150 Parkinson was supportive of reform because of his own experiences as a young accountant in the City in the 1960s when ‘They could keep you out of the Stock Exchange if they didn’t like the way your tailor cut your suit.’151 Parkinson felt in a ‘creative fervour’152 – as he, with unintentional comedy, put it – because he knew he had the Sara Keays problem hanging over him and thought he might not survive in the Cabinet.
Parkinson also found in the new Chancellor, Nigel Lawson, a much more ardent bringer of change than Geoffrey Howe. As a former financial journalist, Lawson felt a certain cynicism about the motives of those who ran the City. As a well-instructed believer in free markets, he was, recalled David Walker, ‘like a supersonic missile’153 for reform. Michael Scholar, who was Mrs Thatcher’s Treasury private secretary after the election, recalled being ‘collared’ on the subject by the newly appointed Chancellor in the summer of 1983, ‘and I wondered what the hell he was talking about.’154 Lawson had been the main intellectual driver for the abolition of exchange controls in 1979, and he understood and intended that this would lead to the end of the Stock Exchange’s restrictive practices. The world would want to come to London, and should be encouraged to do so. Indeed, the problem with Lawson was that he wanted to go too fast, ‘not quite trusting the Stock Exchange to deliver any promise it might make’.155 He agreed, however, that it would be better to avoid snarling up change in a court case. He helped Parkinson persuade doubting Cabinet colleagues of the argument.
Mrs Thatcher herself was not deeply engaged in the issue and ‘didn’t descend into the details of how the City worked’.156 ‘It was a real struggle to get time in her diary to brief her on it,’ David Willetts recalled.157 She continued to worry that it looked bad for a Conservative government to interfere, seemingly in favour of the Stock Exchange, in a legal case. But she did have some strong, relevant prejudices which made her easy to win over. She had a distaste for monopoly and ‘disliked the people in the City who were looking after themselves very nicely’.158 Indeed, she had ‘a bee in her bonnet (a good one) about breaking up the men in the City’.159 She had some strong supporters in the Square Mile, including Michael Richardson at Rothschilds, who, when at Cazenove, had arranged for that company to pay for her office as leader of the Opposition. But on the whole she doubted the positive economic contribution made by the City’s club mentality, and she often felt slighted by City men. Parkinson recalled meeting her returning from lunch at a big bank before her first victory in 1979. ‘They had given her hell. She was very depressed. I said: “Don’t worry; they’ll vote for you, and they’ll forget it.” “They may,’ replied Margaret, ‘but I won’t.” ’160
As with privatization, Mrs Thatcher herself does not seem to have been particularly quick to see exactly how City reform might serve her wider economic agenda, but advisers were more than ready to help her. John Redwood saw the opportunity and had the necessary City knowledge to deal with the technical issues, combined with a Thatcherite vision of ‘popular capitalism’.161 In his own mind, Redwood linked City reform with privatization, deregulation, wider ownership, a mass market in shares, personal ‘portable’ pensions, the rejuvenated London Docklands which Mrs Thatcher and Michael Heseltine had begun in the first term, and a more competitive, internationalized Britain. ‘This was something I took to her,’ he later claimed,162 rather than something which she initiated. It was part of the ‘massive enterprise revolution’ which she sought.
In July, Mrs Thatcher supported Parkinson, who urgently wanted to accept the undertakings offered by Goodison to forestall the OFT action. She agreed to an immediate statement to Parliament stating the government’s intention to exempt the Stock Exchange, by law, from the Restrictive Practices Act, so long as it reformed itself within an agreed period of three years. She was not interested in sheltering the City from change. Marking the draft of Parkinson’s statement to the House, she wrote ‘Why?’ against his promise that ‘single capacity’ would be maintained.* ‘Promote competition as well as investor protection,’ she scribbled.163† In his Commons statement, however, Parkinson ignored Mrs Thatcher. He said that he hoped single capacity would be ‘preserved in its present form for the time being’.
As the quid pro quo for the OFT dropping the case, Parkinson also publicly promised, before he resigned in October, that there would be a Financial Services Act to bring new law to the new world which Stock Exchange reform would create. John Redwood thought the situation, even though forced by the OFT threat, was politically advantageous, and a cause for celebration. ‘We should claim more credit’, he wrote to Mrs Thatcher, ‘for breaking a cosy cartel.’164 She doubly underlined the last two words to show her approval.
Within No. 10, it was Redwood who gave Mrs Thatcher the most guidance. When the Stock Exchange set out its own detailed proposals, in April 1984, he counselled her in favour of liberalization: ‘You should not be too worried about the possibility of foreigners coming in and buying up the British financial system … The Americans will undoubtedly make an entry to the market in due course,’ probably through their banking businesses. ‘… This is a perfectly healthy development,’165* and would be natural as trading moved from the floor of the Stock Exchange to computer screens. With his advice in mind, her private office conveyed her views to the DTI: ‘She welcomes the radicalism of the Exchange’s consultative document, which fully justifies the decision to take the case from the OFT and has noted that [it] recognises that the end of minimum commissions will in the end mean that single capacity may not be sustained.’166 She made the link between technological change and reform of the market: ‘She has suggested that the Stock Exchange should now move as rapidly as possible to establishing suitable electronic systems for handling for dealing … in readiness for the move to dual capacity.’ This would provide ‘the best guarantee of investor protection after the demise of single capacity’.167
The end of the Stock Exchange’s club-like existence would also, most people understood, require different, more formal systems of regulation. The new report by Professor Laurence Gower on investor protection moved in this direction. Redwood worried that this would blow back on government: ‘People would expect the Government to offer them redress. People would expect the Government to make sure there were no crooked operators. It is not within the Government’s power to ensure either of these things.’168 Mrs Thatcher underlined these sentences approvingly. Redwood made a classic conservative case for protection by the common law rather than by government control, a view which Mrs Thatcher instinctively shared. Echoing his anxiety about the Gower report, she worried that ‘ultimately the government could be blamed for any malpractice.’169
In fact, the Thatcher–Policy Unit view of regulation was not widely shared and did not prevail. The Bank of England and the DTI accepted the thrust of the Gower report that there should be a statutory regulatory body, and persuaded the City to do the same. The Financial Services Act created a new Securities and Investments Board (SIB), whose first chairman Sir Kenneth Berrill, a former head of the Think Tank, was not seen by Mrs Thatcher as a kindred spirit. (The mo
re congenial Martin Jacomb refused the job.) The SIB got off to a rather acrimonious start, until being later rescued by David Walker. In the view of Nigel Lawson, Mrs Thatcher ‘did not really engage’ with the issues of regulation.170 David Norgrove, her Treasury private secretary at the time of Big Bang, thought that she was ‘a bit out of her depth in the subject’.171 It is clear from the government files that she sometimes learnt about the full proposals only after they were well in train. Her role in the details of City reform was seldom more than marginal.
In general, she was seeking to balance proper control of the risks involved with what she, Lawson and indeed almost everyone who cared about the financial competitiveness of the City of London regarded as inevitable change. In April 1986, with Big Bang fast approaching, Brian Griffiths* and David Willetts produced a report for which Mrs Thatcher had asked to update her on the whole subject. As well as pointing out the clear advantages, they flagged up dangers: ‘Will we see boom and bust?’, would there be ‘more embarrassing fraud cases?’172 They worried particularly about how, in bad times, the new firms might be tempted to ‘dump their losses on to the client’. They pointed out the Glass–Steagall Act in the United States, which enforced the separation of clearing banks and investment banks,† and said: ‘It is open to question as to whether we shall some day, after a nasty scandal, be forced in the same direction.’ Mrs Thatcher marked this passage very heavily. The risk was acknowledged; but in a culture quite unused to regulation of this sort, such a level of legislative interference was considered undesirable.
On the whole, though, the government felt confident that it was going in the right direction. As early as the summer of 1984, Redwood was sufficiently pleased to present a sort of fairy tale about City reform to his Policy Unit colleagues. It was called ‘Tilting at Castles’. He satirically imagined the Stock Exchange as a ‘great big castle’ occupied by a ‘noble and chivalrous group of knights’,173 where brokers and jobbers lived together in ‘fraternal enmity’. The knights had what they considered ‘a very good rule which said that they were never allowed to cut their prices … [for] all the people outside the Stock Exchange’, and so they could enjoy endless feasting and jousting. As a result, the tale continued, the OFT threatened the castle with its guns. But then the country, which had previously been badly governed, ‘fell under a wise ruler’ who sent her ‘boldest champion’ (Parkinson) to parley with the knights, while keeping the guns trained on their castle. Their champion was their ‘most Parfait Knight, called Sir Nicholas’, who agreed they would mend their ways.
Then the ‘wicked old institutional barons’ (commercial banks, pension funds) got interested in buying skills the Stock Exchange could offer and, because they ‘weren’t very bright’,174 paid the knights ‘so much money [for their companies and their skills] that they could go on feasting forever’. But a few bold people realized that ‘the best thing to do was to lead the peasants’ (small investors) – ‘Everybody had tended to forget about the peasants’ – and the Stock Exchange knights began to think that they might have to let in ‘foreigners and institutional barons and all the rabble they’d kept out for so many years’.
Then, Redwood admitted, ‘The narrative of the chronicle now becomes frayed and torn. Several textual commentators have supplied different endings to the story.’175 He proposed a short, happy ending:
And so it became apparent to all the peasants that they had indeed been wisely governed … by being nice to everyone, the Government had wrought a great revolution … All agreed that it was much better to live in a world where the institutional barons now had to behave themselves and do what the peasants told them; and where the Stock Exchange knights no longer belonged to a special Order … but where people could choose for themselves what to do with their wealth.
Thus had popular capitalism triumphed, said Redwood. Mrs Thatcher herself saw a copy of his fairy tale. She was not naturally at ease with the genre, but this one quite faithfully epitomized what she wanted.
Was it what she got? Did the fairy tale correspond with reality? Even now, as Zhou Enlai is alleged to have said when asked his opinion about the effects of the French Revolution, it may be too early to say. Controversy swirls about Mrs Thatcher’s unlocking of capitalism and has become, if anything, more turbid, as the seemingly effortless prosperity of the immediate post-Cold War era has been replaced by the West’s debt crisis which began in 2007.
What is certain is that Mrs Thatcher’s innovations of privatization and financial reform changed the world. The City ‘club’ really did disappear, and London really did become a centre for international markets and for banks as it had not been since before the First World War. It is a mark of the boldness of her government that, despite all the well-known disadvantages of nationalization, no one before her had really tried to unscramble the state grab for industrial power of the middle of the twentieth century. And it is a mark of the policy’s success that no nation, once embarked on privatization, has yet seriously attempted to reverse it. Privatization became, and remains, the greatest policy export ever invented in Britain (unless one can describe parliamentary democracy or the rule of law as a policy).
Oliver Letwin, who joined Rothschilds after his time at the Policy Unit, found the world coming to London to discover what Mrs Thatcher’s governments had achieved and ask how it could follow suit.* Thanks, in part, to Big Bang, City institutions now had the capacity to help answer these inquiries. Nationalization had seemed, in the middle of the twentieth century, to be a ‘structural solution’ to the problem of once-great heavy industries. It had run out of steam and money: ‘Once someone had showed that the reverse was possible, this too was a structural solution.’176 In his ten or so years at Rothschild, Letwin found himself advising the following countries on privatization – Canada, the United States, Colombia, Mexico, Chile, Honduras, Kenya, Tanzania, Congo (Brazzaville), Morocco, South Africa, Ivory Coast, Singapore, Malaysia, Australia, New Zealand, Spain, Italy, France, Ireland, Portugal, the Netherlands, Sweden, Finland, Ireland, Poland, the Czech Republic, Slovakia, Hungary, Moldova, Russia and even Cuba.177 Mrs Thatcher noted the beginnings of this trend as early as 1986. ‘People are no longer worried about catching the British disease,’ she proclaimed. ‘They’re queuing up to obtain the new British cure.’178 She does not deserve personal credit for inventing the policy, but only a government led by her could have seen it through. The world recognized this, more perhaps than did her fellow countrymen.
In a famous speech delivered in November 1985, about a year before British Gas was sold, Harold Macmillan, by then ninety-one years old, likened privatization to the unwilling sale of the contents of a once-noble house: ‘First of all the Georgian silver goes, and then all that nice furniture that used to be in the saloon. Then the Canalettos go.’179 It was wittily done, but it revealed Macmillan’s paternalist way of looking at the phenomenon. In his mind, he – or his friends – had once owned the family silver, and now it was gone. Its departure was therefore a loss. Seen from a wider point of view, however, the silver had not been sold away. As Mrs Thatcher put it, she was ‘selling the family silver back to the family’180 – that is, the nation.* It was now better polished and better used. This was a gain. In the same speech, Macmillan for some reason fastened on Cable and Wireless and BT as ‘the two Rembrandts’ sold off. In both these cases, it was impossible to argue that the ‘Rembrandts’ were not in better hands after privatization. Indeed, his analogy with paintings, silver and furniture was inadequate because privatized companies not only had capital value, but also earnings and profits. In the great majority of cases, these rose, to the general advantage, not only of shareholders, but also of consumers who could benefit from the new profits reinvested in the businesses, and in more competitive prices and better services.
There was a radical transformation in the performance of almost all the companies privatized or opened up by the breaking of cartels. They became, and mostly remain to this day, ‘properly functioning
parts of the capitalist system’.181 There were serious failings too. Some monopolies were not tackled. Even John Redwood admitted, ‘We were weaker on competition than we should have been. It is competition which produces the magic.’182 There were serious problems that were inadequately provided against, such as the merging, after Big Bang, of commercial ‘high street’ banks with merchant, later called ‘investment’, banks. The failure to prohibit the emergence of so-called universal banking, which Nigel Lawson described as ‘my one regret’ about reform of the City,183 contributed to the disaster of the credit crunch in 2008. But it is nevertheless unimaginable that a Stock Exchange playing by the old rules could have survived, or that a nationalized British Telecom with monopoly power could possibly have presided over the telecoms revolution, or that a state-subsidized BL, unbroken up, could have brought about the situation obtaining in 2015 that Britain was exporting more cars than ever before in the nation’s history.