The relatively small amount from this first phase of privatization, between 1981 and 1983, was £1.4 billion for the Treasury and £25 million for the City institutions that advised on
and handled the sales.
11
By contrast, it was the huge scale of the success of BT’s sale, which brought in £3.9 billion for the
Treasury, that emboldened the government to be considerably more ambitious. The biggest sale of all was of British Gas, whose flotation in December 1986 swelled Treasury coffers by £5.4
billion. The promotional advertising campaign again targeted small investors, its catchphrase ‘If you see Sid . . . Tell him!’ embedding itself sufficiently into the popular
consciousness for ‘Sids’ to become a term for the new generation of share-buyers. Then, in February 1987, British Airways was sold for £900 million. In contrast to the other major
state holdings, the airline had been identified for privatization as early as 1979, only for its sale to be cancelled because of fears about its future profitability and worries that it would lose
a legal case (eventually settled out of court) concerning the alleged market-rigging methods deployed to destroy its youthful British competitor Laker Airways. With the
evaporation of these clouds from its horizon, BA’s share offer was eleven times oversubscribed and more than 90 per cent of the airline’s employees bought shares in the
company – ignoring the advice of their union to boycott the sale. In May 1987, Rolls-Royce was sold for £1.3 billion, followed two months later by the British Airports Authority for
nearly the same amount again. In December 1988, six hundred thousand people applied to buy shares in British Steel – previously a persistent recipient of taxpayer subsidy – when it was
privatized, raising £2.5 billion. A year later the sale of the ten regional water authorities brought in over £5 billion.
Some privatizations could be justified on the grounds that they helped unleash competition where previously there had been none – and the sort of customer service that could be expected
from complacency nurtured through monopoly. BT, for instance, gained competition, on a small scale, first from Mercury and subsequently from other communications providers. Yet it was not
competition alone that brought improvements – not least because the extent of the competition created was often highly limited. In privatizing some of the major public utilities, the
government was not so much destroying monopoly providers as shifting them from state to private sector ownership. In these cases, the state created new independent bodies – among them Oftel
for the telecoms industry and the National Rivers Authority for the water providers – to prevent the abuse of monopoly and to limit price rises by imposing formulas linked to productivity
gains and the retail price index. Whatever the limitations of this approach to consumer protection, it ensured better than some nationalizations had done that those responsible for setting the
standards were autonomous from those running the services (or, in the case of Whitehall departments, were removed from conflicting political pressures). As far as the utilities were concerned, the
clearest gain came in the access privatization gave them to fresh investment. By the mid-eighties, the utilities were facing considerable expenses in maintaining and enhancing their infrastructure.
In particular, the water authorities were endeavouring to operate through crumbling Victorian drains and faced enormous costs if a European Community drinking water directive from 1980 was to be
implemented. Given that the government was focused on trying to bring down the public sector borrowing requirement and to balance a budget threatened by the rising cost of unemployment benefits,
there was little appetite in Whitehall for making this level of investment. Letting the utilities turn to the capital markets to raise the money they needed therefore relieved the taxpayer of a
significant cost and freed the utilities from the corset of Treasury restraint. One of the clearest examples of this came with the vastly increased levels of investment in water and sewage
treatment that followed the water authorities’ sale to the private sector. Ironically, this was also the privatization that was most contentious, with opinion polls suggesting that more than
three quarters of the electorate opposed the change (the share offer was oversubscribed all the same).
12
For the Treasury, there were huge one-off windfalls to be scooped by selling the nationalized industries and utilities. However, even some Conservatives questioned the way in which the windfalls
were treated as current account disposable income. This was the point the Earl of Stockton (the former prime minister, Harold Macmillan) attempted to make in a speech to the ‘wets’ of
the Tory Reform Group in November 1985, though the subtlety of his argument was undermined by his arch reference to ‘selling the family silver’, a quip that was seized upon both by his
Thatcherite detractors and by those on the left who tried to interpret his remarks to imply that he imagined the nationalized industries were assets on a par with an aristocratic family’s
Canalettos.
13
Regarding investment as essentially a task for the private sector rather than Whitehall, the use of privatization windfalls to
balance the budget and to make possible tax cuts seemed perfectly acceptable to the current generation of government ministers. For them, privatization brought an additional political benefit
because it ensured that the state no longer had to be directly involved in pay bargaining and other negotiations with the trade unions, whose members were no longer state employees. An entire
branch of post-war corporatism withered and, with it, the influence of the unions upon government strategic and spending priorities.
That the nationalized sector’s preparation for privatization involved extensive job-culling demonstrated both the extent of over-manning that had been tolerated by state-owned entities at
the taxpayer’s expense, and the ruthless prioritizing of commercial imperatives once shareholders assumed ultimate ownership (albeit moderated by the consumer protection directives of the
regulators). One argument was that the state was disposing of assets that were capable of bringing in long-term net revenue. In the case of the already profitable BT, the state did retain a
minority share until 1993. Generally though, it was only the discipline of being made ready for the market that brought profitability to the denationalizing sector. The financial accounts for the
period prior to this process painted a depressing picture. By 1982, the nationalized industries had cost £40 billion in grants and capital write-offs, the taxpayer having contributed
£94 billion in investment – for which the Treasury’s return on investment averaged minus 1 per cent.
14
Despite this record, the
principle of state ownership retained its adherents. The Labour Party promised to renationalize those companies that had been privatized – though ‘nationalization’ had been
rebranded as ‘social ownership’ by the time Labour’s 1987 election manifesto promised also to ‘take a socially owned stake in high-tech industries’.
15
This desire to renationalize, however phrased, ultimately foundered on economic reality, since buying back controlling stakes in privatized companies that
had subsequently
become highly profitable would have all but crippled the Exchequer. The Bennite solution of the state simply seizing for itself the existing private
shareholdings was not seriously entertained – such expropriation without compensation would have triggered a titanic battle through the courts. Other realities also imposed themselves, since
in some cases the rationale for renationalization soon seemed to belong with the imperatives of a bygone age. With customers benefiting from prices being driven down by growing international
airline competition and from the birth of ‘budget airlines’, where was the social utility in the state owning British Airways? Similar arguments applied to British Telecom. The
necessity of keeping all telecommunications in the hands of a sub-department of the Post Office had ceased to resonate among customers choosing from a wide array of mobile phone and internet
providers at the beginning of the twenty-first century.
Ultimately, the Conservatives’ privatization programme during the eighties did more than disturb Westminster’s settled consensus of the previous quarter-century and replace it with a
new consensus for the succeeding quarter-century. It led the way for a global movement of economic change. What Thatcher’s government pioneered, other Western or westernized nation states
watched and then followed – and if imitation is the sincerest form of flattery, then there was little else achieved in Britain during the eighties that gained such widespread international
admiration. It was a process that also created lucrative spin-offs for those British banks (especially Rothschild’s), accountants and lawyers who had worked on domestic privatizations and
were able to sell their experience as advisers on foreign flotations.
Within the UK, many of the so-called ‘Sids’ opted to cash in on their shares by selling them almost immediately (the proportion of individuals holding BT shares, for instance,
falling from 39 per cent to 29 per cent by June 1985).
16
The majority, however, held on to their investment, and between 1979 and 1989 the number
of the nation’s shareholders rose from two million to twelve million, an increase in only a decade from 7 per cent to 29 per cent of the adult public. Nevertheless, it was scarcely evident
that this shift indicated a new culture of ‘popular capitalism’ gripping three in ten of the electorate and encouraging them to take an active interest in investing in enterprise. That
level of immersion in trading remained a minority pursuit. Rather, it was through investing in unit trusts or private pensions that most individuals were dependent on the movements of the stock
market for income, and in this respect they were remote actors whose stakes were handled by large institutional investors. It was these entities that, by the decade’s end, held four fifths of
the UK’s equities.
17
Furthermore, the scale of the sell-offs, though considerable, needs to put in context. The UK’s capital stock had been 44 per cent state-owned in
1979, and even
after the world record-shattering privatizations it was still 30 per cent state-owned in 1989. The state had certainly been rolled back from running the commanding heights of industry, but when the
service sector was included the UK was still very much a mixed economy. While at the time of Thatcher’s fall from power the railways and mines continued to be state-run (John Major’s
government privatizing the former in 1993 and the latter in 1994), far more significant in terms of size, budget and workforce was the fact that the entire National Health Service and over 90 per
cent of the education sector remained firmly in public ownership – a seemingly settled consensus that was to continue unchanged over the succeeding quarter-century regardless of which party
was in power. In this respect,
laissez-faire
’s limits remained clearly demarcated.
A Tale of Two Cities
‘La “City”, un îlot de prospérité dans un ocean d’austérité,’ summarized a 1982 headline in the newspaper
Nice-Matin
, highlighting these relative concepts for the benefit of its readers on the Côte d’Azur.
18
The starkness of the
contrast between Britain’s financial sector in the City of London and the country’s struggling industrial base beyond was no less evident to commentators closer to home. Yet for all the
apparent display of good times in the Square Mile, there was not one ‘City’ to be found there but two. The brash
prospérité
of the one masked the reality that the
other was increasingly marginal to world finance and was facing a momentous decision. If it carried on without reform it could accept a perhaps comfortable but nevertheless long-term relative
decline. Alternatively, it could risk the unleashing of international competitive forces. These might either restore London to its Victorian glory as the centre of global capitalism, or else sweep
away the great stockbroking companies and merchant banks whose names were synonymous with British finance. Few at the time suggested a further possibility – that the City’s future
prosperity and the disappearance of these proud firms might not be mutually exclusive.
The City at risk was that of the securities markets, where investment decisions were made through the trade in shares. At its heart was the London Stock Exchange, with a history dating back to
the deals concluded in seventeenth-century coffee shops and an ethos summed up in a motto that when translated meant ‘my word is my bond’. The Stock Exchange not only provided the
physical trading floor for the buying and selling of shares, it also determined who could participate in the activity. Its rules effectively excluded foreign membership. It was this criterion,
rather than any innate native genius for finance, that explained why all of the more than two hundred broking and jobbing firms that were members of the Stock Exchange were
British-owned. This did not, of course, prevent foreign institutions from buying shares, but in 1983 their contribution still represented under 10 per cent of the Stock
Exchange’s turnover.
19
Primarily, it was a place for British institutions to invest in British companies. One consequence of this
introspection was that, compared to Wall Street, the City’s securities market was seriously under-capitalized. In 1982, the $500 million made in trading by the US investment bank Salomon
Brothers exceeded the total profits made by all the member firms of the Stock Exchange put together.
20
As one side of the City looked inwards, another gazed outwards. This second City was focused not upon the Stock Exchange but upon international bond and currency markets. By its nature it was
less burdened by tradition, not least because so much of its success was of recent minting. In 1963, John F. Kennedy’s administration had tried to discourage American firms from exporting
capital by imposing an interest equalization tax on the purchase of foreign securities. The émigré financier Siegmund Warburg recognized this as London’s opportunity and he
pioneered a ‘eurodollar’ market to take advantage of the large post-war surplus of dollars still held by investors (in part, a legacy of the Marshall Plan). This new market allowed for
bonds to be traded in a different currency from that used domestically by the government or company issuing them. In the eleven years during which Kennedy’s tax operated, a bond market that
might otherwise have been based in Wall Street instead took root in the City. It allowed London to compensate for the two factors – the loss of empire and the end of sterling as an
international reserve currency – that seemed otherwise to be condemning it to second- or even third-rate status as a world financial centre. Once established in this new market, the City
proved able to see off belated competition; London-issued eurobonds became the primary denomination in which international bonds were traded, and the London market became the world’s largest
source of capital. By the early eighties, the City’s turnover from this eurobond market dwarfed that of the Stock Exchange and was a major factor in encouraging foreign banks to increase
their presence in the Square Mile. Related activities developed in tandem. It helped that London was located in an ideal time zone which spanned the New York, Paris, Frankfurt, Rome, Hong Kong and
Tokyo markets. That London became by far the world’s most significant marketplace for currency dealing in such a relatively short period of time was nonetheless remarkable and, more
importantly, it showed no signs of abating in the face of competition. Between 1979 and 1985, the City’s average daily foreign exchange (‘for-ex’) turnover increased from $25
billion to $90 billion.
21