To anyone born before 1980, the idea that the state would own a large part of the economy was normal. The ‘mixed economy’ was a typically British compromise between American cut-throat capitalism and the incompetent communism beyond the Iron Curtain — or at least a compromise between the socialist leanings of the Labour Left and the free-enterprise mantra of the Tories. Such was the tug-of-war of ideologies that the British steel industry found itself nationalised in the 1940s, returned to the private sector in the 1950s, re-nationalised a decade later and re-privatised in the 1980s. Yet despite so much of the rest of the UK economy falling into public hands over the past half century, banking has until now escaped.
Apart from the formality of nationalising the Bank of England in 1946, the Square Mile remained a state-free zone despite the best efforts of the Left to storm the bastions of capital. The original Fabian, Sidney Webb, thought nationalising the ‘means of exchange’ would give him the sorcerer’s stone; a Labour Green Paper before the 1973 secondary banking crisis called for bank nationalisation; Harold Wilson, as leader of the opposition, proposed a state-owned merchant bank. In 1976 his party demanded nationalisation of one merchant bank, four clearing banks and seven insurance groups. But prime minister Callaghan dismissed the idea as an ‘electoral albatross’. His successor as Labour leader, Michael Foot, proved the point by including bank nationalisation in his disastrous 1883 election manifesto.
It has taken Britain’s most centralist Labour government ever to do what its socialist predecessors failed to do. Having had Northern Rock as a canapé, it has swallowed Bradford & Bingley as an hors d’oeuvre and carved off huge slices of the biggest high-street banks for its main course. Never mind whether Gordon Brown passes the ‘fit and proper’ test to be a controlling investor in a bank; suddenly the state has its hands on the economy’s real levers of power. Barely a pound will pass through the system — from pay packet to shop till — without touching a bank that is part of the public sector.
Even for the pre-1980s generation it is easy to forget just how wide state ownership used to be. Gas and water were publicly owned, as were coal and the trains that took coal to state-owned power stations and steel companies that supplied state shipyards making vessels that moored at nationalised docks. Roads were in public ownership of course, but so were many of the lorries that used them. The state made cars — at British Leyland, Jaguar and Rolls-Royce — and owned oil companies, including a large part of BP. It owned aircraft makers, airlines and airports. Add in British Telecom, the BBC, the Tote, the Post Office, National Savings and everything else, and pre-Thatcherite Britain looks remarkably like post-revolution Russia.
But that portfolio did not include a bank. Even in 1975 when NatWest was close enough to collapse to have to deny it, the Labour government did not create Nationalised Westminster. Now the state probably has a finger on your mortgage, your credit card and your savings account — all because of the bankers’ folly. NatWest’s current owner, Royal Bank of Scotland, will become a subsidiary of Whitehall and unless the shareholders who rejected HBOS’s last rights issue sign up to the new offer, it too will come under effective state control, with the government as the largest (though not majority) shareholder in Lloyds-HBOS if the revised merger deal goes ahead.
Those banks are falling into public ownership for the same reason that most industries in the past were nationalised — not because they had a strategic place in the economy but because they faced enormous losses and had to be rescued.
Yet if coal and steel and the other industries were in a bad way when they came under the state’s wing, they fared far worse afterwards. The public sector is a bad owner: those industries clocked up losses on a scale only the taxpayer could finance.
The problem now is not that the state will try to micro-manage its new banks — despite seats in the boardroom and instructions to repeat the 2007 lending that was so unwise — but that lenders will resist even acceptable risks. The exits of the RBS and HBOS chief executives and chairmen is an overdue acknowledgement of the damage done not only to their own institutions but also to the wider economy. But their successors cannot run the banks as though they are National Savings, or put them into run-off like Northern Rock. A two-tier banking system with the state-free HSBC and Barclays distinct from the risk-free but shackled RBS and Lloyds-HBOS will be bad for competition and for enterprise. It will also mean that government — whose ordinary shares are already showing a capital loss and paying no dividends — will not recover full value from its colossal investments. The nationalised banks must be given a free rein — otherwise the next Tory administration will realise little when it privatises this unexpected new cache of family silver.