Flexibilization and State Strategies: Coal and the City

By: Noelle Burgi and Bob Jessop

This on-line version is the pre-copyedited, preprint version. The published version can be found here:
‘Flexibilization and state strategies: British Coal and the City’, in B. Jessop et al., eds, The Politics of Flexibility, Cheltenham: Edward Elgar, 173-194, N. Burgi & B. Jessop, 1991.

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Comparing the coal industry and the City since 1945 illuminates the state’s changing economic and political policies as well as the long-run development of Britain’s political economy. We will relate coal and the City to the post-war settlement, describing the forms and timing of their respective structural crises and looking at the various strategies followed to make them more profitable and/or more flexible. We will also discuss the state’s involvement and try to explain why coal and the City have so often been treated differently.

Coal mining played a key role in Britain’s early industrialization, soon became a leading domestic staple industry, and helped underpin Britain’s overseas expansion through its export earnings;[1] coal-miners themselves became the lance de fer of working class economic and political organization owing to their strategic position in British industry, their dense web of occupational and community ties, and their political role in Liberal, and then Labour, politics. Total coal production began to fall after 1913, however, as export markets declined; and several interwar inquiries reported a growing structural crisis. A different type of crisis emerged in the fifties. Demand for coal was first weakened by the rise of an international oil regime promoted under US hegemony and then by the turn to nuclear power. Moreover, within this global decline for coal, British output failed to compete with overseas competition from state-subsidized and/or opencast mines. The City played an equally crucial role in Britain’s rise to economic predominance and acted as the clearing house of the world economy in the nineteenth century. Its role became more restricted after the First World War with the crisis in the gold-sterling standard and a gradual retreat first into empire and then into the overseas sterling area. The City’s international orientation was still significant after 1945 but it proved more and more difficult to retain market shares in financial services. Moreover, just as miners were a leading force in working class political life, the City is often credited with a dominant, even hegemonic, role in bourgeois politics.

Here we examine only the last 40 or so years: from the nationalization of the Bank of England (1946) and coal mining (1947) to the recent deregulation of the City and the efforts to make the coal industry more flexible and cost-efficient. This comparison should prove interesting. For the coal industry and financial capital: (a) involve contrasting types of activity – hewing raw mat-erials from the bowels of the earth and making money by triggering electronic impulses in the heart of a computer; (b) represent opposite poles in the changing balance of economic forces since 1945 – with output and jobs falling in coal while turnover and employment have expanded in financial services; (c) are tied to opposite poles in the changing balance of political forces – with the collapse of union power in coal and the rise of unregulated entrepreneurs in the City; and (d) have been differently affected by the contradictory dynamic of Britain’s postwar settlements. In addition both sectors have reinforced, as well as suffered from, the growing crisis of Britain’s ‘flawed Fordist’ economy. Indeed, against the conventional wisdom, we argue that British financial institutions as well as coal were in decline in the 1970s. Likewise both sectors have been subject to state sponsored restructuring as well as the discipline of market forces (but to different degrees and in different ways). And, most recently, both have undergone reorganization and flexibilization – promoted in both cases through the neo-liberal strategies of the state.

1. The Postwar Settlements

After the Second World War ended, the Labour Government began to reorganize the economic boundaries and activities of the state. Among other steps in this regard it nationalized the Bank of England and key sectors in energy, industry and transport. These measures were more a reflection of political pressures in the trade union movement and Labour Party rather than technical desiderata, the demands of economic planning or efficiency, or a means to promote social justice by redistributing income or wealth (Cairncross 1985: 464-7). Indeed the subsequent evolution of Labour and Conservative government policies alike toward these sectors shows that nationalization does not in itself fully determine state policy toward specific sectors let alone the entire national economy. Instead such economic policies must be located in a much broader structural and conjunctural context.

For our purposes this can be studied through the two postwar settlements: an informal producers’ settlement and a politicians’ settlement. The former settlement emerged in a period when normal party politics were suspended, the state was near corporatist, the ‘audit of war’ focused attention on production, and financial constraints on government action were not significant. It was supported by the major economic interests and was mainly concerned with economic modernization through the reorganization of production and economic and social policy. The politicians’ settlement came to the fore as normal party politics was resumed (with the Tories’ 1947 Industrial Charter signifying a bipartisan consensus) and set the agenda for electoral competition and government action. Its primary concerns were securing full employment through demand management and effecting a more egalitarian distribution of income and wealth through social welfare policies (see Jessop 1989).

Postwar history until the rise of Thatcherism can be told in terms of the complex and changing relations between the two settlements and the forces mobilized behind them. During the immediate postwar years the politicians’ settlement came to dominate the producers’ settlement as the basis of party politics and economic governance. The failure to pursue the productivist project aggravated the ‘flawed Fordist’ character of the British economy. It was revived occasionally, however, in the guise of corporatist and/or dirigiste strategies for modernizing the economy, state, and civil society. Attempts to pursue both settlements foundered as their internal contradictions and mutual incoherence became clearer and the crisis-tendencies of the international economy intensified in the 1960s and 1970s.

The dominant politicians’ settlement embodied two contradictions affecting coal and the City. Full employment was challenged by commitments to the pound sterling; and welfare spending by the overseas military and imperial role of the state. These contradictions were associated with two contrasting economic and political strategies pursued by the state: (a) state intervention based on a changing mixture of corporatist and dirigiste arrangements within the context of an overall commitment to demand management and social welfare – reflecting the employment and welfare commitments; and (b) reliance on market forces and laissez-faire – reflecting the commitment to sound finance, a limited public sector, and support for Britain’s interests overseas. The coal industry figures prominently in the first strategic ensemble: taken into public ownership, subject to short-term and ad hoc interventions to promote exports, import substitution, full employment, and stable prices, used for regional and social policy purposes, and involved in tripartite patterns of consultation. The history of such efforts clearly reveals the limits of the strategic capacities of the British state in exercising dirigiste powers and in encouraging and underwriting corporatist agreements reached by producer groups. The City’s postwar development belongs to the other strategic ensemble: commitment to the reserve and transaction roles of sterling, a neo-liberal state, and self-regulating institutions. The history of these commitments clearly reveals the weakness of the market and laissez-faire in securing economic expansion: for the City also shared in the relative decline of the British economy and attempts to reverse the latter led to ad hoc interventions which restricted its pursuit of market rationality.

The contrasting strategic orientations were reflected successively in the stop-go cycle of the 1950s, oscillation between planning and laissez-faire in the 1960s, conflicts between advocates of corporatism and supply-side liberalism in the 1970s, and, after the gradual, intermittent, discontinuous shift in dominance from one pole to another, the eventual defeat of postwar Keynesian welfare state commitments at the hands of Thatcherism with its emerging project for a supply-side social security state. We now relate coal and the City to these changing economic and political strategies.

2. The Coal Industry after Nationalization

The Coal Industry Nationalization Act, 1946, established a National Coal Board (NCB) with its members appointed by the appropriate minister. The Board was responsible for the routine operation of the industry and the development of policies in an arms-length relation to government; it was expected to cover its operating and investment costs taking one year with another. But the Act also stipulated that the Minister, after consultation with the Board, could give the Board general directives on how to exercise and perform its functions in the light of the national interest and that, in drawing programmes of reorganization or development involving substantial capital outlay, the Board should follow guidelines approved by the Minister.

From 1947 to 1956/7 (when output reached its postwar peak), the NCB’s oper-ations were subject to increasing state intervention. This was mainly concerned with the macro-economic implications of NCB policy rather than specific output and performance targets. As with other nationalized industries there was constant interference in pricing and commercial judgements. The NCB was told to hold prices below world market levels at the same time as it was requested to maximize output (despite high marginal costs of production in peripheral pits) and legally obliged to break even (although this was not achieved). This produced low investment and inefficiency and contributed to the lack of competitiveness in later years. The NUM had only limited direct contact with government and negotiated instead with the NCB. The NCB and NUM were left to reach agreement on industrial relations and social issues concerning the industry. Both groups opposed government cuts but they also accepted the need for retrenchment. The cosy corporatist compromise concluded between management and union officials did not benefit the miners themselves since officials failed to press for higher wages lest jobs be lost and this in turn reduced the pressure on management to reorganize production. Strikes were mostly concerned with local issues, were rooted in the difficulties of working specific pits or faces, and turned on local wages and conditions.[2]

After 1956/7 governments increasingly attempted to reorganize coal mining as such and as part of attempts at overall economic planning. Until 1971/2 the emphasis was on pit closures but without significant reductions in production capacities. In line with the growing interest in corporatist programming (and further prompted by the oil shock and the miners’ strikes), government concern then turned to a corporatist plan for coal. The oil shock encouraged greater union militancy since the tide seemed to be turning back to coal. Under the Thatcher governments since 1979 there have been growing efforts to reduce capacity. At first this reflected an austerity programme (prompted by excess capacity and falling home demand) as well as Mrs Thatcher’s preference for nuclear power; later it expressed the government’s neo-liberal strategy for economic modernization and political transformation. Even so the NCB’s inability to cut costs rapidly enough at a time of falling demand and rising interest rates required growing state support for the industry in the first few years of the Thatcher regime.

During the period of the postwar settlement, there were three main methods of intervention. Firstly, the state tried to manage the disequilibria provoked by national and international competition in the energy sector through post hoc revisions to corporate plans. Despite occasional criticism from parliament and self-criticism in white papers, state strategy did not change signific-antly until 1970. Secondly, from 1970 onwards, the Public Expenditure Survey Committee was supposed to produce integrated quinquennial plans for the state sector and this led to a more uniform policy towards nationalized industries. The NCB was included in this process. And, thirdly, from 1974-79 there was an open dialogue between the Labour Government, mining unions, and NCB as part of the attempt to implement and then to ‘save’ the social contract.

With the open attack on the postwar settlement launched by the Thatcher government, radical cutbacks have been occurring in pits and capacity since 1981. The government required self-financing within 3 years with a view to privatization: the NCB was to be more commercial, to eliminate unprofitable pits, to cut production in peripheral regions, and to insist that management was the sole judge of the general interests and profitability of the industry. Ian McGregor was nominated chairman of the NCB in September 1983 to pursue this strategy for the government.

3. Flexibilizing the Coal Industry

Coal mining enjoyed a brief revival after the first oil shock. Under the Labour government the tripartite Plan for Coal (1974) envisaged an annual growth in output of 15m tons and a global production target between 130-200m around 2000. This soon proved too ambitious owing partly to competition from  other energy sources and coal producers elsewhere and partly to declining home demand. The NCB accumulated a chronic deficit but, thanks to the NUM’s close ties to Labour, it was not obliged to review the plan annually – which would have accelerated closures, redundancies, and capacity cuts.

The incoming Thatcher government’s response was quite different. The Ridley plan called for closures in declining public industries such as steel, railways, and coal mining and for privatization in expanding sectors. Conflicts were expected and contingency plans made for strengthening the law, police, and the courts in handling these. Indeed coal was regarded as the most likely battlefield: coal stocks were increased, imports encouraged from 1981, non-unionized lorry drivers recruited, mixed coal/oil burning introduced in key power stations, nuclear power encouraged, and a hard-line boss (MacGregor) appointed. This was coupled on the NUM’s side by demobilization and a loss of combativity in a context of rising unemployment (13 per cent in 1981) and the defeat of the steel unions in 1980 and health and rail workers in 1982. There were also serious internal divisions within the TUC over the ‘new realism’ and the NUM leadership opposed the emerging TUC line on this issue. Moreover, in the NUM itself, despite agreement on combatting government policies and pit closures, there was little agreement on the most appropriate and effective methods. These divisions reflected both particular regional differences and general strategic differences. Under the leadership of Arthur Scargill, however, ‘pit politics’ came to dominate national as well as local responses to the joint squeeze exerted by market and govern-ment pressures for cuts in both output and costs.

The strike began in March 1984 over pit closures. It lasted for twelve bitter months and ended in an unconditional return to work (on its history, see Gibbon 1988). Three major themes dominated talks during the strike: renegotiation of the Plan for Coal, criteria for pit closures, and review procedures on the performance and future of individual pits (with a view to possible closure). These themes were linked and MacGregor’s strategy was to make concessions on one or another but never on all three at once: thus no agreement was possible. Behind this lay the desire of government and management to impose a new industrial relations system that would decisively weaken the NUM.

Thus the confrontation between NUM and NCB after the strike moved gradually from the problem of jobs and closures towards reformulating the rules for conciliation and consultation. The two key axes of conflict were: first, management’s desire to adapt the bargaining system to a new type of production planning and to link this directly to market forces; and, second, its efforts to impose substantial changes in work organization, bigger wage differentials, and reduced bargaining power on the unions.

For the first time since nationalization, the NUM found itself opposed by another organization (the Union of Democratic Miners or UDM), officially registered on 6th December 1985 and claiming 30,000 members (around 21 per cent of all miners at that time). The NCB recognised the UDM without consulting the NUM (let alone securing its consent) and insisted on its general right under normal industrial relations law to recognise unions whatever the 1947 Act might imply for the rights of the NUM in the coal industry. Later it unilat-erally suspended the conciliation scheme in order to secure the UDM’s right to take part in conciliation procedures as well as in wage bargaining on the national as well as regional and pit level. Indeed MacGregor insisted that, where no joint UDM/NUM agreement could be reached, at regional level the union with a majority would decide for all. Meanwhile the NCB had negotiated a local wage agreement directly with the UDM, granting an increase denied to the NUM. Thus continuing talks about talks and its recognition of the UDM gave the NCB more room for manoeuvre in negotiations on wages and other issues after the strike. Without legal or regulatory restraint, the NCB could favour the working miners (mostly UDM members) and extend the role of productivity criteria in setting wages.

 More generally MacGregor’s plans for negotiation and consultation aimed to reduce union power and restrict access to information: less information would be available to consultative committees, fewer committees would exist and they would have more restricted powers, fewer meetings would be held, and decisions would be taken on a more decentralized basis. Individual members of minority unions could by-pass traditional disputes procedures; a direct channel of communication would develop between management and workers; and there would be no union involvement in combatting redundancy – individuals would make a direct appeal to tribunals. Subsequent proposals for conciliation and disciplinary schemes aimed to give management significant powers against activists and to enhance their abilities to recompose union membership. The NUM has found it hard to develop a joint front with the UDM against these proposals because of its initial rejection of joint negotiations.

Management strategy has clear implications for wage negotiations and pay flexibility, numerical flexibility, functional flexibility, the use of subcontracting and other forms of ‘distant’ labour, and technological change.

  1. The traditional annual cycle of wage negotiations was oriented to an annual percentage rise which then formed the basis for local incentive payments based on the productivity and profitability of individual pits. During and since the strike the NCB (first under MacGregor and then under Haslam) has successfully imposed several new features on the wage relation. These include breaking the NUM’s national bargaining power and encouraging a shift to decentralised bargaining; imposing differential wage awards on the basis of the union (NUM or UDM) to which miners belonged; encouraging other unions (not just the UDM but also the electricians’ union and the TGWU) to represent miners instead of the NUM; and transferring workers deemed by management to be guilty of industrial misconduct – a very broadly defined category indeed.

  2. In relation to pay flexibility, there has been a further marked shift to decentralised pay bargaining. A shift towards pit and face bargaining had already been initiated by the incentive scheme introduced in 1978 but the broad outlines of this scheme were still negotiated at the national level. The greater stress on market forces prompted NCB managers to revise the incentive scheme and devise new schemes more closely tied to output and profit than to ‘effort’ (as measured by the difficulty of mining coal on a particular face). The dismantling of national level negotiations has eased this development. For example, the ‘Doncaster option’ establishes two pay systems: a ‘task achieved bonus’ for installation workers and a ‘pit tonnage bonus’ for outbye and surface workers calculated on different bases and tied to different percentages of individual pit breakeven points. This is said to divide workers and transfer money to the ‘core’ installation workers at the expense of other miners. A similar agreement was concluded in June 1987 in the Nottinghamshire area.

  3. The recent history of pay bargaining confirms the principle of pay differentials based on union membership; the Board’s move towards no-strike agreements; its use of the UDM to break the NUM’s bargaining power; and its introduction of much more market-oriented criteria for pay bargaining. Similar tendencies are present in the Board’s proposals for conciliation.

  4. Planning has also become more flexible. MacGregor’s New Strategy for Coal in October 1985 moved from the previous indicative planning system oriented to medium-term production targets revised periodically towards a more flexible, rolling annual response to market imperatives. It had three principles: to close uneconomic pits, to maximize production in the most profitable pits, and only to invest where reserves are potentially profitable (i.e. production costs of less than #23.50 per ton). This has reinforced the tendency to centralize decisions, reducing regional directors’ scope to cross-subsidise production for social reasons. The cost of production is now the only criterion for pit closures and this will lead to a few superpits in the central coalfields.

   5. Other aspects of the ongoing reorganization of work include: (a) a shift in pit deputies’ role away from safety issues towards promoting competion among work teams; (b) a likely diminution in the special status of pit deputies as their tasks are shifted up to management or down to chargehands and/or as safety functions are integrated into machinery and computer-based surveillance; (c) replacement of tight statutory regulations on health and safety with looser, non-statutory codes of practice which will leave managers free to decide on how to discharge their health and safety duties and assist them in intensifying the labour process; (d) reforms in working time in order to reduce overtime payments – notably through the effort to introduce six-day working and longer shifts with fewer hours worked each year; (e) efforts to reorganize tasks to secure greater flexibility, higher productivity, and tighter control over wage-effort bargains through such measures as the introduction of incentive schemes offering contracts to small teams of men, subcontracting surface craftsmen’s jobs to local tradesmen; (f) a radical plan for teams of self-employed miners to work blocks of coal under contract to British Coal (the new name for the NCB from April 1986) and moves have also begun to re-introduce the ‘butty’ system, i.e., a pattern of team work for a lump sum payment; (g) attempts to economize on craft and skilled labour through increased use of heavy duty, high technology machinery, automation of various processes, automatic monitoring, and more flexible technologies such as free-steered vehicles; (h) plans to replace craftsmen by workers who have received special training in electro-mechanics and/or by sub-contracted local tradesmen able to undertake maintenance work; and (i) the setting up of a new Information Technology unit and increasing emphasis on the use of computer-aided design in planning, surveying, assessing geological problems, and diagnosing faults with expert systems.

The overall results of these changes, which have been accelerated since the strike in 1984-5, is the development of a more flexible system of coal mining in which labour is intensified and costs of production drastically reduced. Indeed the emerging system marks a historic turning point in the postwar coal industry. The old system involved consultation and conciliation and was based upon the free agreement of both sides, systematically protected by a tradition of respect for mutually agreed decisions and by the relative non-involvement of the state. The emerging system involves much reduced bargaining power for the NUM, recognition of a new moderate union which is based in the most profitable pits, and challenges to the representative monopolies of the NUM and NACODS. New channels of communication are being introduced and attempts are being made to win local union branches to a new, more market-oriented, local corporatism. For a time the financial, legislative, coercive, and judicial powers of the state played a key role in preparing the conditions for this new system. Increasingly tight financial controls reinforced by the imminent privatization of the electricity supply industry (which takes about four-fifths of British Coal’s output) have combined with increasing exposure to world energy markets to impose market disciplines on the coal industry. At the same time state subsidies have been committed to win support for redundancies and to permit the restructuring of the coal industry. Most recently we have seen the write-off of around 5bn in accumulated debt (a typical prelude to privatization) and government pressure on the electricity supply industry to enter contracts with British Coal which will hold for the first 3 years of ESI privatization. Legislative changes have been crucial in industrial relations and health and safety and the police and courts played a crucial role in breaking the miners’ strike in 1984-5. With the strike broken, however, the coercive role of the state has diminished. Today the emphasis is on financial and managerial controls together with attempts to secure local union support.

The relative success of this strategy is not in doubt. Since 1982-3, daily output per coalface has risen by 94 percent and output per man/shift by more than 85 per cent. This has been associated with a 25 per cent cut in operating costs as measured in pounds per gigajoule (a measure of thermal value); a 59 per cent cut in the number of coalfaces; a 51 per cent cut in the number of pits; and a 58 per cent cut in manning levels (from 207,600 men on pit books in 1982-3 to an estimated 70,000 in 1989-90).[3] A more recent estimate puts the number of miners at 64,000.[4] Moreover, although plans for what one minister described as the ‘ultimate privatization’ have been postponed into the indefinite mid-1990s, there has been a certain amount of privatization by stealth through increased resort to open-cast mining undertaken by wholly independent or NCB-subcontracted private firms as well as increased use of subcontracted labour for pit-top and non-extractive deep-mine work (Beynon et al., 1990; Gibbon and Bromley 1990: 62-3). Conversely there are some clear limits to the overall strategy which can be seen in the limited extent of weekend working, the reluctance to undertake a nine-hour shift system and thereby sacrifice opportunities for overtime, a failure to introduce new categories of worker such as ‘electro-mechanic’, and limited displacement of directly employed surface workers with subcontracted labour. But these signs of relative failure in BC’s strategy may be due to the fact that informal labour flexibility has risen substantially (Gibbon and Bromley 1990: 71-2). Further reflections on the implications of these changes follow the presentation of our second case study.

4. The City after the War

The Bank of England was nationalized on March 1 1946. Its Court was directly responsible for managing the Bank subject to such directions as the Treasury, after consultation with the Governor, might deem necessary in the public interest. The Bank of England Act also gave the Bank qualified powers to ‘direct’ the commercial banks. Both types of direction were often given as part of the overall monetary and financial policy of the authorities. There were five broad groups of regulations governing banking activities: rules on the balance sheet ratios (cash and liquid assets) observed by clearing banks, official advice on the composition and amount of sterling lending to the private sector, controls on hire purchase terms for consumer durable goods, a state-sponsored interest rate cartel linking the clearing banks, and exchange controls. In addition a Capital Issues Committee controlled foreign access to the London capital market and also regulated new issues by UK companies. Thus, although banking and financial services were competitive, competition included simple monopoly (e.g. cartels) and state monopoly (e.g. lending ceilings) as well as liberal, free market forms.[5] It is the impact of the organization of financial services and its modes of competition that concern us below.

The Bank served as spokesman for many different City interests but, in so doing, tried to restrict its activities to contact with the Treasury. City institutions[6] were granted self-policing powers rather than being subject to legal and administrative oversight by government. This meant that issues vital to the interests of financial markets – the extent of competition, the definition of honesty and prudence, the distribution of ownership – became ‘non-decisions’ beyond the reach of Whitehall or party politics (Moran 1982: 53-4). At the same time self-regulation helped City institutions to maintain restrictive practices which inhibited real competition and provided monopoly profits – threatened loss of which helped in turn to maintain self-regulation. This situation lasted into the 1960s. But from then on it was subject to increasing pressure from the combined impact of competition from new financial intermediaries at home and abroad and the growing interest of Whitehall, the parties, and the press in City activities which had previously passed unquestioned. Some of the problems this created are discussed later.

The development of City institutions after 1945 is complex and involves several developmental tendencies and shifts. In the three decades after immediate postwar reconstruction, however, an emerging (but incomplete) division between two ‘Cities’ can be discerned (cf. Plender and Wallace 1985: 15-16). At one pole, an ‘international City’ developed which not only specialized in ever more complex and novel forms of international business but also came to be dominated by foreign finance houses. The expansion of this role depended as much on various restrictions which prevented New York from developing as an international financial centre as it did on any intrinsic merits of City institutions themselves. Indeed British institutions which had once dominated international capital (government and business loans) and commercial (sterling bills of exchange) markets suffered a declining market share in these areas. And, with global deregulation, the advantage London once enjoyed as the least regulated of the major financial centres has disappeared and New York and Tokyo have become real threats to London’s position (Coggan 1986: 19-21). At the other pole, a new ‘domestic City’ developed, continuing trends already evident in the 1930s: this was oriented to the financial and commercial needs of domestic industry, trade, and household consumption as well as to an expanding central and local government financial market. It was still dominated by home-grown financial intermediaries which had became more concerned with the British economy as it entered the Fordist phase; but even here an increasing role was also played by foreign-owned transnational intermediaries with a British base.

With the decline of sterling as an international currency and the gradual loss of world market share by the British economy, British financial institutions faced growing problems in doing business abroad. For their sterling-denominated capital base shrank and thus limited the scope of their operations; and, in addition, the state restricted their business activities outside the sterling area in order to safeguard the reserves and protect the value of sterling. The main impact of these twin problems was on the mobilisation of capital rather than overseas commercial and trading activities (such as trade finance in sterling or insurance). Institutions concerned less with capital flows than these other activities managed to grow in absolute terms because of the rapid expansion in international trade and commerce after postwar reconstruction – despite losing world market share. The postwar boom also brought relative prosperity to financial and/or commercial intermediaries which had been traditionally concerned with the home market or redirected their activities to it as mass production and mass consumption expanded and autocentric growth became relatively more important.

This process of recomposition was reinforced as the City acquired a new international role in the late 1950s and 1960s which extended well beyond the sterling area. This was most obvious in three areas: the rapid growth in Eurodeposit banking business and the Eurobond market, the increase in foreign exchange dealing which followed the collapse of fixed exchange rates in 1972-3, and the need to recycle petro-dollars after the first oil crisis. It was precisely these markets, however, which were soon dominated by foreign financial houses. For they acted outside the exchange controls and restrictive practices which limited British institutions’ chances to participate fully in the new markets. The same web of restrictive practices and entry barriers surrounding old-established British institutions also meant, however, that they were protected from foreign competition in such core areas as domestic securities, the marketing of state debt, or Lloyd’s insurance market. But this did not protect them in new or newly important markets from competition from domestic and/or foreign institutions which were more innovative and flexible.

This set of circumstances produced three startling paradoxes. First, though traditional City institutions were dominant in the circuit of capital owing to their key roles in the exchange and credit markets and were also effectively insulated from Whitehall control in many of their core activities, their concern with short-term gain and their trade association consciousness actually led them to neglect their own long-term economic and political interests. Second, the commitment to the reserve and transactions roles of sterling encouraged traditional City institutions to focus on markets (in the overseas sterling area) which not only grew less rapidly but also required policies to support these markets which harmed the domestic manufacturing base on which City strength depended. Third, the cosy protection afforded by self-policing, cartels, and restrictive practices made traditional City institutions vulnerable to more flexible and innovative secondary or ‘fringe’ institutions and/or to more aggressive foreign financial intermediaries. The growth of the non-clearing banks was particularly rapid in the 1960s in both domestic and, even more obviously, foreign business. Thus many of the so-called successes of the City, whether ascribed to its alleged political hegemony or its economic drive, were counterproductive in the long term (such as defense of sterling) and/or really due to outsider institutions (such as the expansion of the Euro-markets).

Indeed the corporatist order of the City’s traditional core institutions entailed rigidities which made it difficult to adjust to growth and innovation in both global and domestic markets. This can be illustrated for many of the traditional City institutions: the London Stock Exchange, merchant banks, clearing banks, and Lloyd’s (see Jessop and Stones 1991). In short the traditional City suffered relative decline and institutional sclerosis at the same time as there was rapid expansion and financial innovation among secondary and/or foreign institutions. This produced a double crisis in the City: a crisis of market share for traditional institutions (due to new, more flexible players) in particular and a general crisis of regulation (due to the entry of new market players and the development of new financial instruments). Thus, although both the coal industry and the City faced crises in the late 1970s, the forms these assumed were different. This reflects a key difference between the coal and financial markets: whereas the coal industry produces a limited range of products (even allowing for new processes such as liquefaction or gasification and new products such as carbon fibres or chemicals) in an energy market where coal’s market share has been declining, the financial services industry is more open, competitive, and complex and offers a rapidly growing range of instruments and products in an expanding market. Thus the forms of flexibility and rigidity and the crises with which coal and finance are associated are different and, even though the dominant strategy in the 1980s in Britain has been neo-liberal, it has still involved different types of response in each case. We now turn to the measures taken in the City’s case to make it more flexible in the face of these crises.

5. Making the City More Flexible

Worries about the dominance of City interests over those of industry were already voiced in the late 1950s and early 1960s; they were reflected in the abortive move to planning and a continuing concern with industrial policy. Doubts about the performance of traditional City institutions themselves became more evident later in the 1960s and, under Heath’s neo-liberal govern-ment 1970-74, were reflected in an attempt to make the British banking system more competitive. This occurred with the ‘Competition and Credit Control’ policy introduced in 1971: this was concerned both to promote competition and to secure a more flexible but still effective control over the banks. The policy failed to control inflation and precipitated rapid growth in bank advances, many of which went into property and commodity speculation and personal consumption rather than into investment. Among other effects, the ‘secondary banking crisis’ was particularly severe. The policy on credit control was reversed when supplementary special deposits (the ‘corset) were introduced in December 1973, eventually terminated in 1980 as growing disintermediation and the 1979 abolition of exchange controls made the ‘corset’ unworkable. Competition and Credit Control itself was abandoned in August 1981.

The next major attempt at reform was initiated under the neo-liberal, supply-side Conservative government of Mrs Thatcher. The liberation and regeneration of the City is meant to be one of her government’s most notable successes and is often presented as a triumph of the entrepreneurial culture and laissez-faire. We have our doubts about the long term stability of the City in its emerging role as the international centre for international capital but we are quite clear that much more was involved in securing this role than unfettered market forces. For some of these forces had first to be unfettered through state intervention going well beyond deregulation or liberalization and/or through their takeover by foreign finance houses as part of the internationalization process.

The Thatcher government’s measures have been concerned with promoting competition and reorganizing the regulatory framework in the financial services sector. In both cases state intervention has occurred with the support of progressive reformers in the City. Some of the state’s measures were meant to be facilitative, such as the 1979 abolition of exchange controls[7] or the abolition of the ‘corset’ on bank lending in 1980.[8] But others seemed to be aimed directly at smashing the City’s restrictive practices and injecting greater competition. Among these measures we can include the deregulation and liberalisation of building societies’ activities[9] and the reorganization of the securities industry.

Crucial in the latter case was the 1979 reference by the Office of Fair Trading (OFT) of the Stock Exchange rule book to the Restrictive Practices Court: a reference which led to the 1983 ‘Goodison-Parkinson’ agreement that produced three ‘little bangs’ and one ‘Big Bang’. The smaller changes involved: an end to the single capacity arrangement whereby member firms specialised either in jobbing or broking, a two-stage relaxation of the rules on outside ownership so that eventually outsiders could wholly own member firms and inject capital into them, and new rules on membership of the Stock Exchange to widen participation. ‘Big Bang’ itself occurred in 1986 with the end of fixed commissions. In addition to the OFT, key roles were also played by the Bank of England and the Department of Trade and Industry (DTI). The Bank pushed for mergers between banks and stockbrokers to create giant British investment banks and also pressed for reforms so that these could compete effectively with foreign investment houses. It also reformed the gilt-edged market by creating a US-style primary dealing system. And it promoted the private Securities and Investment Board as the umbrella Self-Regulating Organisation (SRO) for all the financial services industries. Whatever the government and OFT intended, however, the chairman of the Stock Exchange claims that the delay in reform due to legal action gave American firms the chance to dominate the securities and investment markets after exchange controls were ended (quoted in Financial Times, 27.10.87).

The City has also become more flexible in other respects ranging from the introduction of new ‘back-office’ technology as well as using new technology to extend the range of client services[10] through more flexible working practices in individual firms and the frenetic competition to introduce new financial products and services to the overall development of a flexible system based on giant one-stop financial conglomerates plus ‘niche’ or ’boutique’ financial houses which specialise in high value-added financial services. These changes parallel those in industrial production and the labour force as the transition to more flexible, post-Fordist practices continues.

In addition to the continuing flow of innovations in existing markets in financial assets, new markets have been created both for equity capital (e.g. the unlisted securities market from 1980, the ‘over-the-counter’ market, the third market, and London Securities Exchange for smaller firms) and other financial markets (traded options, financial futures, etc.). The government has also been active in promoting more flexible provision of finance through the tax system (e.g. Business Enterprise Schemes) and boosting investment through privatisation, personal equity plans, changes in stamp duty, capital gains taxation, and so on. Indeed the success of the City in recent years can be attributed in large part to continuation of favourable tax status for institutional investment (pensions, insurance) and certain forms of saving (building society funds, home ownership), new measures intended to encourage stock exchange turnover (such as reductions in stamp duty on transactions), and to the typically neo-liberal preference for fiscal expenditure (tax subsidies and tax shelters) over direct revenue spending in support of industrial investment. Deregulation and liberalisation have reinforced these measures.

Accompanying deregulation and liberalization has been re-regulation. In part this has involved strengthening the hidden “prudential controls” exercised by the Bank of England. But a formal regulatory framework has also been established through the Financial Services Act 1986. The new Securities and Investment Board represents, according to Moran (1987), a new type of negotiated corporatist franchise along American lines. It is still too soon to evaluate this claim but it is clear that the state retains oversight of the system and that self-regulation has certain corporatist features which mean that financial markets are not yet run according to the laissez-faire principle of caveat emptor.

Re-regulation is needed to control the effects of flexibility. Financial services in an age of accelerating financial innovation, electronic money, global telecommunications, and computer-driven trading and arbitrage have in certain respects become too flexible; complete deregulation would render the whole system unstable. In this respect the need to examine flexibilities in the context of rigidities (cf. Jessop et al. 1987) receives further support from the experience of Black Monday and the growing scandals of insider trading, share support operations, Lloyd’s insurance scams, and so forth. Whether the new regulatory framework will be effective remains to be seen.

6. Concluding Remarks

We have argued that both the coal industry and the City experienced a gradual decline which turned into structural crises in the 1960s. That in the coal industry stemmed from a global decline in demand for coal (due to the growing importance of oil, natural gas, and nuclear power) as reinforced by de-industrialization in Britain (which particularly affected heavy industry – in turn a heavy user of coal) and by continued competition from other producing countries. The crisis required decisive intervention to reorganize the coal industry and make it competitive once again: this is not to argue that the neo-liberal strategy pursued by the NCB under MacGregor and prompted by the Conservative government was the only solution. The structural crisis in the City was the product of the long-term decline of sterling as an international reserve and transactions currency and the rigidities in financial adaptation induced by the traditional cartel agreements and restrictive practices in different financial markets. Thus new opportunities were often seized by foreign financial institutions (e.g. the Eurodollar market) or by domestic institutions operating outside the traditional cartels and controls (e.g. secondary banks). The position continued to deteriorate in the 1980s and required decisive action by the Bank and Stock Exchange – prompted by the government – to bring about the deregulation and liberalization of financial services which has helped to turn the City into the international centre for international financial capital. Even this apparent triumph of the neo-liberal strategy is double-edged, however, since the City has survived only at the cost of its growing domination by foreign financial institutions. It can also be asked whether the increased flexibility of financial institutions has not occurred at the cost of the real economy.

The general strategy adopted by the Conservative government in resolving these crises has been similar. This is the neo-liberal strategy based on six main elements: liberalizing competition, privatizing the state sector, deregulating the private sector, introducing commercial criteria into the residual state sector, internationalization as a source of competitive pressure and of learning experiences, and tax cuts to create the space for private market expansion.

In the coal industry this strategy has been pursued mainly through an emphasis on commercial criteria and increased flexibility in all areas. Key elements in its commercialisation have been reduced subsidies and external finance limits, the shift in the planning system from output targets to target rates of return, growing emphasis on productivity and profitability in pay settlements, internal competition among individual coalfields, pits, and even work teams. This has prompted growing flexibility in many areas. This primary strategy has been supplemented by deregulation (in industrial relations in general and through legislative changes bearing directly on the coal industry, e.g., health and safety in the pits), by the pressures stemming from privatization elsewhere in the state sector (most notably in the electricity supply industry), and, last and so far least, through internationalization (both in the form of MacGregor with his experience in the American coal industry and through the growing reality of coal imports – not merely during the strike but also since). This has occurred against the background of careful government planning to confront and break the NUM through the miners’ strike (whether or not the government itself can be said to have directly triggered the strike). After the active intervention of industrial relations law, the police, and the courts during the strike, the law now has a more passive, unspoken but still present, role in legitimating managerial power, maintaining divisions among the mining unions, and promoting the unilateral imposition of flexibility where the latter is not voluntarily conceded. This is part of a long-term strategy for the coal industry aimed at producing a small, profitable, high-tech, largely automated industry; this will be based on the most productive central coalfields where the ‘new realist’ UDM is predominant; it will be oriented not only to coal production but also to high-tech coal products and processes; and it could be privatised either wholesale, by competing coalfields, or through management buy-out. This is considered to be the ‘ultimate privatization’ and, should the strategy suc-ceed, a flexible, post-Fordist coal industry organized along the lines of the ‘flexible firm’ will emerge.

The City has also been transformed through the neo-liberal strategy – notably through internationalization and deregulation. Deregulation clearly involves the state. But, even if internationalization depends more on relatively autonomous market forces driven by the rise of multinational industry (with banks and insurance companies following industry) and the more general global integration of financial markets, it also depends on state action and has driven in turn the move to deregulation and other facilitative measures. For, whilst the authorities could take a national financial system for granted in the 1950s and 1960s and impose various constraints on financial intermedi-aries to influence the availability and/or the cost of finance, international-ization of finance in the 1970s and 1980s has spurred competition for business among financial centres. In this context state action to attract international financial capital and business-to-business services comes to play a key role in international competition. The Thatcher government has been especially  active in this regard.

In this context liberalisation and deregulation have a broad significance. Since success in this competition depends on things such as good telecommunications facilities, the availability of skilled labour, the tax regime, reserve requirements imposed on banks, the time zone in which a centre finds itself, and many others, governments must consider many factors when embarking on policies to sustain a financial centre. Two examples of recent action by the British state will suffice. Firstly, the liberalisation and deregulation of telecommunications has harmed British equipment manufacturers but has produced a revolution in the supply of equipment and a significant reduction in prices to financial users as British Telecom, Mercury, and suppliers of value-added network services have competed in the lucrative City market. In turn this has boosted the attraction of London as an international finance centre. Secondly, since the office requirements of modern financial centres are radically different from those of traditional finance, the government has promoted the redevelopment of the London docklands as a site for hightech financial services buildings – this has involved a combination of compulsory purchase, state-sponsored infrastructure (rail link, airport, roads), a quango (London Docklands Development Corporation) with major powers over development and limited accountability to local residents, and enterprise zone status which enables major construction firms to offset investments against tax. In short, whilst the expansion of the City may owe something to the entrepreneurial drive of new City institutions and/or foreign intermediaries, the favourable circumstances for this expansion also depend on state intervention. This can be seen most recently in government promotion of the EC’s ‘internal market’  -which particularly affects financial and business services – and its demands that other EC member states open these sectors to international competition.

Privatisation has necessarily been limited in financial services and banking because nationalization had not existed outside the post office: a partial  exception was the privatisation of the Trustee Savings Bank but, since this was not state-owned, proceeds went straight back to the TSB. Yet financial institutions have gained indirectly from the state’s privatisation programme and commitments to wider share ownership, home ownership, and pension ownership: this has generated fee income from flotation and increased demand.

Additional favourable factors have been the emphasis on commercial criteria in the state sector (associated with reductions in public sector borrowing and restraint in the growth of public spending) and favourable tax treatment of financial institutions and investment. Commercialisation (or, in banking jargon, ‘marketisation’) has also been advanced through the ending of administrative control over interest rates (via the Bank Rate and the clearing bank interest rate cartel) through the increased importance of the active short-term money markets[11] in setting interest rates competitively. these markets are international and have become an integral part of the financial system; extensive business is premised on their continued existence.

The effects of this strategy for financial services are double-edged. Deregulation began with the abolition of exchange controls in 1979, passed through the deregulation of building society activities, and culminated in ‘Big Bang’ and the shift towards self-regulatory organisations. But the effect of deregulation has been the dominance of international financial institutions in City activities – including the takeover of many British institutions by Japanese, American, and other investment banks. In addition deregulation in the City has been accompanied by re-regulation. Deregulating the securities industry not only involved state intervention in the short-term, however, it has also left more statist forms of regulation. For, alongside the corporatist SROs, the Department of Trade and industry has acquired major supervisory and investigative powers. Paradoxically this is ‘intended to ensure that the industry’s corporatist institutions do not once again use their power to preserve established interests in the face of market change’ (Moran 1987: 22; cf. on ‘statutory corporatism’, Longstreth 1985: 10). Likewise the 1979 Banking Act brought all banking activities (whether of recognised banks or licensed deposit takers) under Bank supervision to prevent a recurrence of the 1973-4 secondary banking crisis. Further efforts at re-regulation were prompted by ‘Black Monday’ (1987), the instabilities produced by excessive flexibility in the financial markets, and a series of scandals involving fund managers and investment advisers. How much further state intervention proceeds will depend on the evolution of market practices and the state of public opinion. For another paradox of Thatcherism has been further politicization of the City as the drive for popular capitalism exposes the wider public to the general adverse impact of a flexible, volatile market system as well as to specific abuses by insiders.

The City’s long-term strategy must be continuation of the dual process of internationalization: the growing penetration of the City by international financial capital and its increasing concern with servicing international capital. This specialized role for the City (which distinguishes it from the New York and Tokyo markets with their primarily domestic orientation) is likely to be reinforced with the move to the internal market in financial services in the European Community by 1992: indeed a key element in the Conservatives’ economic strategy is to promote the City’s dominance in this context.

Thatcherite economic strategy cannot, therefore, be treated as monolithic. For, although it has a certain coherence as a neo-liberal strategy which has been pursued fairly consistently for some twelve years, it has also been continuously adapted to changing circumstances and modified from case to case. The contrasts between coal and the City are especially instructive here since both have been subject to neo-liberal interventionism by the Thatcher regime but with quite different objectives, techniques, and consequences. This lesson will hold for other sectors too and cautions against over-ready generalization about the nature and impact of Thatcherism. None the less the fact that such vastly different sectors have been subject to different versions of the same overall neo-liberal strategy suggests that there is probably more coherence to the Thatcherite project qua project than was true of earlier periods of state intervention. Whether this is necessarily good for the sectors in question or the national economy as a whole remains to be seen. Current indications do not augur well.[12]

Endnotes


[1]  Especially as Britain enjoyed a virtual monopoly in coal exports and could set prices above British domestic rates until new sources of world supply emerged in the late nineteenth century: see Debier et al., 1986: 176-9.

[2]  Such strikes are characteristic of ‘pit politics’ as opposed to the corporatist tradition of ‘minerworkers’ politics’ at national level; the rise to power of Arthur Scargill signified the dominance of ‘pit politics’ at national as well as local level (see Gibbon and Bromley 1990).

[3]  Financial Times, 14 February 1989.

[4]  Financial Times, 23.5.1990.

[5]  On this classification, see Jessop 1982.

[6]  In this paper institutions refer both to specific markets, such as the London Stock Exchange or Lloyd’s, and to ensembles of intermediaries, such as the clearing banks, subject to common rules and procedures and with their own trade associations; intermediaries will refer to individual organisations or firms in these markets.

[7]  Although in the short-term this encouraged even more foreign investment banks to move to London.

[8]  A move by the Bank which followed soon after the introduction of the Medium Term Financial Strategy and immediately threw money supply targets off course.

[9]  They have been allowed to engage in commercial lending, second mortgages, unsecured loans, mortgage credit elsewhere in the EEC, residential development, money transmission, foreign exchange business, estate agency, insurance broking, and property management. The larger societies want to become all-purpose financial intermediaries and the Abbey National is already seeking a stock market quotation.

[10]  For example, automatic teller machines to extend effective banking hours, simple ‘home banking’ and complex ‘office banking’ through the installation of terminals in clients’ homes or offices, electronic funds transfer at the point of sale.

[11]  These include markets for short-term bank deposits, discount house deposits, certificates of deposit, short-term time deposits from non-bank sources, other deposits of various kinds, such as local authorities, finance houses, ECUs, and SDRs.

[12]  For an analysis of the economic consequences of Thatcherism and their impact on the crisis of Thatcherism, see Jessop et al., 1990.

 

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