Sorry to be away for so long, a few days work seems to have expanded into a few weeks. Things will be a bit hit and miss with the school holidays kicking in soon, and living in the middle of the Olympics will not help, but there will be a few posts over the summer and these will become more regular towards the end of August.
So, back to work. On page 9 of Seasons in the Sun Dominic looks at the economic legacy bequeathed to the Labour government in 1974. I wish to avoid looking back at the Heath government and have no intention of expanding this study to Dominic’s previous book, State of Emergency, which covers the Heath government 1970-1974. But it is important in understanding the problems that the incoming Labour government faced.
What page 9 amounts to is a statement that by the end of 1973 the economy was in a bad way, which has much truth but it is also worth noting that the growth rate in GDP over the period of the Heath government was a respectable average of 2.4% p.a. (derived from figures at http://www.guardian.co.uk/news/datablog/2009/nov/25/gdp-uk-1948-growth-economy). But instead of an analysis we are offered, as we often are, a list. And this list is a particularly messy list. Here we are offered the following factors that led to “Heath’s ambitions…..crumbling into dust.”
1. The Barber boom (the reflationary budget of March 1972) leading to an inflationary credit boom and overheated economy.
2. A balance of payment crisis.
3. “Above all” the oil shock of October 1973.
4. The response to this was a credit squeeze, leading to a collapse in housing and other markets and public spending cuts.
5. The stock market going into “cardiac shock”
I will deal with these in forthcoming posts, and try to tease out the relationships between these factors. I will start with the credit boom. Dominic puts the blame for this problem at the door of the 1972 budget, when Dominic tells us that “Heath told his Chancellor, Anthony Barber, to go for broke….Thanks to the ‘Barber boom’, the economy went into overdrive, with house prices surging…” (Seasons, p9). None of this is quite right. The easing of credit was the result of measures adopted in 1971, specifically those constrained in the policy statement “Competition and Credit Control” (to be found in the Bank of England Quarterly Bulletin). It was these measures, intended to create a freer market in bank services and loans that had led to a boom in credit and therefore an increase in money supply. (Alec Cairncross, “The Heath government and the British economy” in Stuart Ball and Anthony Seldon (eds), The Heath Government 1970-1974: a reappraisal (London: Longman, 1996), p125)
Looking at house prices increases shows how they picked up before the “Barber boom” budget (which led to a surge in growth, particularly in the first quarter of 1973, when annual growth in GDP topped 5%). The figures below are for each quarter of the year, the percentage being for the yearly equivalent of the house price rise in that quarter. The Conservatives came into power in June 1970, at the end of the second quarter. Credit was eased in the second quarter of 1971.
Q1 1970 5.6%
Q2 1970 6.0%
Q3 1970 6.6%
Q4 1970 6.3%
Q1 1971 8.3%
Q2 1971 10.3%
Q3 1971 16.3%
Q4 1971 20.7%
Q1 1972 26.7%
Q2 1972 33.6%
Q3 1972 41.0%
Q4 1972 42.4%
Q1 1973 39.8%
Q2 1973 34.7%
Q3 1973 24.2 %
Q4 1973 24.0%
Q1 1974 18.2 %
Q2 1974 13.5%
Q3 1974 10.5%
Q4 1974 4.5 %
As can be seen from these figures, house price inflation started well before the Barber boom, and was beginning to fall back by the time that the reflationary measures were having their fullest effect in early 1973.
As can be seen, the claim that “House prices….collapsed” (Seasons, p9) is not accurate, although by early 1974 they were increasing at a rate less than general inflation. Throughout the period, house prices continued to rise, although certainly not at the high rate of 1972 and 1973. Average house prices were not falling, this did not happen until 1990 when many house owners felt the impact of negative equity.
The point here is that not all of the Heath government’s economic problems came from the unions, Arab oil producers or from the reflationary budget of 1972. Some stemmed from the earlier period of more free market policies.
So that was the credit boom. In my next post I look at the credit crunch that followed at the end of 1973 (probably more accurately a credit squeeze) and the contemporaneous secondary banking crisis.