British industrial strategy and the problem of the City

The Coalition government’s stuttering industrial strategy is reminiscent of earlier failed attempts at revitalisation, and once again the banks are at the heart of the problem

Jeremy Green
Jeremy Green

As we head further down the spiral of a possible triple dip recession, the question of growth is becoming ever more pressing.  The unravelling of the Anglo-liberal growth model has left the British political class groping for remedies.

If Britain is to grow its way out of this recession, not forgetting the environmental problem that this poses, then there is a desperate need for a coherent industrial strategy.

Unfortunately, this has not been a traditional strength of British public policy. The latest quest for a coherent industrial strategy is not the first. It is actually part of a long line of failed attempts to develop a convincing strategy to foster British development.

At the root of these failures has been the powerful nexus between the City, the Treasury and the Bank of England.  Throughout the post-war period this alliance has often sought to devise ways to use the international monetary system to discipline elected governments seeking to pursue Keynesian growth strategies.

The problem conventionally dates back to the decades after World War II, where the requirement to protect the high value of sterling, vehemently promoted by the City and the Bank, combined with the initial failure to join the European Economic Community, gravely damaged the growth prospects of British industry.  But the real origins lie even further back – in the nineteenth century when an increasingly archaic British industrial capacity was overtaken by competition from Germany and the US which led the way in key sectors of the Second Industrial Revolution, with Germany in particular benefiting from a superior industrial banking system.

By the Sixties, after years of stuttering growth associated with a ‘stop-go-cycle’ brought about by the deflationary policies required to defend sterling in the face of periodic speculative attacks, both Conservative and Labour governments moved to accept the need for a rethink of British industrial strategy.  When Harold Wilson came to power in 1964, he promised to forge a revived growth strategy through the ‘white heat’ of industrial modernisation.

To this end Wilson established a new Department of Economic Affairs tasked to help steer the development of British industry. Yet, despite pulling off some modest achievements, the DEA was doomed from the outset. Its responsibilities were never clearly delineated from the Treasury, which was sceptical of its contending mandate for British economic policy and, crucially, retained the all-important control over the public purse strings.

After the failures of the 1960s, Ted Heath adopted a new approach. He promoted membership of the EEC in the belief that exposing British firms to European competition would filter out the weaker units, leaving Britain with a leaner and more competitive industrial sector.  This didn’t pay great dividends and by the end of the 1970s Margaret Thatcher had come to power with a radical plan.

Thatcher pulled the plug on vast swathes of British industry, dismantling the traditional industrial basis of the North of England and Scotland, and opting to promote a liberalised and aggressively expansionary financial services sector in the South-East.  The City increasingly played host to American and Japanese banks, as foreign competitors swallowed up British merchant banks during the 1980s and 1990s.

So was born the growth model that has largely persisted until the current crisis.

As we can now see, the reality is that the desire to embrace globalisation and establish Britain as a key financial pivot within the global economy has had enormously damaging consequences for underprivileged regions within the country.  These areas still bear the scars of Thatcherite deindustrialisation and now face further pain as the public sector expansion that plugged the hole for them under New Labour faces drastic retrenchment through Coalition cuts.

The Coalition’s current industrial strategy has focused upon the need for a Public Investment Bank, the pet project of Business Secretary Vince Cable. In recent years small and medium-sized businesses have been starved of access to affordable credit, despite the massive public bail-out of the banks. Not surprisingly, the supply-side warriors that fixate on removing ‘red tape’ and further ‘flexibilising’ labour markets have generally neglected to draw attention to the inadequacies of the supply of credit to small and medium-sized businesses.

Nevertheless, establishing a Public Investment Bank is an attempt to sidestep a financial system that has proven, time and time again, not to serve the longer-term interests of the British people.  The power and purpose of finance is once again harming Britain’s national development. What these industrial strategies have consistently failed to address is that disjuncture between the interests of key financial players within the City of London and the need for employment and opportunity throughout Britain.

But LIBOR and the massive corruption surrounding the banks suggest that the health of the national economy is not a primary concern for the City. London has become an island economy, remaining above the surface while other parts of the country sink into decline.

Britain’s consistently failing attempts to put together a coherent industrial strategy are a reflection of real social and political divisions within the country.  Finance needs to be deployed to meet the needs and interests of the country as a whole, not just to enrich privileged groups in the City and the South-East.  That necessarily means enlarging the role for public control over finance and weakening the City’s hold on financial power.