In the late 1980s Britain suffered a series of disasters which many attributed to the public spending cuts made years earlier by the Thatcher government. During the first, 1979 to 1983 government, Britain lost more than two million industrial jobs. Over the same period, so-called “red tape,” including much health and safety regulation was dispensed with. And as companies were increasingly forced to compete against firms from developing states which employed far cheaper labour, the temptation to cut corners was too great to resist. So the second, 1983 to 1987 government presided over the first of what was to become a long list of disasters: The Bradford City football ground fire, the Manchester air disaster, and the terrorist bombing of Air India flight 182 in 1985 were merely the first of a series of disasters which were to become household names in the third and final, 1987 to 1990 Thatcher administration.
The capsizing of the aptly-named Herald of Free Enterprise, the Kings Cross Fire, the Clapham Junction rail crash, the Kegworth air crash, the Locherbie bombing, the sinking of the Marchioness and the mass deaths at the Hillsborough football stadium were the first and most obvious failure of the neoliberal consensus. Governments which cut public spending and leave health and safety to market forces inevitably find themselves reeling in the face of disasters later on. But it was a disaster on 6 July 1988 which was to prove to be the Tories’ nemesis.
On that day, a simple health and safety failing – the failure to notify the next shift that a valve had been shut down for maintenance – began a chain of events which was to leave 167 men dead and 61 survivors injured or psychologically damaged. The Piper Alpha explosion was Britain’s worst offshore disaster. But its more insidious result was the strange “M” shaped graph of British North Sea oil and gas extraction:
The Piper Alpha platform was not just a drilling rig. It acted as a hub for other North Sea platforms sending oil and gas to the mainland. The result of the disaster was that connected platforms also had to be taken offline, causing a significant decline in UK production. So much so, indeed, that between 1998 and 1994 the UK became a net importer of oil and gas:
Although investment in the North Sea had accelerated after the 1973 oil shock, which saw oil prices quadruple, it was the Thatcher government which inherited the fruits. The question was whether Thatcher’s Tories would use the proceeds from the sale of oil and gas to revitalise Britain’s crumbling industrial base or would they use them to paper over the cracks. Looking back on the period, former Welsh First Minister Rhodri Morgan explained which way they chose to go:
“Back then whoever was running the Government had this amazing ability to spend oil revenues. Governments could afford things. They didn’t have to worry about where the next few quid was coming from. The Falklands War was eminently affordable. Paying the cost of the rocketing unemployment benefit bill, as dole queues doubled, then trebled, wasn’t a problem.”
Writing in the Guardian, Ian Jack made a similar observation:
“I had the idea… when I was walking through a London square around the time of the City’s deregulatory ‘Big Bang’ and Peregrine Worsthorne coining the phrase ‘bourgeois triumphalism’ to describe the brash behaviour of the newly enriched: the boys who wore red braces and swore long and loud in restaurants. Champagne was becoming an unexceptional drink. The miners had been beaten. A little terraced house in an ordinary bit of London would buy 7.5 similar houses in Bradford. In the seven years since 1979, jobs in manufacturing had declined from about seven million to around five million, and more than nine in every 10 of all jobs lost were located north of the diagonal between the Bristol channel and the Wash . And yet it was also true that more people owned more things – tumble dryers and deep freezers – than ever before, and that the average household’s disposable income in 1985 was more than 10% higher than it had been in the last days of Jim Callaghan’s government.”
Margaret Thatcher regularly berated trade union leaders and corporate CEOs for living beyond their means, and for expecting Britain to be paid more than it earned. In reality the Tories did the same thing by squandering the North Sea capital on day-to-day revenue expenditure. For a while, though, the illusion of prosperity allowed people to convince themselves that the structural problems which had afflicted the UK economy following the First World War had somehow been solved.
Following the 2008 crash and the wider public awareness that the vast bulk of our money supply is created by private banks when they make loans, critics have been at pains to point out that sovereign governments cannot go broke. A country like the USA or the UK can simply print money directly in order to pay off any outstanding debts. Indeed, to some extent this is what central banks are doing in response to the Covid-19 pandemic. The flaw in this argument, however, is that only countries which are net exporters or states which are autocratic can do this without consequences. For a country like Britain, which needs to import many essentials – including much of the food we eat – currency printing means devaluing the currency against the currencies that we need to trade in. Until recently this was a particular problem for oil trading because the trade had to be conducted in US dollars. In periods when Britain has been a net oil importer, it has had to store enough dollars to pay its way in the world. One way of doing this is to raise interest rates. Another is to privatise British public assets in exchange for foreign currency. In the late 1980s, Britain did both.
European policy led to Margaret Thatcher’s resignation on 22 November 1990. Among the policies which caused open revolt in the Tory Party at that time was Britain’s proposed membership of the European Exchange Rate Mechanism (ERM) which had been in place since 1979. Thatcher was a staunch opponent of the ERM, believing that it would stifle economic revival. This opposition led to the resignation of her Chancellor, Nigel Lawson in October 1989; triggering the growing revolt against Thatcher’s leadership. A year later and a month before Thatcher was forced to step down, new Chancellor John Major took Britain into the ERM; creating the conditions for the crisis which would destroy his own government two years later.
If Britain had been badly placed to join the ERM in 1989, things were even worse by the end of 1990. The loss of US dollar oil and gas revenues from the North Sea had left the British Pound weakened and artificially inflated as a result of a 10 percent interest rate. Foreign currency speculators such as – famously – George Soros had begun to short Sterling; betting that Britain would eventually be forced out of the ERM. This wasn’t idle speculation. European bankers had also let it be known that they believed that Sterling was over-valued; bringing into question the administration of the ERM itself.
The thinking behind the ERM was that member currencies would act in concert to ensure that fluctuations in the value of individual currencies would remain within a pre-set band. If a currency rose too high, member states would sell it. Conversely, if a currency fell too low member states would buy it. In this way, companies trading across the European Union would have certainty about the cost of doing business.
Britain’s membership of the ERM was ill-fated from the start. As Joshua Warner at IG recalls:
“Within two years of joining the ERM the pound started to struggle to stay within the agreed range and fell by more than the 6% limit against the stronger currencies at the time, including the leading Deutsche Mark. This required the government to take action to shore up sterling and get it back within range but ended up demonstrating why we have institutions like the Bank of England (BoE) today. The BoE has, of course, been around for centuries but was under the thumb of the government of the day. Major and his team addressed the falling pound by raising interest rates – which generally pushes inflation down and the pound up. The BoE was also instructed to spend nearly £30 billion of its reserves – up to 40% of the entire kitty – on buying the pound to help counter the heavy selling that continued to ensue.
“The problem was that interest rates were already running at 10% – levels that today’s generations have never experienced – and the jump to 12% was unexpected. But there was a bigger underlying problem that meant this didn’t work. Quite simply, the rate at which the UK had tried to peg the pound was too high, the economy was not strong enough and higher interest rates ultimately failed to prop up the pound to the desired range.”
The bigger problem though, was that the German Bundesbank refused to honour its part of the deal. As the issuer of the strongest currency in the ERM, the Bundesbank was supposed to sell Deutschemarks and buy pounds in order to lower the value of the German currency while raising the value of the pound. But as the Bank of England’s chief currency dealer Jim Trott put it:
“The cavalry were the Bundesbank. We kept on looking over the hill, but there was no dust and there were no hats and no sabres. And then later at the conference call they suddenly didn’t speak English, which was extraordinary. So we were kind of stretched on that day.”
It was the realisation that the Bundesbank was not going to act which prompted speculators like Soros to begin selling. As Joshua Warner explains:
“George Soros, the world-renowned billionaire investor, made his name on Black Wednesday by betting against the pound and making a staggering £1 billion. It was a brave move based on a sharp approach. Soros had actually backed the pound to the tune of £1.2 billion only one month before Black Wednesday, but quickly reversed his position as the sell-off started and the devaluation began.
“Through his Quantum Fund, Soros instructed his team to borrow UK gilts and sell them before repurchasing them later on at a lower price. Much like the BoE lost more money with every transaction, Soros and his team were turning a profit with each trade.”
The Bank of England squandered £3.3bn in their vain attempt to stabilise the pound. Soros pocketed more than £1bn of it. At one stage, UK interest rates rose to 15 percent, before the government finally admitted to itself that the economic cost of defending the pound would be far greater than the cost of leaving the ERM.
The irony of Black Wednesday was that it brought the UK currency closer to its true value at the time. As a result, British exports became more competitive; so that when North Sea oil and gas began to flow abroad again the economy began to turn up. But the mishandling of the crisis left an indelible stain on the Major government; which was to be seen as economically incompetent and fundamentally divided over Europe.
That Major was Prime Minister at all was a surprise. Many pundits had expected the Tories to lose the 1992 general election. In a triumphalist rally in Sheffield however, Labour leader Neil Kinnock skilfully snatched defeat from the jaws of victory. Major won in 1992 with a small but workable majority of 21, including many leftovers from Thatcher’s 1997 win. Even more impressive was Major’s ability to hang onto power despite visceral divisions in his party, a growing perception of economic incompetence and the loss of seats at by-elections following the deaths of older MPs. By 1997, Major was running a minority government; and was desperately hoping that an improving economy would translate into better electoral fortunes.
It wasn’t to be. Just as in 1979 North Sea oil and gas exports were to be gifted to an incoming government, so in 1997 the eventual recovery following the Piper Alpha disaster was to favour the incoming Labour government. And despite North Sea oil and gas extraction peaking for good in 1999, the Blair government was able to use the export revenues as the basis for another debt-based boom which finally came to grief in 2008.
Alternative histories are always fun because they can neither be proved nor disproved. It is possible though, to suggest that without the Piper Alpha disaster Britain’s currency would not have been over-valued when it joined the ERM. This, in turn, might have made speculators more cautious about shorting the pound; perhaps going after one of the other ERM currencies instead. Without Black Wednesday, the Major government’s reputation for economic competence would have remained intact. More importantly, the economic recovery which only began to gather pace after 1995 would have arrived much earlier; making voters far less likely to vote for change.
In that parallel universe the Brexit divisions which we are now coming to terms with might have remained on the fringes. As Warner recalls, however:
“The political ramifications of Black Wednesday are still evident today and part of the same story that led us down the road to Brexit. The mood toward Europe after Black Wednesday changed markedly and the more European-leaning Conservatives gave way to the sceptics that today are at the forefront of British politics: people like Boris Johnson and Michael Gove. The prime minister that got us into the Brexit debacle in the first place, David Cameron, stood alongside the Treasury’s Gus O’Donnell (as his assistant) on the evening of Black Wednesday when he announced the pound was being withdrawn from the ERM.
“In 2005 – five years before Cameron would win over the electorate from Labour – the then future prime minister ominously said he and the Conservatives would never again put ‘economic stability at risk’ as they had done on Black Wednesday. A decade later when he was in office Cameron would end up doing exactly that by calling the EU referendum that happened in 2016, underpinned by the rising resentment toward Europe by Conservative ministers that are still reeling from the events of the 1990s.”
It would, of course, be unacceptable reductionism to claim that the political events between 1988 and 2016 were all caused by the Piper Alpha disaster. But in an age when reason has largely been replaced by emotion, and when political events are viewed as nothing more than bad people following bad ideas, it is useful to highlight the fact that events in the real, material economy really do have profound consequences; often unforeseen ones. In modern Venezuela we see all too readily what happens to a state whose fortunes are built around its oil industry, when the price of that oil falls below what is needed. Because of its industrial heritage, Britain is less obviously an oil state. Nevertheless, governments of both neoliberal parties have used foreign currency oil and gas revenues to underwrite Britain’s debt-based economy for the last four decades. And a great deal of what is wrong with the current economy is due to those oil revenues being squandered for short-term political advantage.
Brexit is not simply a bad idea being pursued by wicked people. It is an attempt – albeit a mistaken one – by those who have opposed Britain’s political and economic course over the last thirty years to return to the course they believe we ought to have followed after 1990. They are wrong not because the current, technocratic elitist version of the European Union is the best course open to us, but because both the industrial base upon which Britain was built and the North Sea revenues which resuscitated it in the 1980s and 1990s are history. There is no way that any of the contending political parties gets to Make Britain Great Again. Indeed, it is doubtful that any has even the insight to cushion the coming collapse.
As you made it to the end…
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