Telling the Economic Story of the Major Years in 2009 : the Example of the 1990-1992 Recession
This article underlines how the 2008-2010 recession is shifting our perception of the economic history of the Major Years and uses one of the new intellectual spaces thus created to return to an examination of the 1990-1992 recession. Its major characteristics (e.g. the pattern of unemployment, the incidence of negative equity) highlighted the fundamental changes that had taken place under Thatcherism (e.g. the severe contraction of the secondary sector, the deregulation of financial services, the increase in owner-occupancy) but the recession also had its own impact on the mutations taking place, accelerating, notably, the decline of manufacturing.
Keywords :economic history, recession, inflation, negative growth, unemployment, negative equity, owner-occupation, deregulation, manufacturing, financial intermediation
PlanHaut de page
- 1 For some recent reflections on ‘History and Telling Stories’, see the last chapter of John Brewer’ (...)
1Writing very contemporary history tends to bring out the relative nature of historical truth. Unexpected events in the present jolt perspectives on the recent past often more violently than archival discoveries or changes in interpretative paradigm trouble the more settled narratives about more distant periods. The sudden realisation, in the autumn of 2008, that the world economy was crashing into the worst recession since the 1930s, after a spring spent worrying about commodity shortages and accelerating inflation, has already become a textbook example of the intellectual consequences of the unexpected, notably in the field of economics. What, at the time of writing, appears likely to prove to be the recession of 2008-2010 will also have a lasting impact on how we view the Major Years.1
- 2 Thanks to the Freedom of Information Act, the documents tracing the emergence of the new policy to (...)
- 3 ONS.Gross Domestic Product CVM SA : series IHYP and IHYQ. In terms of year-on-year growth, the yea (...)
2From an economic-history perspective, the Major Years were already a period of great interest in at least three respects, even before the present crisis began to unfold. Firstly, they contained the key moment in the separation of the destinies of the pound and the future single European currency, namely Black Wednesday (September 16th, 1992): after the brief and unhappy experience of Britain’s twenty-three-month membership of the Exchange Rate Mechanism (ERM) of the European Monetary System, the pound was brutally expelled by speculative short-selling on the exchange markets. Secondly, after thirteen years of Conservative searching for a way to anchor the fight against inflation - which took Britain through the successive episodes of the Medium Term Financial Strategy and its use of the sterling M3 definition of the monetary supply and then of the Public Sector Borrowing Requirement as targets, of shadowing the mark, and of the ERM (all indirect ways of establishing an inflation target) - John Major’s first Chancellor of the Exchequer, Norman Lamont moved, in the wake of the Black Wednesday earthquake, to what subsequently became standard practice: the adoption of a direct inflation target, to be attained principally by monetary policy.2 Thirdly, the growth of the British economy in the third quarter (Q3) of 1992 proved to be the first of sixty-three successive quarters of growth, the longest sequence of growth quarter by quarter since the beginning of quarterly GDP statistics in 1955. The first twenty of those quarters took place during John Major’s premiership.3
3Our way of looking at those three aspects of the Major Years has already begun to change as a result of the events of 2008. The recovery of the British economy in the months following Black Wednesday, its better performance than that of its principal European rivals in the rest of the 1990s and then of the euro zone after January 1999, had led to Black Wednesday being interpreted as a fortunate occurrence which freed the economy from an unnecessary and deflationary straightjacket. The 28% fall of the pound against the euro in the course of 2008, notably in the fourth quarter, raised the question of the structural vulnerability of sterling outside the euro zone and of its consequences for inflation, for the credibility of government economic policy, and, therefore, for the capacity of the government to borrow at the most advantageous market rates at a time of a rapidly growing budget deficit. Britain’s failure to stay within the ERM may, thus, come to be interpreted more negatively.
- 4 Bank of England. 17.04.07 Letter from the Governor to the Chancellor. (http://www.bankofengland.co (...)
- 5 Bank of England. 16.06.08 Letter from the Governor to the Chancellor. (http://www.bankofengland.co (...)
- 6 Bank of England. 08.01.09 News Release : Bank of England reduces Bank Rate by 0.5 Percentage Point (...)
- 7 Bank of England. Statistical Interactive Database : Official Bank Rate History (http://www.bankofe (...)
4The events of 2008 have also destabilised the narrative about the final emergence of a successful way of dealing with inflation. Two successive and contradictory changes in price movements left monetary policy and commentators reeling and a big question mark hanging above the achievements of John Major’s governments in this field. A first alert in March 2007, when Consumer-Prices Index inflation (CPI inflation) reached 3.1%, had obliged the Governor of the Bank of England, under arrangements prevailing between the Bank and the Treasury, to write an open letter to the Chancellor of the Exchequer to explain why inflation had risen above the official target of 2% and what the Bank’s Monetary Policy Committee proposed to do about it.4 The vertiginous rise of oil, gas and food prices in the months which followed (« In the year to May , world agricultural prices increased by 60% and UK retail food prices by 8%; oil prices rose by more than 80% to average $123 a barrel and UK retail fuel prices increased by 20%; wholesale gas prices increased by 160% and UK household electricity and gas bills by around 10%.») made such a monthly letter from the Governor a regular feature of the British landscape after June 2008.5 Yet the sudden acceleration in the collapse of economic activity induced by the banking crisis of September 2008 replaced worries about inflation by fears of price deflation, or, in the Bank’s coded jargon, of « a significant risk of undershooting the 2% CPI inflation target in the medium term. » 6 In the space of three months, between October 8th 2008 and January 8th 2009, the Official Bank Rate was reduced from 5% to the historically unprecedented level of 1.5%.7 The supply of credit is no longer responding to monetary policy and the debate has moved on to the question of ‘quantitative easing’, that is to say the creation of money by central banks, and the guaranteeing of loans to industry by the taxpayer.
5The significance of that extraordinary sequence of events for our interpretation of the Major Years is twofold. Firstly it demonstrates that although the method devised to control inflation – direct inflation targeting and piloting by interest rates – coincided with good inflation results for some fifteen years (annual CPI inflation fluctuated between 2.6% and 0.8% in the years 1993 to 2007), it was not capable, on its own, of definitively solving the problem of price fluctuations, as was sometimes maintained. Secondly, the sequence of events reopens the debate about the relative contributions of good policy and favourable economic conditions to Britain’s long period of price stability. The period of unusually low inflation, which included the last four Major years, seems also to have coincided with a particular phase in the already long history of globalisation during which low commodity prices, declining prices for certain types of manufactured goods imported from countries such as China, and the downward pressure on wages exerted by a supply of labour that, in many sectors, became worldwide, certainly contributed to the absence of inflationary pressures in a strongly growing economy. The price fluctuations in the first part of 2008 announced, no doubt, the new conditions for economic activity in the medium term, namely worldwide shortages of basic commodities leading to strong inflationary pressures. The Bank of England, therefore, is likely to return at some future stage to the task, once again rendered difficult, of trying to combine economic growth with low inflation. The Major Years will consequently lose their status as the ‘beginning of the End of History’ in terms of the quest for price stability.
- 8 ONS. Gross Domestic Product CVM SA. : series IHYQ.
6Thirdly, the suddenness and the depth of the plunge into recession in 2008 have destroyed, in riveting fashion, the much spun story about the virtues of the cycle of growth that began in 1992 Q3 and its supposedly eternal qualities. The economy officially shrank by 0.6% in the third quarter of 2008 and unemployment rose by 137,000 or 0.4%. The fourth quarter proved to be much worse, involving negative growth of 1.5%.8 As a result of such startling figures, some of the very same factors which were being cited yesterday as explanations for Britain’s relatively strong economic performance after 1992, such as the degree to which the economy had become service-oriented and its specialisation, within the service sector, in financial services as part of an optimal global division of labour, are today being invoked to explain the particularly violent nature of the arrival of the crisis within Britain. The impressive unbroken run of quarters displaying growth is now scrutinised for the seeds it contained of the future catastrophe.
- 9 Daron Acemoglu, the Charles P. Kindelberger Professor of Applied Economics at MIT, identifies thre (...)
7 A final change in approach induced by the present recession has been to reactivate interest in what for some years had become a neglected aspect of the Major Years, the recession of 1990-1992. This economic episode did not figure in my initial list of the three aspects of the economic history of this period that drew attention in the years prior to 2008. Theoretical interest in recessions, indeed, waned under the warm glow of constant growth and they came to occupy an increasingly marginal position within standard economics textbooks. An inevitable corollary was that interest in historically conceived case studies also evaporated.9
- 10 The sub-prime crisis has already reactivated historical econometric work on crises. See, for examp (...)
8Today the spectre of previous recessions haunts Britain. The recent run of dismal statistics has already leapt over the recession of the early 1990s to produce comparisons with the early 1980s and headlines such as ‘UK slump worst for 28 years’. The consensus is that things will only get worse. The 1976 syndrome – the year Britain was obliged to seek special drawing rights from the IMF – is again mentioned in the press and this unravelling of history will surely take public debate back to the events of the 1930s before the year is out. In this context there is an intellectual space for an article dealing with the 1990-1992 recession conceived as a contribution to a more general attempt to re-evaluate the Major Years.10
- 11 Preliminary estimates of the evolution of GDP in the previous quarter are generally produced three (...)
- 12 ONS. Gross Domestic Product CVM SA. : series IHYP and IHYQ.
9The series of statistics available from the Office of National Statistics, despite the continuing revision of certain of them, allow us to map the contours of the 1990-1992 recession. The most basic outline of the crisis is given by the growth figures. Negative growth first appeared in 1990 Q3 and was followed by a second consecutive quarter of negative growth in 1992 Q4. Thus, two months after the arrival of John Major at 10 Downing Street, the UK could officially be considered as being in recession.11 Official certification of entry into recession occurred, as by definition it must, six months after the beginning of the real downturn, which began in July 1990 during the last months of Margaret Thatcher’s period in office. In all, there were five consecutive quarters of contraction (1990 Q3- 1991Q3) followed by three quarters of virtual stagnation or sideways drift, oscillating between -0.2% and +0.1%, before growth finally returned in 1992 Q3 ( see the statistical appendix, figure 1). Hence, in annual terms, 1990 and 1992 were years respectively of weak growth (0.8%) and stagnation (0.1%), whereas 1991 saw the economy contract by 1.4%, the sharpest annual contraction since the war, at that point, barring 1980 (-2.1%). The economy only overtook the size it had had in 1990 in 1993 (see figure 2).12
- 13 For the idea of GDP gap, see Peter Jay, "The Economy 1990-1994," in The Major Effect, ed. Dennis K (...)
10If we view these figures from the perspective of the long-term growth potential of the British economy, we can appreciate the full cyclical dimensions of the period. After finally managing, in 1988-1989, virtually to close the output gap between actual and potential GDP resulting from the recession of 1980-1981, the gap began to widen again in 1990 and was only closed again in 1997. By that year the economy was indeed ‘working’, as the Conservative general election slogan proclaimed, but the growth associated with the period 1993-1997 did no more than bring Britain back to where she would have been without the recession which opened the decade (see figure 2).13
- 14 ONS. Workforce jobs : series DYDC. Employee jobs : series BCAJ. Self-employment jobs : series DYZN (...)
11Below-average-trend growth or stagnation or negative growth all meant the destruction of jobs. In 1990 Q3, the total number of workforce jobs also started to decrease from the highpoint of 29.232 million reached in the previous quarter. The decline was continuous until 1992 Q4 when it bottomed out at 27.276 million, a fall of some two million or 6.7%. The number of jobs existing in 1990 was only finally overtaken in 2000, after eight years of growth. The fall not only concerned employee jobs which fell by 1.441 million or 5.9% between 1990 and 1993 but also self-employment that lost 0.263 million jobs, a decline of 6.5% (see figure 3).14
- 15 ONS. Labour Force Survey Summary, 1971-2008 : series YBSH and YBTI. Claimant count : series BCJE.
12The destruction of jobs led directly to a rise in the level of unemployment, with the normal time lags visible between fluctuations in growth figures and those concerning unemployment. ILO unemployment bottomed out at 7% or 1.968 million in 1990 Q1-Q2 before beginning a long and constant climb to 10.8% or 2.972 million in 1993 Q1, with one of the sharpest jumps taking place in 1992 Q4 (+0.5% or 115,000 additional unemployed)(see figure 4). Just over a million more people were unemployed at the worst moment of the crisis, in employment terms, than at its beginning The other measure of unemployment, claimant count - historically the main indicator quoted since the invention of unemployment insurance in 1911 but which has been influenced by the constant changes in social security legislation, notably in the 1980s - paints a similar picture: claimant count unemployment rose from 5.2% in 1990 Q2 to 9.9% in 1993 Q1 and Q2.15
- 16 ONS. Labour Force Survey Summary, 1971-2008 : series YBSO, YBTM, YBSP and YBTN.
13The difference between the loss of about two million jobs and a rise in ILO unemployment of about one million clearly demonstrates (even taking into account the fact that the first measure concerns jobs and the second people, some of whom may have had two or more jobs) that other factors were also at work. Indeed, after six years of relative stability between 1984 and 1990, the recession also re-launched the upward movement of the male working-age inactivity rate, which gained nearly four percentage points between the first quarters of 1990 and 1995, taking it to 15%, a jump of 687,000 people. The female working age inactivity rate, on the other hand, although it interrupted its downward trend between 1991 and 1995, only saw a 1.1% increase, involving 240,000 women.16
- 17 ONS. Labour Force Survey Summary, 1971-2008 :series YBSI, YBTJ, YBSJ and YBTK.
14This latter phenomenon introduces us to one of the social specificities of the 1990-1992 crisis: the degree to which it affected male rather than female employment. The number of men of working age (16-64) classified as ILO unemployed rose from 1.147 million in 1990 to 1.957 million in 1993, an increase of 70.6%. That produced a male unemployment rate of 12.6%, which was even higher than the 12.4% of 1983. The equivalent unemployment rate for women peaked at 8.1% in 1993, a rate that was substantially lower than that of the previous peak of 12.1% in 1984 (see figure 4).17
15The regional incidence of the crisis was also commented upon at the time. In its issue of February 20th 1993, The Economist published a small statistical dossier entitled ‘Three million down, more to go’. Its introductory gloss upon the figures ran as follows:
- 18 ‘Three million down, more to go’, The Economist, Feb 20 1993, 35.
The number of people out of work, at 3.062m (2.99m seasonally adjusted), is close to the 1986 post-war peak, and still rising. Our charts show who, what and where is worse hit: the south is suffering more than the north, the young more than the middle-aged, blacks and brown more than whites, manufacturing more than services, and men more than women.18
- 19 In the opposition North/South, as used in the 1980s, the expression ‘North’ came to include all ar (...)
16The most surprising of those conclusions, from the viewpoint of post-First World War British history, was the first: “the south is suffering more than the north”. It was true in an absolute sense as regarded Scotland and Wales, where the map entitled ‘The pattern of pain’ showed that unemployment was lower, at respectively 9.9% and 10.3%, than in either ROSE (the Rest of the South East, i.e. the South East minus Greater London) as it was then called (10.5%) or Greater London (11.7%). But, as the colour-coding of the map indicated, The Economist’s formulation was above all meant to bring out the fact that unemployment had increased by more percentage points in those two latter areas than in any other area of the country: ROSE and Greater London were the only two regions which had seen unemployment rise by more than six percentage points since 1990.19
- 20 Richard Disney, Andrew Henley and David Jevons, “House price Shocks, Negative Equity and Household (...)
17Finally, in terms of this brief description of the crisis, mention must be made of one other characteristic of the crisis, namely the mass incidence, for the first time in Britain, of negative equity, that is to say the situation where people who have taken out a loan to purchase an asset find themselves in the situation where the value of their loan exceeds the value of their asset. In the particular context of the British recession of the early 1990s, the asset in question was a house, the loan a mortgage to purchase the house, and the reason for negative equity a collapse in house prices. After a housing boom that took off in 1986 and peaked in 1988 with an increase in real house prices of over 20% in a single year, the market collapsed producing three successive years of decline in average real house prices (1990-1992) and even two years of decline in average nominal prices (1991-1992).20 By October 1992, 21% of those people who had taken out a mortgage between 1988 and 1991 were in a situation of negative equity, estimated globally to have amounted to the sum of £2.68 billion.
- 21 Christopher Gentle and Daniel Dorling, "Negative Equity and British Housing in the 1990s : Cause a (...)
18The situation generated by the housing market contributed to the depth of the crisis in numerous ways: falling house prices or in other words declining personal wealth deterred consumer spending; negative equity undermined labour market flexibility by locking people into homes which they could not sell; and in the worst cases, where the mortgagees defaulted on payments, it led to repossessions and downward spirals of personal indebtedness. The number of warrants for repossession actually executed in England and Wales more than doubled from 30,000 in 1989 to 62,000 in 1992. In social and geographical terms, it was ‘the owner-occupier in poorer quality housing in the less prosperous parts of the South’ who proved the most vulnerable 21
- 22 Pierre Vilar, "Problèmes Théoriques De L'histoire : Entretien Avec Pierre Vilar," La Nouvelle Crit (...)
19As the previous section has illustrated, it is difficult to give an account of the shape of a crisis without already hinting at the economic mutations it reveals and the causes at work. As the French economic historians Pierre Vilar stressed on many occasions, this revelatory dimension of economic crises is one of their aspects which makes them of such importance for the historian : « Inutile de redire une fois de plus que la conjuncture ne crée pas; elle révèle, en les rendant plus aiguës les contradictions de la structure. Elle date le choc historique; elle ne le ‘cause’ pas »22. We will now look at some of those structural contradictions which lay behind the crisis and the mutations that had produced them.
- 23 Social Trends 25 (1995), 173-174.
- 24 Gentle and Dorling, "Negative Equity and British Housing in the 1990s : Cause and Effect," 183.
20Property speculation of one form or another is a recurrent dimension of recent economic crises. What was new about the recession of 1990-1992 was the mass dimension of negative equity. This revealed, and was indeed the direct result of, the interaction of two trends. The first was an acceleration in the long-term rise of mortgage-backed owner occupation, a trend clearly visible from the 1960s. By 1993 there were sixteen million owner-occupied dwellings in the United Kingdom, which represented an increase of nearly two thirds since 1971.23 Under Mrs Thatcher that acceleration had become associated for the first time, through Conservative ‘right-to-buy’ legislation and controls upon investment in council housing, with a significant decline in the number of dwellings rented from local authorities and new towns. That reinforced the change-over from rented accommodation to owner occupancy. By the time of the 1991 Census, 67% of all households benefited from the later form of tenure but 42% of all households (or 63% of all so-called ‘home-owning’ households) were still paying for their home and therefore vulnerable to negative equity. They included many more low-income families than in the past.24
- 25 Ibid. : 185-186. For the reasons behind the reforms, see Nigel Lawson, The View from No. 11 : Memo (...)
21The second trend brought into focus by the negative-equity phenomenon was the deregulation of the housing-finance market. This was very much the product of Thatcherite economic policy. In pre-Thatcher days, this market had been regulated by guidelines to delimit the size of mortgages, measures to concentrate lending upon the Building Societies and to keep the banks out of this field of activity, such as the Supplementary Special Deposit Scheme otherwise known as the Corset, and toleration of a Building Society interest cartel which both guaranteed above-market rates of interest for savers and imposed above-market rates of interest upon borrowers (mortgagees). By 1986, all those forms of regulation had been removed, with far reaching consequences. These were also amplified by an increase in the value of loans covered by mortgage-interest tax relief and the dismantling of restrictions on home-owners being allowed to borrow further on the basis of a rise in the market value of their house (equity withdrawal).25
- 26 Mortgage debt was not the only form of debt that soared in the 1980s : the nominal value of unsecu (...)
22At the height of the housing boom, in 1988, the banks’ share of net mortgage lending had risen from 8% in 1980 to 29%. It was associated with a generalised increase in lending that fuelled the enormous real annual rises in house prices and contributed to a doubling of average household debt as a percentage of household annual income in the course of the decade. The scene was set for a sharp contraction in demand and a slump in the housing market in the event of a rise in interest rates.26
- 27 ONS. Retail Pices Index : series CZBH. The reasons for the resurgence of inflation are much debate (...)
23The way that the rise in interest rates came about and everything it reflected is the second dimension of the period brought into focus by the recession of 1990-1992. Contrary to what some commentators asserted the very stiff deflationary medicine delivered to the economy in 1979-1981 had not eliminated inflationary tensions and, perhaps above all, inflationary expectations from the economy. Unlike in the lead-up to the 2008-2010 recession, the housing boom fed through into a more generalised resurgence of inflation. After falling as low as 2.6% in 1986 Q3, Retail-Prices Index inflation (RPI inflation), the most commonly used indicator at the time, began to accelerate in 1988 Q3 and, after reaching 8.2% in 1989 Q2, would finally peak at 10.4% in 1990 Q3, the quarter during which GDP began to contract. This demonstrated, it must be said in passing, that the government’s strategy to deal with inflation was far from infallible at the time (see figure 5).27
- 28 Bank of England. Statistical Interactive Database : Official Bank Rate History.
24It was in order to try and stop the general rise in inflation, rather than to rein in the property market specifically, that the Chancellor of the Exchequer, after four successive cuts in the Official Base Rate in the first five months of 1988, finally began to increase interest rates at the beginning of June 1988. In the course of fifteen months, the Base Rate doubled from 7.38% to 14.88%, a level at which it remained for a year (from October 6th 1989 to October 8th 1990) before beginning a more gradual descent back towards a band of fluctuation situated between 5% and 7%, reached in November 1992. Economic growth was, therefore, very deliberately slowed down by the government.28
- 29 Quoted in Jay, "The Economy 1990-1994," 204
25The discourse of the government that accompanied the interest rate rises confirmed the degree to which neo-liberal ideas had settled in as the economic common sense of the period. In his first speech as Chancellor of the Exchequer, on October 27th 1989, John Major put the case for deflationary policies in the following terms: « Many think a little inflation does no harm. I do not share that view. (…°) Ending it cannot be painless. The harsh truth is that if the policy isn’t hurting, it isn’t working. »29In his memoirs, John Major admits quite freely that he and his experts did not have an accurate idea of the precise consequences of their actions at the time. Talking of the forecasts that accompanied his Autumn Statement of November 15, 1989, his « first substantial parliamentary appearance as chancellor », he notes:
- 30 John Major, The Autobiography, 2nd ed. (London : HarperCollins 1999), 140. A few pages later (p.14 (...)
The forecasts in the Autumn Statement were the first acknowledgement that the economy was slowing down, and they attracted a good deal of attention. As it happened the forecasts were wrong. It is notoriously difficult to make predictions when an economy is turning either to growth or recession, and most of the forecasts, although gloomier than many expected, were less gloomy than they should have been.30
- 31 Ibid., 136-138. His account of the social logic of the fight against inflation is phrased in terms (...)
- 32 Despite the rhetoric, it should be noted, however, that the monetarist budgetary disciplines preac (...)
26This, however, did not stop him, ten years later, from continuing to defend his initial approach and choices, with a characteristic passage on the dangers of inflation for the little man and on the need for constancy in the application of policies once chosen.31 Nor did it prevent his first Chancellor from espousing a similar discourse on beneficial hurting when the full economic and social consequences of the recession were beginning to become apparent. On May 16, 1991, Norman Lamont notoriously declared in Parliament: « Rising unemployment and the recession have been the price that we have had to pay to get inflation down. That price is well worth paying. »32
- 33 ONS. Workforce jobs by industry : series LOLO and LOMJ. The word ‘manufacturing’ is here used in i (...)
27 That statement was made as ILO unemployment reached 2.454 million people. It was to go on rising for another seven quarters. The geography of the unemployment and its gender make-up, which we briefly described above, revealed, thirdly, the changing nature of economic activity in Britain. The combined effects of the recession of 1980-1981 and of the Lawson Boom of 1985-1989 had accelerated a trend which had been visible since the mid 1950s: the decline in the relative and absolute size of the secondary sector of the economy, Manufacturing had been particularly badly affected: between 1979 and 1987 nearly 1.9 million jobs corresponding to 27% of the original total of 7.1 million had disappeared. By contrast, growth in the number of service jobs experienced only a minor interruption in 1981 and 1982 and by 1987 1.8 million more jobs existed in the service sector than in 1979. Growth in that sector continued to be particularly strong down to 1990. As a result, by 1990 there had been a radical shift in the respective weights of the secondary and tertiary sectors in the economy. Instead of being less than twice the size of the secondary sector, the tertiary sector had become more than two and a half times as big, representing 71% of total employment as compared to the secondary sector’s 27% see figures 6and 7).33
- 34 ONS. Workforce jobs by industry : series LOMA. This series corresponds to sections J and K of SICs (...)
28 Part of that expansion was linked to the overheating of the economy and the speculation that characterised the Lawson Boom. Employment in financial intermediation (banking, insurance and pension-funding) and in real estate, renting and business activities (computer services, accountancy, legal services, call centres) increased by 0.9 million or 26% between 1986 and 1990. The historically unusually high rates of unemployment that occurred in the south-east in the recession that followed reflected, in part, both the new weight of services within the economy and the scaling down of financial intermediation and other business activities that accompanied the crisis. Institutions such as the banks not only replayed their historic role of over expanding credit in the upward phase of the business cycle, but they also made a significant direct contribution to the rise in unemployment in the downward phase by shedding labour. They had become sufficiently sizeable employers to have such an impact.. Employment in financial intermediation and business activities fell by 150 000 between 1990 Q2 and 1992 Q3 (see figure 7).34
- 35 By 2008, this symbol of the impact of the 1990-1992 recession found itself at the heart of the new (...)
29One of the key symbols of the 1990-1992 recession thus became the One Canada Square tower on Canary Wharf. In May 1992, its developer, Olympia and York Canary Wharf Limited, went into administration, leaving the top half of the building shrouded in darkness and much of the office space unused. Cut backs in the service sector of the London economy and in particular in city-linked activities had contributed to a major collapse in the commercial property market.35
- 36 ONS. Workforce jobs by industry : series LOLO.
30That symbol, however, was partially misleading. Although the 1990-1992 recession did mark a new role for the service sector of the economy in the development of unemployment during a recession, the main effect of the recession upon employment was, nonetheless, to bring about a further phase of acceleration in the contraction of manufacturing. Employment in manufacturing had been in free-fall every quarter save one between 1979 Q3 and 1987 Q2, unlike in the service industries, which had begun to create jobs again in 1983 Q1. After a brief period of respite, a new period of brutal contraction of manufacturing began again in 1989 Q4, nine months ahead of the general turn-down. It continued for nearly four years and only bottomed out in 1993 Q3, this time outlasting the contraction in service employment by a year. Just over a million manufacturing jobs disappeared (in absolute figures the decline was from 5.335 million to 4.329 million), a fall of 19%, which reduced employment in manufacturing to a mere 15.9% of the total. By 1993 employment in the secondary sector as a whole had fallen to 24%, making the service sector, with 74% of total employment, three times its size (see figures 6 and 7).36
- 37 Regional Trends 36 (2001), table 12.5 157-159. The effects of recession upon the London economy ar (...)
31Thus, high unemployment in the south-east was not simply the reflection of the new phenomenon of mass service-sector unemployment. It was also the result of two dimensions of the recession that concerned the secondary sector: firstly, after the speculative heights of 1989, a major turn-down in the construction industries which were to continue shedding labour down until 1998; and secondly, the continuing deindustrialisation of the economy of the south-east, whose specialisation in services was reinforced by the recession. By 1995 manufacturing contributed a mere 12.7% of London’s GDP and 17% of that of the south-east by comparison with a national average of 21.9%.37
- 38 ONS. Workforce jobs by industry : series DYDC, LOLA and LOLB.
32This new phase in the contraction of the secondary sector in general and of manufacturing in particular also explains men’s and women’s different experiences of the recession. A majority of jobs in services (50.2%) had already been occupied by women in 1979, at a time when employment in manufacturing was still predominantly male (68.9%). The gender imbalance in favour of women within the service sector was reinforced during 1980s, their share of employment rising to 53.4%. The severity of the contraction in the secondary sector and its greater length took male unemployment to record post-war heights, as well as pushing hundreds of thousands of other men off the labour market into economic inactivity. Thanks to the behaviour of the service sector, women’s unemployment rose less and was more short-lived. Total women’s employment in the economy began to rise again in 1992 Q1, suffered a brief set-back in 1992 Q3 because of the particularly strong shake-out in the service sector that quarter, and then began a long period of continuous growth in 1993 Q1. Male employment by contrast fell virtually continuously for over three years between 1990 Q2 and 1993 Q2 (see figure 3).38
- 39 See for example the methodology adopted in Local Government Association, From Recession to Recover (...)
- 40 Carmen Reinhart and Kenneth Rogoff, ‘Is the 2007 U.S. Sub-Prime Financial Crisis So Different ? An (...)
33Today, the shape of the 1990-1992 recession, like that of its predecessor, is being used to try and create detailed predictive models of what will happen in the period 2008-2010.39 What strikes the historically informed observer, however, is the enormous qualitative difference that distinguishes the trigger mechanism of the two most recent British recessions. The credit crunch of 2008 came about not through the rising of interest rates by the government but through a systemic failure and near collapse of the banking system. This itself reflected many structural changes that had taken place within the economy, and notably its financial sector, during the long intervening period of prosperity. As Reinhart and Rogoff have pointed out, recessions which are set off by a “protracted large scale financial crisis” tend to be particularly deep and protracted themselves.40 The UK economy was officially pronounced by the Office of National Statistics to have been in recession since 2008 Q3 on January 24th 2009 but forecasts are still fluctuating wildly as to when it might end.
- 41 See interesting contributions by two of Britain’s leading business and economics editors : Chris G (...)
34The most intrepid commentators have already begun to try to envisage the permanent effects it might have. Economic historians, for their part, will have to wait until the dust has settled, at least slightly, and economic growth has re-started. A comparative approach to the recessions of 1990-1992 and 2008-2010 based upon evidence rather than untested hypotheses will then become possible and should allow narratives of the intervening years of prosperity, including the period 1993-1997, to become more solidly rooted.41
1 For some recent reflections on ‘History and Telling Stories’, see the last chapter of John Brewer’s Sentimental Murder: Love and Madness in the Eighteenth Century (London; HarperCollins, 2004), pp. 280-293. The book itself is a masterful exercise in what he calls “a punctuated history … one marked by a particular series of moments when the story was told once again.”(p. 293).
2 Thanks to the Freedom of Information Act, the documents tracing the emergence of the new policy towards inflation are available upon the web site of the Treasury (http://www.hm-treasury.gov.uk/foi_introduction_of_inflation_targets_2005.htm). The new approach to dealing with inflation was, of course, consolidated in May 1997 by Gordon Brown, who transferred responsibility for piloting interest rates from the Treasury to the Bank of England. The US Federal Reserve System is today an exception to general central baking practice, as it still does not operate an inflation target.
3 ONS.Gross Domestic Product CVM SA : series IHYP and IHYQ. In terms of year-on-year growth, the years from 1949 (the initial year for these statistics) to 1973 represented a much longer period of growth.
4 Bank of England. 17.04.07 Letter from the Governor to the Chancellor. (http://www.bankofengland.co.uk/monetarypolicy/pdf/cpiletter070417.pdf). Prior to December 2003, the measure of inflation taken into account had been the retail-price index excluding mortgage-interest payments (RPIX). At the request of the European Union, the CPI was then adopted and the Treasury changed the target of 2.5 %, in May 1997, to 2 %.
5 Bank of England. 16.06.08 Letter from the Governor to the Chancellor. (http://www.bankofengland.co.uk/monetarypolicy/pdf/cpiletter080616.pdf). The ensuing letters are all to be found in the Publications (News Releases) section of the Bank of England website. As CPI inflation was still at 4.1 % in November, a final letter was published in December, despite most people’s worries having moved onto price deflation ; The fall of CPI inflation to 3.1 % in December 2008 seems to have justified the non-publication of a letter in January, although one was still technically required.
6 Bank of England. 08.01.09 News Release : Bank of England reduces Bank Rate by 0.5 Percentage Points to 1.5 %. (http://www.bankofengland.co.uk/publications/news/2009/001.htm)
7 Bank of England. Statistical Interactive Database : Official Bank Rate History (http://www.bankofengland.co.uk/mfsd/iadb/Repo.asp ?Travel =NIxIRx)
8 ONS. Gross Domestic Product CVM SA. : series IHYQ.
9 Daron Acemoglu, the Charles P. Kindelberger Professor of Applied Economics at MIT, identifies three notions that impelled economists to ignore the impending economic problems and their causes in the lead-up to the recession. He formulates the first notion in the following terms : “The first is that the era of aggregate volatility had come to an end. We believed that through astute policy or new technologies, including better methods of communication and inventory control, the business cycles were conquered. Our belief in a more benign economy made us more optimistic about the stock market and the housing market. If any contraction must be soft and short lived, then it becomes easier to believe that financial intermediaries, firms and consumers should not worry about large drops in asset values.” Daron Acemoglu, "The Crisis of 2008 : Structural Lessons for and from Economics," Centre for Economic Policy Research Policy Insight 28 (2009) : 1. (http://www.cepr.org/pubs/PolicyInsights/PolicyInsight28.pdf).
10 The sub-prime crisis has already reactivated historical econometric work on crises. See, for example, the much commented upon paper by Carmen Reinhart and Kenneth Rogoff, ‘Is the 2007 U.S. Sub-Prime Financial Crisis So Different ? An International Historical Comparison’ (February 5, 2008 version). (http://www.economics.harvard.edu/faculty/rogoff/files/Is_The_US_Subprime_Crisis_So_Different.pdf)
11 Preliminary estimates of the evolution of GDP in the previous quarter are generally produced three and a half weeks after it has finished.
12 ONS. Gross Domestic Product CVM SA. : series IHYP and IHYQ.
13 For the idea of GDP gap, see Peter Jay, "The Economy 1990-1994," in The Major Effect, ed. Dennis Kavanagh and Anthony Seldon (London : Macmillan, 1994), 179-181. He agues convincingly that it is “conceptually and computationally the most straightforward measure of the cyclical tone of an economy – where it lies between boom and slump.” Using a notion of long-term growth potential calculated over the period 1979-1989, he estimated that the GDP gap peaked at 6 % in 1993 Q2.
14 ONS. Workforce jobs : series DYDC. Employee jobs : series BCAJ. Self-employment jobs : series DYZN. Workforce jobs are the sum of employee jobs (as measured by surveys of employers), self-employment jobs from the Labour Force Survey, those in HM Forces, and government-supported trainees.
15 ONS. Labour Force Survey Summary, 1971-2008 : series YBSH and YBTI. Claimant count : series BCJE.
16 ONS. Labour Force Survey Summary, 1971-2008 : series YBSO, YBTM, YBSP and YBTN.
17 ONS. Labour Force Survey Summary, 1971-2008 :series YBSI, YBTJ, YBSJ and YBTK.
18 ‘Three million down, more to go’, The Economist, Feb 20 1993, 35.
19 In the opposition North/South, as used in the 1980s, the expression ‘North’ came to include all areas of Britain not located in southern or midland England, hence my reference to western-lying Wales. In absolute terms, it should be noted that, as The Economist’s maps showed perfectly clearly, the region of England then called ‘North’ had a higher rate of unemployment (12.2 %) than the two south-eastern regions. The difference was, of course, that unemployment had never come down there to the very low levels of the south-east in the second half of the 1980s.
20 Richard Disney, Andrew Henley and David Jevons, “House price Shocks, Negative Equity and Household Consumption in the UK”, Royal Economic Society Annual Conference 2002, Paper 64, p. 15 (http://repec.org/res2002/Disney.pdf).
21 Christopher Gentle and Daniel Dorling, "Negative Equity and British Housing in the 1990s : Cause and Effect," Urban Studies 31, no. 2 (1994) : 181-199. Social Trends 31 (2001), table 10.26 Repossession of properties : warrants issued and executed 1984-1999.
22 Pierre Vilar, "Problèmes Théoriques De L'histoire : Entretien Avec Pierre Vilar," La Nouvelle Critique, no. 50 (1972). In the wake of the work of François Simiand and Ernest Labrousse, the history of economic cycles was at the heart of French post-war economic historiography down until the 1980s. See for example Fernand Braudel and et al., eds., Conjoncture Économique, Structures Sociales : Hommage À Ernest Labrousse (Paris : Mouton, 1974). and in particular the contribution by Jean Bouvier , ‘Feu François Simiand ?’ pp. 59-78.
23 Social Trends 25 (1995), 173-174.
24 Gentle and Dorling, "Negative Equity and British Housing in the 1990s : Cause and Effect," 183.
25 Ibid. : 185-186. For the reasons behind the reforms, see Nigel Lawson, The View from No. 11 : Memoirs of a Tory Radical (London : Bantam, 1992), passim.
26 Mortgage debt was not the only form of debt that soared in the 1980s : the nominal value of unsecured consumer credit outstanding at the end of the year more than tripled between 1981 and 1991, with bank credit card lending coming to represent nearly one fifth of all consumer credit. Social Trends 25 (1995), 110.
27 ONS. Retail Pices Index : series CZBH. The reasons for the resurgence of inflation are much debated. There seems little doubt that the conflict between Nigel Lawson and Mrs Thatcher over the Chancellor’s policy of shadowing the mark temporarily distracted the government’s attention from the fight against inflation. The nearest that Lawson comes to admitting to an error of appreciation is this : “At one level my central mistake was undoubtedly to underestimate the strength and duration of the boom of the late 1980s, and thus of the inflationary forces it unleashed.’ Lawson, The View from No. 11 : Memoirs of a Tory Radical, 989. He defends his policy choices at considerable length. See pp. 844-859 and 989-994.
28 Bank of England. Statistical Interactive Database : Official Bank Rate History.
29 Quoted in Jay, "The Economy 1990-1994," 204
30 John Major, The Autobiography, 2nd ed. (London : HarperCollins 1999), 140. A few pages later (p.145), he admits “we were steering the economy in a fog.”
31 Ibid., 136-138. His account of the social logic of the fight against inflation is phrased in terms which make ample use of his own class background : “Inflation is disastrous and morally corrosive, and it destroys lives. Those who can best protect themselves or even gain from it are often those who have most, and the losers are those who have least. It is a tax on the poor and a tax-free benefit for the rich. While my own family’s financial hardships wee brought about by other causes, I had had enough experience of inflation’s effects on neighbours and friends to make my detestation of it personal as well as theoretical.”
32 Despite the rhetoric, it should be noted, however, that the monetarist budgetary disciplines preached in the early 1980s were not respected during the recession. The pubic sector borrowing requirement reached 7.7 % of GDP in the fiscal year 1993-1994. HM Treasury. Public Sector Finance Statistics. (http://www.hm-treasury.gov.uk/psf_statistics.htm)
33 ONS. Workforce jobs by industry : series LOLO and LOMJ. The word ‘manufacturing’ is here used in its strict sense, corresponding to section D of the 1992 and 2003 versions of The United Kingdom Standard Industrial Classification of Economic Activities (SIC). The rest of the secondary sector is made up of sections C (Mining and Quarrying), E (Electricity, Gas and Water Supply) and F (Construction).
34 ONS. Workforce jobs by industry : series LOMA. This series corresponds to sections J and K of SICs 1992 and 2003, namely Financial Intermediation and Real Estate, Renting and Business Activities. For the place of London in that development, see A.G. Champion and A.R. Townsend, Contemporary Britain : A Geographical Perspective (London : Edward Arnold, 1990), 102-105. Using a slightly different series deriving from SIC 1980, the authors calculate that, between 1981 and 1989, employment in banking, insurance and finance increased by 83 % in ROSE and by 49.1 % in Greater London.
35 By 2008, this symbol of the impact of the 1990-1992 recession found itself at the heart of the new recession. It housed many of the key actors in the banking crisis of September 2008, such as the Financial Services Authority, Lehman Brothers, Citigroup, Bank of America, Barclays and Crédit Suisse. For an account of the intervening rise and fall of London, see ‘Reykjavik-on-Thames : London’s other names and what they say about Britain’s recent history’, The Economist, Jan 31 2009, 42.
36 ONS. Workforce jobs by industry : series LOLO.
37 Regional Trends 36 (2001), table 12.5 157-159. The effects of recession upon the London economy are particularly difficult to predict. When you take into account the average impact of a fall in GDP upon employment in a given industry and the structure of the London economy by industry, such an approach systematically underestimates the degree of unemployment really experienced. London had an economic structure which because of the low amount of employment in manufacturing and construction should have made it the region the least at risk. In reality it lost 8.2 % of its jobs between 1990 and 1992, the highest percentage for the whole of Britain. Local Government Association, From Recession to Recovery : The Local Dimension (London : Local Government Association, 2008), 10-14. Research for this report was carried out by Public and Corporate Economic Consultants (PACEC).
38 ONS. Workforce jobs by industry : series DYDC, LOLA and LOLB.
39 See for example the methodology adopted in Local Government Association, From Recession to Recovery : The Local Dimension.
40 Carmen Reinhart and Kenneth Rogoff, ‘Is the 2007 U.S. Sub-Prime Financial Crisis So Different ? An International Historical Comparison’ 1-3.
41 See interesting contributions by two of Britain’s leading business and economics editors : Chris Giles, ‘New look UK economy to emerge from gloom’, Financial Times, 22 Jan 2009 and Robert Peston, ‘The New Capitalism’ (08.12.08) (http://www.bbc.co.uk/blogs/thereporters/robertpeston/16_12_09_new_capitalism1.pdf).Haut de page
Pour citer cet article
Andrew Lincoln, « Telling the Economic Story of the Major Years in 2009 : the Example of the 1990-1992 Recession », Observatoire de la société britannique, 7 | 2009, 151-175.
Andrew Lincoln, « Telling the Economic Story of the Major Years in 2009 : the Example of the 1990-1992 Recession », Observatoire de la société britannique [En ligne], 7 | 2009, mis en ligne le 01 février 2011, consulté le 30 mars 2017. URL : http://osb.revues.org/768 ; DOI : 10.4000/osb.768Haut de page
Observatoire de la société britanniqueHaut de page