The Radcliffe Committee

The 1951 election saw Winston Churchill and the Conservatives return to power after six years in which Labour had significantly remade the country. The Conservatives stayed in power until 1964 yet, broadly speaking, they reinforced a post-war consensus in continuing macroeconomic interventionism with no concerted effort to reverse the majority of what Labour had achieved. They were unprepared to risk a return to high levels of unemployment amidst outstanding national debt, the Korean war and the threat of balance of trade deficits. The Conservatives denationalised iron and steel, but also pursued areas of what can be considered new forms of nationalisation, for example with the creation with the UK Atomic Energy Commission. The new consensus is sometimes referred to as ‘Butskellism’: a term, in part mockingly used by the The Economist newspaper to characterise the continuity from Labour’s Hugh Gaitskell to the Conservative Chancellor of the Exchequer Rab Butler (who had argued for many for these policies prior to the end of the Labour government).

In the 1950s, restrictions on lending, the increases in requests for funding advances following the difficult economic conditions of the early part of the decade and political pressure on banks to limit lending led to further difficulties in access to finance for small firms. In 1955, these qualitative restrictions on bank lending were extended with quantitative controls imposed by the Bank of England (excluding loans supporting exports). Carnevali and Scott (1999: 60) quote a senior manager at Barclays who explained how small firms effectively gave up applying for financial support:

. . . the small trader is certainly more liable to be hit than the larger or medium concern. This is not due so much to direct action as to the indirect effects of the squeeze, such as a general tightening and shortening of credit which has placed the more slender resources of the little man under greater strain. . . . The banks are conscious that there is a very heavy suppressed demand for accommodation.

As the decade continued, so too did the difficulties for small firms, limiting the availability of finance in the market as well as leading to further restriction of the activities of the ICFC. In many cases this led to business failure and the impacts were reported to the Bank of England by banks. Carnevali and Scott’s (1999) archival research reveals that these effects were deliberately kept from being made public and that there ‘is no mention in Bank of England files of possible measures that could be taken to avoid the credit restrictions forcing small firms into liquidation’ (p. 60), demonstrating the significant limitations of enterprise policy at this time.

While the Macmillan Committee was held a decade after the First World War, another committee was appointed to consider similar monetary issues a decade after the second: the Radcliffe Committee (the Committee on the Working of the Monetary System). The Committee was again chaired by a Law Lord, in this case Cyril Radcliffe, and included academic members A. K. Cairncross and R. S. Sayers. It was established in a similar context of massive international debt, substantial devaluation of the pound and increasing cartelisation of the banking sector. Perhaps surprisingly given the advances of time and economic theory, there were many core similarities in the approach of the respective committees, for example in emphasising the use of discretion by central banks (Griffiths, 1974). Unusually, the report did not offer formal recommendations, seeking more to challenge ideas and offer ways of thinking about the challenges the country faced, focusing, for example, on issues of liquidity. While welcomed by government, the approach to monetary policy put forward was not well-received by economists, and Gordon (1972: 976) judged the report to be ‘a dead document, of historical interest only.’

However, the Radcliffe report did call for greater availability of term loans for small businesses. It reinforced the idea of the Macmillan gap, in terms of a ‘difficulty in borrowing’ for small businesses, particularly in relation to its potentially restricting businesses’ potential for growth. Nonetheless, this remained disputed by the banks, who continued to insist that any Macmillan gap resulted from a lack of creditworthy customers. However, Carnevali’s (2005) in-depth analysis of a Midland Bank scheme suggests that the problem might have been more specifically related to the insufficient returns available.

Following the Radcliffe Report, Midland Bank launched a scheme that received significant press coverage, and was lauded by the bank’s official historians and, 10 years later, was reviewed by the Bolton Committee (see Chapter 5 on this Committee and its work). The Bolton Committee found that the scheme was unsuccessful due to a lack of demand. However, Carnevali’s research found that the scheme was ‘little more than a public relations exercise’ (p. 125) that it continued standard practices of focusing on short-term credit repayable on demand (i.e. insufficient for investment and small business growth). Carnevali’s research identified

Filling the Finance Gap 51 instructions from the bank’s head office instructing branch managers to discourage term loans. Nor did other banks respond to Radcliffe’s call for help for small businesses in any meaningful way. The perceived difficulties of small businesses to access finance would continue to be a central, unresolved theme in UK enterprise policymaking.

Conclusion

As we have seen, small firm access to finance is a topic of debate that emerged from the changes in the economy and industrial makeup of the country following the First World War. This intensified after 1931 and the identification of the Macmillan gap, with the Macmillan report functioning as a convenient shorthand label, even if the work of the Committee did little to evidence or substantiate the problem. What this facilitated was the identification of small firms as a distinct interest group (albeit sometimes referred to as the ‘small man’ or ‘small trader’) with distinct problems resulting from a form of market failure. Discussions focused on the role of government in addressing the concerns of this interest group with general public and political acceptance of the market failure, even while this was persistently resisted by the banks (Baker and Collins, 2010). It is this debate focused on small firms as a distinct grouping that we identify as the birth of enterprise policy in the UK.

However, despite widespread adoption of the term ‘Macmillan gap’ and ongoing public and political debate, the perceived market failure was not challenged by regulators (e.g. the Bank of England also accepted the existing model of banking) and there was no attempt to address how the banks operated. Further, there was little consideration of demand-side problems and why small firms may be reluctant to apply for finance, especially in relation to equity finance but also more generally in terms of their perceptions and expectations of the finance sector. Instead, the policy approach pursued was to help provide additional forms of support for small firms. This tended to involve government supporting the establishment of limited companies in collaboration with the clearing banks (and involving investment from the latter) rather than direct government intervention. In this way, the early enterprise policy agenda reinforced and maintained the ‘rules of the game’ and privileged the interests of the existing financial institutions. This chapter has demonstrated how the existing financial institutions were very quick to defend their interests through significant dispute and debate, predominantly among clearing banks, the Bank of England and the Treasury. As a result, the fledgling attempts to support small firm finance were often restricted in their activities and limited in their successes, either through lack of funding (which relied on the existing financial institutions), political pressure or undermining of schemes through practices such as ‘poaching’ by the banks.

Nonetheless, small business financing problems such as those identified, albeit in passing, by the Macmillan Committee report remained a persistent area of enterprise policymaking. The Macmillan gap was considered by the Radcliffe Committee (1959), the Bolton Committee (1971, discussed in detail in Chapter 5) and the Wilson Committee (the Committee to Review the Functioning of Financial Institutions, 1979), which singled out small firms for special consideration. Where governments did intervene more directly in response to these debates this tended to be as part of a wider regional development agenda, and this is the focus for our next chapter.