Broke: Who Killed the Middle Classes?

The terrible truth is that the key to this health and independence is education, that the opportunities and advantages it can give are more and more scarce and competitive, and that they require investment in bricks and mortar.

Christopher Stockwell used a trust fund set up years before the Lloyd’s Scandal broke, which he had intended for his children, to buy another house. He also managed to claw back some of his businesses, but he says it has taken him two decades. He says that making the house habitable, and creating a garden in the field next door, was what kept him sane during the desperate years. When I met him there, the whole story was finally coming to its end in the European courts. The legacy of the scandal that engulfed Lloyd’s of London is that there are now only a few hundred Names left. Their place has been taken by institutional investors who are better able to look after themselves.

It was Stockwell who suggested the parallel with events around the 2008 banking collapse. I had previously seen no further than the ‘lie’ of unlimited liability and its terrible human consequences. But there are other parallels with the moment when the financial system tottered.

For one thing, the whole weight of government action was thrown behind preserving the status quo, at all costs. We have come to believe that governments govern on behalf of the middle classes. That clearly isn’t so any more. In their terror that the whole system would unravel, Western governments outdid themselves in their desperation to protect the guilty. The Lloyd’s Scandal showed that they would, and if the middle classes must suffer to preserve the system, they were a necessary sacrifice.

The scandal showed something else as well. If willing and naive investors were required to fill the yawning financial gap that threatened the Lloyd’s insurance market, then they would be recruited. Like First World War generals, they herded the little investors over the top – into the path of the machine guns.

Ever since they discovered political economy in the 1820s, the English middle classes have felt secure in their financial knowledge. They might not have enough money – yet – but they trusted the system that would allow them to invest it safely and sensibly. The problem at the root of their serious decline, and present crisis, is that something has happened, decisions have been taken over the past generation, that have turned that position upside down.

We now have to find out how and why.

Middle Classes in Figures

Percentage of UK population declaring themselves to be middle-class: 43 per cent (though other surveys have taken this up to 70 per cent).

The New Middle-Class-Values Dictionary

INDEPENDENCE:Perhaps the old middle classes valued independence too, as long as people used it to reach the correct conclusions. Not so now: the middle classes believe passionately in their own independence and admire it in other people. In fact, the desire for independence is now central to the middle classes; not necessarily independence from employers, but from landlords and tyrannical bosses, and the long, desperate uphill struggle towards financial independence. It leads them to invest terrifyingly in property just as it leads others to disinvest and downshift. They also admire independence of mind – in moderation, of course …

Dispatches from the Frontline

Brown & Green café, Crystal Palace station, Friday 10.30 a.m.

Gipsy Kings waft out of the digital player behind the counter, over the luxurious sound of sizzling bacon. This is an English scene, with all the luxury of a late breakfast when everyone else is at work, but with a Latin American edge.

The middle-class newcomers to Crystal Palace, high on the hill above south London, are generally pretty oblivious to the culture they are displacing – which is anyway on the exhausted side. Since the original Crystal Palace building, designed by Joseph Paxton, burned down so spectacularly in 1936, nothing much has changed around here except for the closure one by one of the public toilets and the slow march of gentrification, as confident and as doubt-free as the Plantation of Ulster.

So there has been a flurry of excitement locally about the opening of this café, run by the televisual Laura and Jess who have made such a success of the café in the next station down the line. Even so, there are not so many people here at our odd collection of rescued 1960s tables, with the red Formica tops and strange tapering legs, hallmarks of an alien civilization.

The usual herds of buggies that clutter up middle-class cafés in the mornings these days are conspicuous by their absence. Instead there is a whole collection of black cocker spaniels, with their owners. One of them turns out to be called Peggotty, a distinctively middle-class literary reference (David Copperfield).

There is also a mixture of class symbols in this café, with its tomatoes being chopped behind the counter and the carrot cakes sweltering above it. The blackboard advertises porridge with seeds, honey and yoghurt. I am drinking green tea as if it were going out of fashion. The walls have been whitewashed. Aluminium saucepans hang from the ceiling (do they ever use them?). On the blackboard above me are the lines from The Sound of Music about climbing every mountain (we know from Mike Savage’s research (see page 44) that the working classes never go to musicals, so this is as clear a sign that we are in middle-class territory as anything else).

Yet dotted around are also the traditional symbols of working-class café life – rusty old signal lamps, third-hand furniture, and here in front of me a tomato-shaped plastic dispenser for ketchup, straight from the 1960s. It is as if the symbolism of working-class culture in another age is a reliable sign that this is not nouvelle cuisine and the helpings will be encouragingly and comfortingly generous.

Crystal Palace station, with its vast echoing staircases, was built to handle the crowd for FA Cup finals (100,000 people in 1900), which were played here until the advent of Wembley Stadium. The huge Victorian windows of this reclaimed station were the very centre of working-class culture in south London. Yet here we are in 2012, eating our scrambled egg on rye.

‘No, she’s not pushy,’ says Peggotty’s owner behind me. ‘She’s shy and retiring. Just like me.’

2 (#ulink_eabe97ed-30fa-55bb-8a88-aad51a6d4fc1)

The first clue: the staggering house-price escalator (#ulink_eabe97ed-30fa-55bb-8a88-aad51a6d4fc1)

‘Every summer we can rent a cottage in the Isle of Wight,

If it’s not too dear.

We shall scrimp and save …’

Paul McCartney, ‘When I’m Sixty-Four’, December 1966

Spring 1979. No Internet. No mobile phones. No cash machines in the wall. No personal computers (or very few). Only three television channels. Orange street lights. Pirate radio stations. Electric fires. Flared trousers (occasionally). The Central Electricity Generating Board, British Rail, the Department of Health and Social Security and other huge bureaucracies running our lives. Grunwick. The National Front and the Anti-Nazi League. Tom Robinson and ‘Glad to be Gay’. Works to rule. Closed shops. Angela Rippon, Morecambe & Wise and Tinker, Tailor, Soldier, Spy on the TV. Brian Redhead and Jimmy Young on the radio. Prince Charles still unmarried. James Callaghan in his last few months, and his last few sessions of beer and sandwiches, at 10 Downing Street. Patrick Hutber’s TheDecline and Fall of the Middle Class on the bookstalls.

It was my middle year at university, shivering in a room with no central heating. I had long hair and dreamed of student revolts that – as it turned out – had long since disappeared. This was the generation caught between the certainties of the hippies and the certainties of the yuppies which the novelist A. S. Byatt writes about so sensitively (and I appreciate it because I was one of them). I had no idea at the time, nor for many years afterwards, what I wanted to do with my life, and couldn’t imagine anyone ever employing me – let alone paying me enough money to buy a house.

We were already talking about house prices in those days, in training for a thousand middle-class dinner parties to come, but actually – compared with what came later – the average price of a home in the UK was very low: £18,000 (now worth about £74,500 at today’s values).

Despite that, there had already been a round of major house-price inflation during the so-called Barber Boom of the early 1970s. There was another flurry in 1977–8 when controls on lending mortgages were briefly loosened because of fears about the house builders. It was enough to get the tongues wagging.

This was not quite the 1930s, the heyday of middle-class house buying, when a new semi-detached cost just over £500, available with a down payment of £50, and when mortgages cost about 10 per cent of a middle-class income and were paid off within sixteen years. But looking back, 1979 was actually the beginning of the extraordinary process which – over the next three decades – has goaded the rise in prices so brutally that it has ended the house-owning dream for many people, and which now, more than anything else, threatens the very existence of the middle classes.

There is always an argument about why house prices rise, and why those prices accelerate. Politicians like to say that it is a shortage of homes, and there certainly is a shortage and it doesn’t help. But if it was only about housing shortage, you would expect massive price rises in the late 1940s, whereas – after a burst after the war – house prices stayed completely steady from 1949 to 1954. In our own day, planning permission has already been given for 400,000 unbuilt homes in the UK, yet prices still rise, as they do in places like Spain, where there is little or no planning restraint.

Politicians get muddled about this because building houses sounds like a tangible thing they feel confident about tackling (though they usually don’t), whereas they don’t feel confident about mortgage supply at all. Yet that is the other side of the process: inflation is about too much money chasing too few goods, and the main reason for the extraordinary rise is that there has been too much money in property, both from speculation and from far too much mortgage lending.

Sometimes this came from people’s rising incomes, which translated into rising home loans. Sometimes, more recently, it was bonuses and buy-to-let investors. But most of the time, it has been a catastrophic failure to control the amount of money available to lend, and which has fed into all the other trends to create a tumbling cascade of money, with its own upward pressure on incomes and debt until the acceleration now seems quite unbreakable. It was a roller coaster that terrified and thrilled the middle classes, as they saw the value of their homes rise so inexorably, but which ended – as we have seen – in undermining the very basis for their continued existence.

So what happened? As so often, there is no smoking gun, no deliberate policy, but a series of decisions – taken for very good reasons and often in other areas of policy – by a close-knit group of people. Back in 1979, as they prepared for the historic election that swept Margaret Thatcher to power, there was an institution that was designed partly to prevent house-price inflation. It was called the ‘Corset’, which tripped off the tongue a little easier than its other name: the Special Supplementary Deposits Scheme. It worked by penalizing banks when they lent too much, and – although it was not always effective at limiting the money they lent – it did keep bankers out of the mortgage market.

So travel back with me to the moment of the first clue in this book, the autumn and winter of 1978, as it turned into 1979, when a small group of economists and radical thinkers was meeting regularly at the home of Sir Geoffrey and Elspeth Howe next to Vauxhall Park, in the elegant Georgian terraces of Fentiman Road. Elspeth was then deputy chair of the Equal Opportunities Commission. Sir Geoffrey was a former Solicitor General and had good reason to believe that he would be appointed as Chancellor of the Exchequer in the new Conservative government, if Mrs Thatcher could lead them to victory.

These were people who had bought into the intellectual argument for free markets, which emerged from divisions inside American liberalism in the 1940s, and was identified with the controversial economist Milton Friedman. In Howe’s sitting room week by week were the economic journalist Nigel Lawson, a future Chancellor himself, and Sir Keith Joseph, the former health minister who had performed a kind of mea culpa for his role in the sins of the last Conservative government under Edward Heath, and was now an agonized intellectual figurehead for the new dispensation. There were also a number of other young advisers and thinkers, prominent among whom was the future banker Adam Ridley.

It was a heady and exciting time as they met, through the events known to modern history as the ‘Winter of Discontent’, when the trade unions rebelled against their government’s incomes policy and rubbish piled up in the streets. Inflation was running at 10 per cent and rising. But Howe’s group were not just fairly certain they would win, they had the confidence of a big idea behind them – that inflation could be squeezed out of the system by reducing the amount of money in the economy.

Their other idea was in some ways the very opposite. It was that ending all the detailed controls on banking – most of all the restrictions on money leaving the country which had begun at the outbreak of war in 1939 – would provide a kind of discipline to Britain’s unruly economy. As many as 750 civil servants policed the exchange control system at the Treasury and Bank of England. Everyone’s passport in those days noted the money they were taking out of the UK on holiday on a page at the back. This radical group believed the whole system must go.

Ridley and the other policymakers were aware that the controls had tightened through the decade, and especially when the government had been forced to borrow money from the IMF in 1976. ‘The essential concern was that a sophisticated financial system finds ways of outflanking most controls within a few years,’ he says now, ‘and from that point on the complications and distortions cause more damage and loss than any of the uncertain benefits which they may have initially brought.’

The problem was that these were highly uncertain times. John Hoskyn, then the head of the Prime Minister’s policy unit, described running the British economy as ‘fighting for the controls of an aeroplane that can no longer fly’.

The price of oil was soaring and pushing the economy, yet again, into recession. Nobody on the Conservative side wanted to frighten the markets or the electorate by revealing their plans too publicly. It certainly wasn’t in the Conservative manifesto for the election, which had been ready the previous year when they thought the election would take place. Lawson risked using his column in Financial Weekly during the election campaign to talk about relaxing exchange controls. Howe was ‘apprehensive but fundamentally sympathetic’, at least according to Lawson.

Looking back at the May 1979 election with the benefit of hindsight, it is extraordinary how united the middle classes were – perhaps it was the last election to be fought strictly on class lines. I remember watching the documentary series about the public school Radley College later that year, and seeing their entire staff room gather to watch the results, united in their assumption that they were all cheering the Conservatives on to victory.

They did indeed win – by forty-three seats. Margaret Thatcher quoted St Francis of Assisi on the steps of 10 Downing Street. Howe was duly appointed as Chancellor with Lawson as his deputy (Patrick Hutber had already taken over from him as City Editor of the Sunday Telegraph). Ridley became their special adviser. The revolution had begun.

I bought a house in the early winter at the end of 1986, just over six years after the events I have just described, when interest rates stood at 11 per cent. It was a struggle, even with help from my stepfather, but then I wasn’t earning very much either. I remember the strange, adult excitement of the key going into a front door of my own place, even if was a little damp and dilapidated. I remember the excitement (yes, and the expense) of doing it up myself, and the misery when the flat roof leaked down the staircase and I had no idea how I could afford to mend it.

The following eighteen months were almost the eye of the house-price storm, as money cascaded into the mortgage market and house prices began to rise, slowly at first and then catastrophically. I benefited from that rise, and there certainly was a feeling of delicious self-congratulation by the middle classes, then and later, that our assets – though we may not have owned them outright – had risen so much in value.

Pinpointing the abolition of the Corset is not straightforward, but its demise was a direct result of the revolution wrought by Howe, Lawson and their colleagues. Of course house prices rise for many reasons, and it is hard to believe that the Corset would have prevented the flood of foreign financial institutions, mainly American, that poured their money into the UK housing market. The fact that fewer homes were built in 2009 than in any year since 1924 doesn’t help. Often prices rose because the middle classes compulsively wanted them to do so. They loved it. It made them feel rich, right up to the point where it ruined them. The Corset may have been impossible to sustain, but its demise marked the end of mortgage rationing. Mortgage debt didn’t rise at all in the Corset years of the 1970s. From 1979 to 1987 it grew at 10 per cent a year. The real problem was not so much the demise of the Corset. It was the failure to replace it with any policy that could possibly hold down house prices as the Niagara of mortgage money roared through the national economy.

Howe wrote in his memoirs that he was only ever lobbied once by his government driver, and then it was about house prices – during the cabinet battle over mortgage-interest tax relief (set at £25,000). That amount ‘would have bought me a small country estate when I first joined the car service’, said the driver.

House prices had begin to thrill, and the decisions to loosen lending after the 1987 Stock Market Crash accelerated the process. So did the housing-boom years under Tony Blair and Gordon Brown.