The Barber Boom

Sports cars on country lanes – a lesson in clutch control
Shifting gears
Rory McIvor
Senior Associate

This piece was written in autumn 2019 and published before the outbreak of the coronavirus pandemic.

Years have happened in the last few months. Unemployment has soared to the highest level since World War II, locked down businesses are fighting for survival and livelihoods have vanished almost overnight. In response, central banks have launched a tsunami of monetary stimulus and government cheque books have been blown open to help plug the gap. One effect has been to catalyse the forces of inflation explored in this article.

The Barber Boom (1971-1974) is the story of an economic gear shift which sent post-war Britain careering around country lanes, before skidding on an oil slick and being sent ditchward. There it was left, engine smoking, entangled in the brambles of inflation. It wasn’t until 1980 that road-side recovery eventually arrived in the shape of Paul Volcker and his inflation curbing toolkit.

Following the sudden death of Iain Macleod, Anthony Barber was appointed Chancellor of the Exchequer in Ted Heath’s cabinet. It was a popular choice, at least with the opposition. Labour leader Harold Wilson remarked that Barber’s appointment was the first time he realised that Heath had a sense of humour. During his time in Number 11, Barber implemented experimental monetary and fiscal policies leading to an extraordinary, but short-lived, economic expansion which came to be known as the Barber Boom.

The scourge of early 1970s Britain was that of stagflation – simultaneous high inflation and high unemployment against a backdrop of waning economic growth. Remedial, if not radical, measures were required. Barber set in motion a ‘dash for growth’, a hugely ambitious budgetary policy aimed to deliver 10% growth over two years (twice the economy’s productive potential). The Heath-Barber government pushed both the fiscal and monetary pedals to the floor in a no holds barred attempt at igniting growth.

The scourge of early 1970s Britain was that of stagflation – simultaneous high inflation and high unemployment against a backdrop of waning economic growth. 

Barber’s first assault was on the tax system. In his speech accompanying the 1971 budget, he said of taxation in Britain ‘it too often stultifies enterprise. Too often it discourages the pursuit of profit. Too often it penalises savings on which the nation’s worth and the growth of the economy so largely depend.’ Comprehensive reform was required and so began a series of income tax cuts, an overhaul of the ‘purchase tax’ and the introduction of VAT. It was vintage Keynesian fiscal expansion.

Alongside this fiscal stimulus, Barber embarked on a major liberalisation of the banking system under the title of ‘Competition and Credit Control’. In the revamped regime, bank lending rose from £71 million to £1.33 billion, government borrowing soared and a deluge of new money flushed into circulation. Money Supply (M3) had grown a total of 25% in the three years to 1970, an increase of this magnitude was shown in 1972 alone.1

Barber’s expansionary fiscal and monetary policy had oiled the engine and growth was beginning to tick up. In his 1972 budget he determined, however, that a further boost was required. In terms of the inflationary effect, Barber seemed relaxed; ‘I do not believe that a stimulus to demand of the order I propose will be inimical to the fight against inflation. The National Institute for Economic and Social Research agreed, they too could ‘see no reason why the present boom should either bust or have to be busted.’

Barber Boom

Click chart to view larger image

A deterioration in the balance of payments following a record drain on reserves exerted heavy pressure on the Heath-Barber government. The decision was taken to ‘temporarily’ abandon the fixed exchange rate in June 1972. This meant the value of sterling was left to market forces resulting in a 15% decline in value over the following 18 months.2 Fears of rising prices loomed large once again and a notable change in tone was evident in the 1973 budget.

Things then took a turn for the worse. On 7 October 1973, Arab oil ministers proclaimed an oil embargo, targeted at nations perceived as supporting Israel during the Yom Kippur war, of which the United Kingdom was one. Oil prices quadrupled overnight. In November, the government declared a state of emergency and was forced into a wages freeze, sparking industrial action led by the TUC (Trades Union Congress). A three-day week was imposed on 13 December in order to conserve energy. Growth fell short of the formidable targets laid out by Heath and Barber and as annual growth in broad money ballooned, inflation did likewise, reaching 24% in 1975.3

Barber Boom

Click chart to view larger image

Both the fiscal and monetary pedals were at full throttle, eventually the engine spluttered and out chugged the blackened fumes of inflation. The Barber boom is a warning of the dangers of monetary and fiscal profligacy. With monetary easing close to exhaustion and fiscal expansion all but guaranteed, the economy is at biting point – the challenge now is one of clutch control.

A stock by any other name
Traditional finance theory tells us that markets are rational. Investors incorporate all public and private information when making their investment decisions. This school of thought is grappling with the field of behavioural finance, which asserts that human psychology and biases also act in an irrational way to influence these same investment decisions.
Cold War II
July 2020: Alexander Chartres, Investment Director and resident geopolitics specialist, explores the shifting sands of world order. He discusses the deteriorating relationship between the US and China and considers the implications of a new world disorder – on companies, portfolios and our everyday lives.
Scrabbling around for income
July 2020: Coronavirus shutdowns have triggered the worst recession since the Great Depression. Like a depth charge dropped against a submarine, we’ve felt the shockwave but have yet to see how much debris floats to the surface. Ratings agencies suggest the damage is serious and that default rates will soar.
  1. Matthijs, MM (2012), Ideas and Economic Crises in Britain from Attlee to Blair (1945-2005)
  2. Ibid
  3. Ibid

Chart sources: Datastream

The views expressed in this article are not intended as an offer or solicitation for the purchase or sale of any investment or financial instrument, including interests in any of Ruffer’s funds. The information contained in the article is fact based and does not constitute investment research, investment advice or a personal recommendation, and should not be used as the basis for any investment decision. This document does not take account of any potential investor’s investment objectives, particular needs or financial situation. This document reflects Ruffer’s opinions at the date of publication only, the opinions are subject to change without notice and Ruffer shall bear no responsibility for the opinions offered. Read the full disclaimer.

our thinking
Investment Review
July 2021: We have been talking of inflation for well over a decade – which is not the same thing as calling its timing. An impasse was created by the failure of the economy to grow after the 2008 crisis – all the risks (as we patiently explained) were deflationary, and in vain did the central banks and governments try to force an inflationary impulse into a sluggish world.
Audio icon
Bitcoin – the future arrived early
July 2021: The best investments are often the least comfortable ones. This is certainly the case with our decision to add bitcoin exposure to our portfolios in November last year.
Responsible Investment Report
In our latest quarterly report, Investment Manager Rory Goodman examines the global significance of US President Joe Biden's new emission reduction targets announced at the Earth Day summit, and we share our stewardship and engagement activities during the second quarter of 2021.
Navigating information
It’s easy to be overwhelmed by the volume of information aimed at us. Inundated by a daily torrent of headlines, images, messages and data, we can be left feeling unable to process it to a satisfying degree. For investors, navigating information is central to being effective. Insights from information theory and gauge theory can help.
80 Victoria Street
London SW1E 5JL
31 Charlotte Square
Edinburgh EH2 4ET
103 boulevard Haussman
75008 Paris, France