Secondary Banking Crisis Of 1973–1975
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The secondary banking crisis of 1973–1975 was a dramatic crash in British property prices that caused dozens of small ("secondary") lending banks to be threatened with
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.


Crisis

The secondary banks, like the larger institutions, had been lending heavily based on the previously rising housing prices of the late 1960s and early 1970s, borrowing excessively in relation to the collateral assets. A sudden downturn in house prices and increases in interest rates well before the November
1973 oil crisis In October 1973, the Organization of Arab Petroleum Exporting Countries (OAPEC) announced that it was implementing a total oil embargo against countries that had supported Israel at any point during the 1973 Yom Kippur War, which began after Eg ...
left the smaller institutions holding many loans secured by property with lower value than the loans. The
Bank of England The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694 to act as the Kingdom of England, English Government's banker and debt manager, and still one ...
, led by Jasper Hollom, conducted negotiations resulting in bail-outs of around 30 of the smaller banks and intervened to assist some 30 others. While all of the banks were left able to pay depositors, the Bank of England lost an estimated £100 million. The downturn was exacerbated by the global 1973–74 stock market crash, which hit the UK while it was already in the midst of the housing price crash.


Recovery

On 19 December 1974, a rent freeze by the
Edward Heath Sir Edward Richard George Heath (9 July 1916 – 17 July 2005) was a British politician who served as Prime Minister of the United Kingdom from 1970 to 1974 and Leader of the Conservative Party (UK), Leader of the Conservative Party from 1965 ...
government which had lasted since 1971 was ended, and the Bank of England, which had severely restricted the supply of credit for housing in 1971, released more funds. While housing prices and lending recovered in 1975, inflation continued to rise, leading to greater economic, labour and political problems for Britain. The
Bank of England The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694 to act as the Kingdom of England, English Government's banker and debt manager, and still one ...
's regulatory powers over lenders were increased in the Banking Act 1979 to try to prevent a repeat of the crisis.


Causes

The causes remain a source of debate. Some blame the lax regulation of lenders and policy-driven inflationary pressures (the 'Barber Boom', named after
Chancellor of the Exchequer The chancellor of the exchequer, often abbreviated to chancellor, is a senior minister of the Crown within the Government of the United Kingdom, and the head of HM Treasury, His Majesty's Treasury. As one of the four Great Offices of State, t ...
Anthony Barber Anthony Perrinott Lysberg Barber, Baron Barber, (4 July 1920 – 16 December 2005) was a British Conservative politician who served as Chancellor of the Exchequer from 1970 to 1974. After serving in both the Territorial Army and the Royal A ...
), which failed in its target of lowering the high unemployment rate. A sudden tightening of credit (interest rates were raised to 13% in October 1973) was laid at the feet of the Bank of England.Led Zeppelin, soaring oil and house prices: is it 1973 all over again?
Larry Elliott, ''The Guardian'' 14 September 2007.
Andrew Sheng. Role of the Central Bank in Banking Crisis: An Overview. in Patrick Downes, Reza Vaez-Zadeh, International Monetary Fund Central Banking Dept, (eds.) The Evolving Role of Central Banks: Papers Presented at the Fifth Seminar on Central Banking, Washington, D.C., 5–15 November 1990. International Monetary Fund, (1991)
"The English secondary banking crisis of 1973–75 was mainly the result of overborrowing on the part of real estate and securities firms and by the collapse of property and share prices following tight monetary policy in the wake of the 1973 oil crisis." p. 204
Others blame the Heath government's fixing of rent price rises in 1971. The only book-length study of the crisis by Reid (1982) blames all those factors but also a bubble of housing prices that saw a 50% increase in London real estate prices over 1971 and the financial uncertainty caused by the end of the Bretton Woods agreement and the inconclusive elections of February 1974. The period was also marked by a series of crises, including the political uncertainty of the Heath government, waves of public sector and industrial strikes and oil shortages that led to a government-mandated three-day work week. However, Reid also blames the entire market culture of the London banking institutions from the late 1960s, which she considers made market speculation (and consequent crashes) inevitable.Margret Reid. The Secondary Banking Crisis, 1973–75: Its Causes and Course. Macmillan, London (1982)/ 2nd ed, Hindsight, London (2003)


See also

* Economic history of Britain. 1960–1979: the Sixties and Seventies * Political history of the United Kingdom (1945–present) * Stock market crash of 1973–74 *
October 1974 United Kingdom general election The October 1974 United Kingdom general election took place on Thursday 10 October 1974 to elect 635 members of the House of Commons. It was the second general election held that year; the first year in which two general elections had been held ...
*
Harold Wilson James Harold Wilson, Baron Wilson of Rievaulx (11 March 1916 – 23 May 1995) was a British statesman and Labour Party (UK), Labour Party politician who twice served as Prime Minister of the United Kingdom, from 1964 to 1970 and again from 197 ...


References


Further reading

* Needham, Duncan. (2020). The story of the secondary banking crisis 1973-1975, ''Property Chronicle'', 9 June. * Read, Charles. (2023). ''Calming the Storms: The Carry Trade, the Banking School and British Financial Crises Since 1825.'' Palgrave Macmillan. pp. 276−305. {{DEFAULTSORT:Secondary banking crisis of 1973-1975 Banking crises 1973 in the United Kingdom 1974 in the United Kingdom 1975 in the United Kingdom Economic history of the United Kingdom 1973 in economic history 1974 in economic history 1975 in economic history Banking in the United Kingdom Financial history of the United Kingdom