U.K. Bank Takeover Is Costliest Nationalization Since the 1940s

By Thomas Penny

Oct. 15 (Bloomberg) -- The cash injection into Britain's banks by the U.K. government this week is the biggest stake it has taken in the private sector since the nationalization wave by a socialist government after World War II.

The Oct. 12 decision to purchase stakes in Royal Bank of Scotland Group Plc, HBOS Plc and Lloyds TSB Group Plc could cost as much as 37 billion pounds ($65 billion), the Labour government said. That compares with 80 billion pounds in today's money spent on nationalizing industries including transportation, coal, gas and electricity between 1945 and 1951.

The government has set aside as much as 50 billion pounds for equity stakes in the banks, and has also provided 250 billion in inter-bank loan guarantees and 200 billion in a special liquidity program.

The biggest single nationalization by Labour Prime Minister Clement Attlee's post-war government was transportation, including 52,000 miles (83,700 kilometers) of railway track and 2,000 miles of canals, under-capitalized and damaged by war. That cost 1.06 billion pounds in compensation to shareholders or 31.5 billion pounds when inflation, as measured by the Retail Price Index, is taken into account.

``In the great splurge of nationalization in the 1940s, about 20 percent of output and roughly the same proportion of employment came into the public sector, so in those terms this is much smaller,'' Jim Tomlinson, professor of history at the University of Dundee, said in a telephone interview.

``What the government is doing is taking a stake with the intention of then, if they're really lucky, making some money and selling it back, which was clearly not the intention in the 1940s,'' he said. ``The assumption was that it was a permanent state of affairs.''

`Commanding Heights'

In the 1940s program to assume control of ``the commanding heights of the economy,'' shareholders were compensated with government stock and bonds. The 850 owners of the coal industry, which was nationalized with the support of opposition leader Winston Churchill, received 164 million pounds in 1940s money in compensation after a tribunal ruling, according to historian Robert Pearce's 1994 book on Attlee's time in power.

``In one sense you could argue it was simply an exchange of paper,'' Robert Millward, professor emeritus of economic history at the University of Manchester and author of ``The Political Economy of Nationalization in Britain,'' said in a telephone interview. ``If you owned a share in a coal company or an electricity company the government bought that and in exchange they didn't give you cash, they would give you a government bond or a government-guaranteed bond related to that particular enterprise,'' he said.

Almost all the industries nationalized by the Attlee government were privatized in the 1980s and 1990s after the election of a Conservative government led by Margaret Thatcher in 1979.

Emergency Nationalizations

Governments of all political persuasions carried out emergency nationalizations in the 1960s and 1970s to bail out ailing industries, including the car industry and shipbuilding.

Rolls Royce, the aircraft engine and car-maker, was nationalized by Edward Heath's Conservative government in 1971 and its aeronautical arm went on to receive 744 million pounds in state aid before it was sold back to the public in 1988. Car- maker British Leyland Motor Corporation was nationalized by the Labour government in 1975 and Johnson Matthey Bank was bought for one pound by Thatcher's administration in 1984. The bank collapsed after a series of high-risk loans.

Attlee's government stopped short of nationalizing banks, except the Bank of England, as socialists had suggested in the 1930s and have continued to advocate ever since, because it decided the private sector was best placed to run them, according to Tomlinson.

``Unlike other European countries, when there was lots of nationalization in Britain, particularly in the 1940s, the one thing that wasn't nationalized was private sector financial institutions, banks or anything else,'' Tomlinson said.

``Britain had earned a lot of money from financial dealings overseas and most of that had been lost in the war,'' he said. The Attlee government ``wanted to revive that and thought the private sector was probably more likely to do that than a nationalized banking system,'' he said.

To contact the reporter on this story: Thomas Penny in London at tpenny@bloomberg.net.