Margareta Pagano: A century on and Macmillan could inspire a route to bridge the capital gap
Sunday 26 July 2009
How about this for Groundhog day: "By the end of World War 1 successive merger waves had produced an oligopolistic, tightly cartelized, English banking system, which was widely viewed as having restricted lending to small to medium-sized firms – the famous Macmillan Gap in industrial finance. We explore the reasons behind the failure of market entry to bridge this gap. The clearing banks are shown to have acted as jealous monopolists, obstructing the activities of the Credit for Industry Ltd (CFI), the only significant firm established to breach the gap (rather than narrow its upper limit). By poaching many clients it had vetted and approved, the banks blocked CFI's growth, deterring further market entry, and thus, preserving their monopoly position."
This analysis by a group of economists of what went wrong at the beginning of the last century is as appropriate today as it was then. It prompted the Macmillan committee – which had identified the gap – to set up what was to become 3i in 1945 (through the merger of FCI and the Industrial and Commercial Finance Corporation, ICFC) with starting capital of £15m. By 1983 it had become the 3i brand and then floated on the London Stock Exchange in 1994, with a market capitalisation of £1.5bn. It's been a huge success and central to helping fund a myriad of new businesses – over the years it has lent more than £29bn and today manages assets of £8.9bn.
We need another 3i, or at least something similar to get capital flowing again into businesses of the future, and most crucially, for the UK to start making things again. Every era needs its own new creature and, as we report on the news pages, both the Conservatives and the Government are looking at how best to get money flowing again. New banks are one idea to break the paralysis but banks are never the source of seed-corn capital. For that, the real trick is to create an atmosphere in which investors are confident again, and that's not something which can be forced. But massive tax breaks would help.
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