ABSTRACT
The United Kingdom has experienced two severe economic recessions, separated by almost exactly 10 years, in 1980–2 and 1990–2. On each occasion the government has deliberately exerted serious pressure on the company sector by a policy of raising—and maintaining at high levels—short-term interest rates (see Figure 20.1). In each instance the government has justified its course of action by reference to the long-run policy objective of steady growth achievable only by the maintenance of a stable business environment characterized—as the Governor of the Bank of England recently explained—by “stability of prices and stability of policy” (Bank of England Quarterly Bulletin (BEQB), 1991c:496). The difficulty is that the two forms of stability are often incompatible. Moreover, as Keynes noted,
It is much easier to preserve stability than to restore it quickly after a serious state of disequilibrium has set in. Thus, if we are asked to start control operations in a situation which is already unstable, we may find that the position has got, for the time being, beyond effective control.
(Keynes 1930: II, 351) This chapter examines the experience of a random sample of 230 UK companies, grouped according to size and interest sensitivity, 1 over the period 1978–91; all of the companies in the sample have been included in the Datastream database of accounting information since January 1969. Industries are similarly classified according to their sensitivity to increases in interest rates, and the profile of annual company liquidations in interest-sensitive industries is contrasted with that of all UK industries. A questionnaire survey sent to both the interest-sensitive (IS) and the non-interest-sensitive (NIS) companies in the sample was designed primarily to throw light on (a) the importance of short-term relative to long-term strategic considerations for such companies, (b) the importance to company strategy of different functions such as finance, marketing and human resources, c) perceived areas of competitive advantage, (d) the relative importance of different sources of cash flow pressure, 1988–92, (e) company priorities in cutting capital expenditures and (f) whether IS companies which had experienced severe cash flow pressures in 1980–2 had pursued policies designed to ensure that such traumas would not be repeated on any future occasion of high interest rates and recession.