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David Cameron needs to take note. Henry Angest and Michael Spencer are two of the most admirable men one could meet. Through good times and bad, they have proved themselves in the City. Both of them have demonstrated that they know how to combine stability and innovation. They are staunch Tories, who were happy to stand by the party in the hard years, when it appeared to be condemned to endless exile from power. They are also personally loyal to Mr Cameron. So when they are driven to express their doubts in public, the Prime Minister should be worried. To put it mildly, neither character is given to self-pity. If they are uneasy, thousands of other City types will be on the edge of a nervous breakdown.

In the Prime Minister's defence, human affairs rarely allow stability. A problem emerges. It appears that a solution has been found. Delight all round, until the law of unintended consequences makes its presence felt. One problem is solved; two or three new ones replace it. There is an analogy with medicine. A powerful new drug is invented which can cure a serious ailment. General rejoicing – until the side-effects appear. Thus it is with high City salaries.

Back in the 1970s, the media was full of references to the "brain drain", which had become a cliche. A lot of the UK's ablest youngsters were moving abroad, to escape low salaries and high taxes: limited opportunities and economic pessimism. Then came Margaret Thatcher. Tax rates were cut. Salaries went up. The language of opportunity returned to British public discourse. She had revived the animal spirits of the British middle classes. Brains were no longer draining away abroad. Able people from all over the world were coming to work in London.

Moreover, Thatcherism was turning Professor Laffer's theories into practice. Arthur Laffer argued that, within reason, lower tax rates would produce higher tax yields. In 1979, with the highest tax rate at 98 percent, the top one-percent of tax payers paid 25 percent of all tax. Ten years later, when the top tax rate was 40 percent, the same was true. There were two differences. Because of economic growth, the sum paid was much larger. Because of lower rates, the taxpayers were much more contented. "Brain drain" had passed out of daily usage into political archaeology.
But Mrs Thatcher did not just cut the  taxes which had emerged from socialism and the politics of envy. She took an axe to their ideological roots. Over and over again, she would repeat the message: a society which allows no-one to grow rich is a society in which everyone is condemned to remain poor. By 1990, she seemed to have won that battle. Now, everything is less clear, which is why David Cameron is under fire.


This is partly due to side effects. In 1979, it was very hard for successful people to earn an adequate recompense. Thirty years on, it is much too easy for middle-ability characters who happen to have made the right career choices to earn enormous salaries. Very high rewards for successful risk takers and for the dynamic characters who transform companies; none of that should be controversial. But large salaries for mediocrities and generous pay-offs for those who transform profitable companies into failures: quite another matter.

Payment by merit and results: that sounds like commonsense. But we must always remember that commonsense is a highly uncommon quality. Especially in fraught economic circumstances, the government would be unwise to depend on it. Although there is a difficulty with financial excess and with unjustifiably-high salaries, not all high salaries are unjustifiable. Yet in recent weeks, ministers have come perilously close to giving the contrary impression.

Fred Goodwin did not help. The decision to remove his knighthood has aroused widespread disapproval, which is impressive, because few if any of those expressing their dismay were speaking out of friendship. In all this complicated affair, one point commands universal agreement. Fred Goodwin has no friends. It is appropriate that Gordon Brown should have recommended him for a knighthood; they went to the same charm-school. Those who were trying to make sense of the whole business all asked the same question: what general principle underlay the ruling? It is not enough to act as it a man should lose an honour when the criticism reaches a certain decibel, so that the government is sorely embarrassed. That would merely substitute lynch-law for the rule of law. Equally, the wrong people took the decision. Permanent Secretaries, however able, are not qualified to sit in a quasi-judicial capacity. In future, that Committee shoud consist of judges, serving or retired. It would be much easier for their verdicts to command confidence.

Under the current system, Sir Victor Blank ought to tremble. Well before the banking crisis, Fred Goodwin bought a bank and there was widespread approval. In the midst of the banking crisis, Sir Victor, then of Lloyd's, bought HBOS and there was widespread scepticism. Even though Gordon Brown had asked him to, there is a difference between a drink with the Prime Minister and due diligence. Disgruntled Lloyd's shareholders are threatening a class action. They would appear to have a case. As the lynch-mob's appetite is slaked, and Victor Blank had the good fotune never to become a well-known name, he will probably retain his knighthood. But the haphazards of thumbs up or down from the mob is no way to run dignity and ceremony in a nation which takes both of them seriously.

In a nation which takes its economic well-being seriously, there ought to be no need to defend banking. Yet there has been a lot of capricious nonsense written and talked over the past few months, all of which ignores a basic truth. Without a healthy financial sector, this country would be finished. That emphatically does not mean that we can rely solely on banking. This is a strong argument for broadening the basis of the GDP. But you do not achieve that by weakening the banks. If there is something wrong with your left leg, you do not start the treatment by breaking your right one.

The government now needs to educate the public in the importance of banking. It should not shirk from saying that healthy banks require well-paid senior bankers. Above all, it should not try to rival Ed Miliband in thoughtless populism. That would give irresponsibility a bad name.

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