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Considering 'Impasse': A very short history of 'the city' and the economy

Developing points he contributed to ‘Notes at an Impasse’, David Purdy examines the changing role of the City of London in the UK economy over the past two centuries.

While industrialisation was transforming the northern half of Britain, the City of London became a global commercial, banking and financial hub with a permanent interest in the maintenance of a liberal economic order, both at home and overseas. Originating with the creation of the Bank of England in 1694 and the development of a modern system of state finance, the City grew as the Empire grew. But its interests were not confined to the 'white settler' colonies that later became self-governing 'dominions', nor to the subjugated territories from India to the Caribbean that came under direct British rule: they extended to the 'informal empire' in weak sovereign states such as Argentina and China. Moreover, then as now, Britain's principal trade links were with strong sovereign states in Europe and the US.

By 1870, City institutions were closely integrated with the Bank of England and the Treasury, forming what Geoffrey Ingham in Capitalism Divided? The City and Industry in British Social Development (Macmillan, 1984) called a “core institutional nexus” within the British state. Each partner in this triad derived sectional benefits from it. City institutions secured privileged access to the corridors of power; the Bank, then still a private company, gained competitive advantages over the provincial banks from its connections with the City; and the Treasury, as the guardian of the public purse, strengthened its hand in dealing with the demands of other Whitehall departments through its intimate links with the world of finance and banking and the perennial need to maintain the confidence of 'the markets'. But beyond these separate – albeit interdependent – sectional interests, what united the members of the triad was their shared commitment to the 'holy trinity' of free trade, sound money and balanced budgets, with public spending and taxes kept at the lowest level consistent with the defence of the realm and the maintenance of law and order.

After the repeal of the Corn Laws in 1846, this minimalist formula for government became hegemonic. Demands for protection were sometimes voiced by sectional farming and manufacturing interests, particularly in periods of recession and falling prices. But the formula was not seriously challenged until 1903 when Joseph Chamberlain, the former Radical-Liberal turned Liberal-Unionist, launched his campaign for Tariff Reform. This protectionist response to German and US competition offered a visionary alternative to liberal imperialism. It had four interrelated aims: to turn the Empire into a self-sufficient, cohesive economic bloc; to unite capital and labour in defence of national production; to provide a new source of revenue to pay for social reforms, countering the appeal of socialism and forestalling the imposition of higher taxes on rich; and to extend and deepen support for the Unionists. Chamberlain's campaign failed. Tariff reform was popular with the Unionist rank and file, but split the party in parliament, while reuniting the Liberals, who rallied in defence of free trade and won the support of the trade unions and the fledgling Labour party by promising to protect union funds against damages for strike action.

From inter-war crisis to post-war resurgence

The City, understood in Ingham's sense, has remained a major influence on British economic policy. But its strength has waxed and waned. In 1914 the principles of 'sound finance' were suspended for the duration of the war. After the Armistice, the Bank and the Treasury set out to put the pound back on the gold standard at its pre-war parity against the dollar, deploying the tools of monetary and fiscal policy to drive down UK costs and prices relative to those in the US, where wartime inflation had been lower than in the UK. This policy carried significant costs. High interest rates depressed investment and impeded growth; pressure for wage cuts provoked bitter industrial conflict; and falling prices increased the real burden of debt, both public and private.

By the time sterling was re-anchored to gold in 1925, UK prices had still not fallen enough to restore competitiveness. At the pre-war parity of $4.86, the pound was overvalued by about 10 per cent against the dollar and by even more than that against the main European currencies. Thus, in the second half of the decade, UK exporters, whose markets had shrunk during the war, had to contend with the additional handicap of an overpriced currency. Little wonder that UK economic growth was painfully slow throughout the 1920s, dragged down by severe depression in the four large staple industries – coal-mining, iron and steel, shipbuilding and textiles – all of which were heavily dependent on exports and all of which produced less in 1929 than they had in 1913.

After the currency and fiscal crisis of 1931 brought down the second minority Labour government, the Bank and the Treasury finally admitted defeat. The pound was taken off gold and allowed to depreciate. Thereafter, as international trade collapsed under the impact of world-wide depression and national protectionism, the City's economic and political heft declined and monetary policy was subordinated to the promotion of national economic development, as interpreted by the government of the day. It was not until the 1960s that the City began its return to global prominence as London became the home of the Euro-dollar market. But the financial re-engineering of the UK economy did not really take off until the 1980s as controls on international flows of money and capital were removed and the sector was deregulated, leading to the restructuring of the London Stock Exchange and the entry of the old merchant banks and some high street banks into full-service investment banking. That said, it should be borne in mind that the ensuing developments were not peculiar to the UK, but affected all the advanced capitalist economies to varying degrees as the neo-liberal word became incarnate in the shape of globalisation..

Capitalism unleashed

Consumer credit boomed, making household spending temporarily independent of current incomes. Banks took over building societies and entered the mortgage lending business, generating aggressive competition for customers and much easier access to credit for house purchase. Pension funds and insurance companies, hitherto tightly controlled by government as to what assets they could hold in order to protect savers from risk, lobbied successfully to have these restrictions relaxed, allowing them to invest funds in corporate equities and risky ('junk') bonds rather than safe government assets. Unlike individual investors, these 'institutional' shareholders had both the resources and the incentives to monitor company performance closely, and as they came to dominate trading in company shares, were able to exert pressure on management to cut costs and maximise short-term profits. Managers were induced to do whatever would boost profits and thus the share price by means of stock option plans, allowing them to buy shares in the company at a later date at what would be an extremely favourable price if the company was successful. In this way, the interests of corporate executives and institutional shareholders came to be aligned, often to the detriment of other stakeholders: notably, company employees and local communities. At the same time, the explosion of executive pay set the pace for top salaries generally, and this trend together with the growing concentration of share ownership gave rise to inequalities in the distribution of income and wealth that were greater than at any time since the nineteenth century.

Opening the borders to international financial flows made it much more difficult to regulate the domestic financial system. As a result, the era of financial liberalisation that began in the 1980s was marked by recurrent corporate scandals, volatile stock markets and frequent currency and banking crises, not just in the rich countries with sophisticated financial markets, but also in the 'emerging market' economies which were forced to liberalise regardless of domestic circumstances. In such conditions, boom and bust were always on the cards. Nowadays, the 1960s and 1970s, characterised as they were by chronic inflation and a severe profits squeeze, are a by-word for instability and turmoil. But if we had known then what we know now about the consequences of unfettered financial markets, would we have been willing to let capitalism off the leash?

Published 3 December 2023.

Illustration: 'Notes at an Impasse' was published by Democratic Left Scotland on the occasion of the 'Break up of Britain?' conference in Edinburgh, 18 November. Over 400 copies were distributed to participants.


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