The City of London is uniquely made up of shiny glass skyscrapers and historic stone buildings dating back to the Great Fire of London. The mix of the old and new showcase London’s rare landscape of a dynamic financial system that is grounded in established practices and procedures that provide the means for transactions totalling billions of pounds per day.
Throughout history, cities such as Venice and Amsterdam have held and lost the title of being the world’s biggest financial hub. London has retained this status since the 1600s, primarily due to its favourable time zone, fluid regulation, established banking systems and English language. Due to England’s colonial history, many postcolonial economies based their legal systems on the English legal system as there are historical precedents and judicial independence, as well as a stable environment for international arbitration.
The City of London was established north of the Thames after the Roman invasion. As it was a port city, it drew in merchants from around Europe and quickly became a centre of commerce, drawing in over 8,000 immigrants per year after 1650. Many of the first financial institutions and organisations were originally guilds and confraternities that were able to wield power and lobby for special freedoms that endorsed favourable conditions and laws for businesses. Under Henry VII the Hanseatic League, a commercial trade organisation made up of merchants from German towns, traded freely with merchants from London. As the Protestant Reformation took hold, many communities that had been exiled from their countries began to establish their trades in London. French Huguenots established the silk industry in Spitalfields after the Revocation of the Edict of Nantes in 1685 that threatened Protestants in France.
The foundation of institutions such as the Bank of England, Lloyds of London and the London Stock Exchange laid the groundworks for the boom of the industrial revolution and the increase in the reach of the British East India Company globally.
As much of the business was done within London’s increasing coffee houses after the Great Fire of London in 1666, different coffee houses began to attract different trades and types of business. For those wanting to secure future prices or buy shares in other merchant’s ventures, the London Stock Exchange was founded with its roots in a coffee house named Jonathan’s in Change Alley. Lloyd’s of London began its business from a coffee house named after Edward Lloyd, where sailors and ship merchants were provided with marine insurance and reliable weather forecasts. Lloyds of London expanded and obtained a monopoly, where multiple financial investors grouped together into syndicates and spread the risk of underwriting amongst themselves.
The Bank of England, the eighth-oldest surviving bank in the world, was established in 1694 after England lost a battle against France and needed to rebuild its finances to rebuild the Royal Navy. As no public funds were available and lenders refused to lend the money at the favourable interest that the government desired, the Bank of England created a subscription for the loan, issuing the first government bonds of the time as the financiers of the government were able to issue notes to others and the privilege of becoming a member of the bank. The Bank of England moved to Threadneedle Street in 1734, where it still stands today. As well as managing the government’s debt and finances, the Bank of England, which was an independent institution till 1946, also managed the finances of wealthy individuals and goldsmiths. Goldsmiths stored their gold with the Bank of England and issued notes to borrowers, who would trade their notes or allow depositors to use notes.
The 18th century became known for the rise of the City and the Corporation, with power moving from the old establishment to the new entrepreneurs. The foundation of institutions such as the Bank of England, Lloyds of London and the London Stock Exchange laid the groundworks for the boom of the industrial revolution and the increase in the reach of the British East India Company globally. Business owners both big and small came to London in search of capital to grow their businesses, making London a global centre of finance and trade.
Fast forward to the modern period, English contract law has continued to be adopted for global international finance and London was instrumental in developing the foreign exchange market and creating new financial products, such as Eurodollar, the most common foreign exchange combination and Eurobonds. London continues to be the biggest market for derivatives, foreign exchange, money markets, gold, silver and metal markets through the historic London Bullion and the London Metal Exchange markets.
The City of London had been freed from its prisoner; the British government, and took the opportunity to grow, diversify and increase clientele from corporations around the world in the new age of free markets and globalisation.
This is largely due to the post-Thatcherite changes to the financial centre, allowing greater liberalisation through privatisation, deregulation and increased competition policies, allowing financial institutions to flourish. Exchange controls on the currency were abolished in 1979, raising the value of British assets abroad by nine times to £12bn. The 1986 Financial Services Act, later dubbed the “Big Bang” in the City of London’s history as it removed government intervention on derivatives trading. Many of these changes were kept on during the New Labour government under Tony Blair, and the Bank of England was once again privatised and given independence to run monetary policy. Business run by the state became drastically slower; no longer did the government own industries such as telecoms, steel or power, and they did not prop up capital markets either. The City of London had been freed from its prisoner; the British government, and took the opportunity to grow, diversify and increase clientele from corporations around the world in the new age of free markets and globalisation. London had overtaken New York as the biggest financial centre of the world, and everything seemed to be rosy.
Yet few had anticipated what would happen in 2008, indicating that the City of London needed accountability to governments and the people it served and stringent regulation to protect the investments of ordinary people who had ploughed their money into homes, pensions and insurance. The bubble burst, and for many, so did their livelihoods, homes and savings. The increasing globalisation of the 2000s meant that, if one economy collapsed, others that had traded with it were vulnerable. Organisations in the City of London that were deemed too big to fail were on the cusp of collapse.
With banks such as Northern Rock disappearing from the high-street and the Royal Bank of Scotland, with its foundations in the early 18th century, needing to be bailed out by the taxpayer, it seemed that the financial services sector in the City of London was at the brink of failure. Once the biggest bank in the world by market capitalisation, following the financial crash, the government now has a 62% stake in the bank. To avert a collapse in the financial services sector, an investment of around £1.6tn was made into the biggest banks including HSBC and Lloyds TSB (not to be confused with Lloyds of London as they are separate corporations). The City of London, once an entrepreneurial and democratic city that was free of intervention from the Crown and stood on its own two feet, was at its knees and at the mercy of the government.
With new legislation and regulations such as the separation of consumer and investment banking arms and MiFID II, a long and arduous regulatory document with 1.4m paragraphs that seeks to inject more transparency into the sector, it seems that greater government regulation will hold the unruly London bankers to account. A lesson has been learned by financial institutions as the ripple of the financial crash of 2008 still has repercussions today.
While the City of London has found its feet again, Brexit is threatening to take London’s crown as the biggest financial centre in the world, with New York edging closer. The historic city that started with independent merchants and their goods, coffee shops and a community of immigrants is under threat as the reduced freedom of movement of goods and services, political uncertainty and change to laws take hold. The next decade will undoubtedly change the landscape of the City of London.