Inside the City

A Guide to London as a Financial Centre

William Clarke

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781351365383
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Originally published in 1979, Inside the City looks at The City of London as one of the important financial centres in the world. The book provides an interesting insight into the City as a major centre of international banking, asking key questions such as, how long the city can last as a major centre, how do its services compare with other centres, and what it can do to maintain its present position? The book examines how the great network of markets and institutions that make up the City operated when the book was written, providing key chapters on the Stock Exchange, institutional and private investors, the banking world, including foreign and merchant banks, the commodity and money markets, Euromarkets, Sterling and insurance. This book will be of interest to those studying or researching in the field of economics and finance.

Chapter 1

What is the City?

The City of London, widely known simply as ‘the City’, is in reality a financial city within a city. It was once the centre, if not the whole, of London. At its peak, in the early seventeenth century, before the Great Fire, over 130,000 people lived there. Now only a few thousand can be found at night, though close on half a million still go there to work – in banks, insurance offices, broking houses and markets.

What do they do and is it worthwhile? Two simple questions, but ones that rouse fierce political passions. Part of the Labour Party wants to nationalise two of the City's basic industries – banking and insurance – and a Government-appointed Committee of Inquiry, under Sir Harold Wilson, has been looking behind the City's traditional façade. After a lifetime working in and around the City, I start with a bias in its favour. This is, therefore, essentially a book written from the inside looking out. I have been an observer, rather than a doer; a commentator, rather than a banker, broker or dealer, but a commentator from inside the City rather than from outside. I almost said ‘inside the village’, for the City has many characteristics of the narrow village life. It's only a mile square. People throng its streets. It thrives on gossip. It quickly detects the newcomer. It readily adopts an ‘us’ and ‘them’ approach to life. It trusts some and not others, though the recipients will hardly notice the difference. It is intensely loyal to its own kind. It needs and trusts its village policeman and abhors outside interference. Above all it can mistake polite criticism for outright attack. And as quickly regret it. In a word it has all the virtues and failings of a closely-knit community.

First I should explain exactly what the City is and what people generally mean by it. Just as ‘Wall Street’ operates from one of the oldest settlements on Manhattan, so the City's markets operate on the spot where Roman London developed nearly two thousand years ago. The foundations of Bucklersbury House, home of stockbrokers, foreign banks and insurance companies, contain a well preserved Temple of Mithras; and the City's International Commodity Clearing House is carefully built over the remains of the old Roman Wall. In effect the City extends from another section of the Roman Wall in the north (known as London Wall) to the river in the south and from the Tower of London in the east to Temple Bar in the west.

Within this square mile, the City's offices cluster in several specialisations: the banks and discount houses near Lombard Street and the Bank of England, the insurance companies (and Lloyd's) between the Bank of England and Leadenhall Street, the shipping offices (both the lines and the brokers) around Leadenhall Street and St Mary Axe, the commodity markets nearer the river, with the Bank of England and Stock Exchange (along with the old Royal Exchange – once the home of the foreign exchange market) at the fulcrum near the Mansion House.

In short, the City's financial district has grown up and developed on the oldest spot in London, while the government and the more prosperous residential districts have gradually moved westwards to the West End and beyond. But the City encompasses more than the physical square mile of offices and markets just east of St Paul's. It is the centre of the country's financial activities and, as such, acts as a magnet for the country's savings – from the thousands of bank branches, insurance offices and investment trust and unit trust investors up and down the land. Insurance offices in Liverpool, Norwich and Salisbury (each has the head office of a leading company), investment trusts in Edinburgh, banking offices in Manchester, Glasgow and Birmingham, the stock exchanges in Liverpool, Manchester and Birmingham – all maintain daily contact with and channel funds to, and from, the City. All are essential parts of the City's mechanism. ‘The City’ is in effect used as convenient shorthand for the hub of all the financial and commercial activities that go on in the UK, for a score of different markets and industries rather than geographically to describe a spot on the map.

Several functions and several characteristics need to be etched in at the outset. The City, as we have said, plays many overlapping roles. The following are, I believe, basic:

• It provides capital and services for industry and government.
• It channels and invests the country's savings.
• It operates leading domestic markets in commodities, securities and money.
• It operates world markets in Eurocurrencies, foreign exchange, gold, insurance, shipping and commodities.
• It provides advisory services in accountancy, investment, law and commerce.
• It attracts and communicates financial and economic information to and from the rest of the world.
• It earns valuable foreign exchange.

The main characteristic of the City is perhaps its compactness. You can walk from one side to the other in fifteen minutes. Most City people do just that: walk. Walking, meeting, talking – these are the habits of generations, and in many ways they have not changed much through the centuries. As in most villages, everyone seems to know everyone else. In ten minutes you can pass a bullion dealer in touch with Moscow; a shipbroker arranging the cargo for a ship in Hong Kong or Rio; a banker considering a loan for a chemical plant on Teeside; a bill broker dealing in millions daily (and often wearing a top hat); a Eurodollar dealer who has daily contacts with New York, Zurich, Paris and Frankfurt; an exchange manager who will still be dealing in dollars with New York from home at 10.30 that evening; or an insurance broker just off the plane from Seoul or Caracas. It is in essence a village with both domestic and international contacts. Internal communications, on the street or on the phone, are swift and immediate. Paperwork is kept to a minimum. One survey has shown that 500 people interviewed in the City had made no less than 28,000 contacts in the course of one day – by telephone, letter, messages or meeting face to face. More important, 70 per cent of the meetings were within the City and three quarters were ten minutes walk from their office.

International communications are almost equally commonplace and equally fast. The City accounts for one in six of the country's total international telephone calls, and more than half of all the international private leased circuits provided by the Post Office terminate in the City. Moreover, the directors of one Lloyd's broking firm in a recent year made 220 overseas flights, covering 1¼ million miles between them. It pays the City to know what is going on in every corner of Britain and of the globe. And it is not by chance that Fleet Street, the centre of a similarly huge communications network, led by Reuters and aided by world-wide syndication through Britain's leading international papers and magazines, is within a stone's throw of the City's centre and well within its boundaries. By using local and international communications the City can provide quick deals, often by word of mouth, covering millions of pounds and dollars, and a remarkable variety of services. Markets in gold, silver, rubber, ships, insurance and money are all within easy walking distance of one another.

As the City's contacts, particularly its involvement, with the outside world have grown, questions about the way it goes about its business have increased too. For example, have some of the gains in take-over bids, in special tax situations in the Cayman Islands, on the stock market, or on the commodity or foreign exchange markets been the result of manipulation or inside information denied to the rest of us, or are they simply the reflection of market forces? On some occasions – those highlighted by Lonrho, Sir Hugh Fraser of Scottish and Universal Investments, and the Sime Darby affair, for example – the City has found its name dragged into the limelight, even when the action has been hundreds, if not thousands, of miles from the Square Mile itself. On others – the Bank Rate Tribunal of 1957, the unit trust operations of Sir Denys Lowson, the Slater-Walker affair – the finger has pointed directly at the City.

Some of the criticisms have been fierce and to the point. British bankers were described on a television programme some time ago as ‘strong, arrogant, privileged, overweening and unpatriotic’. The money they deal in, across the exchanges, to the detriment of the pound, was ‘mafia money, the cut off the top of the American gambling casinos’. The speaker was a union member of Sir Harold Wilson's Committee of inquiry into the City. Another critic, a member of the House of Commons, recently blamed ‘currency manipulators, currency speculators, and currency dealers, most of whom are British and occupy desks in this country’, for the plight of sterling and the British economy. The Stock Exchange, depicted extensively on a recent television programme, was described thus by a newspaper critic next morning: ‘It was much as I remembered it. The pecuniary giants, in whose capable hands this island's economic destiny is juggled, still ran about the floor in undiminished schoolboy enthusiasm, shouting their amusing jargon, playing with their walkie-talkies, having enormous fun, and generally carrying on as if there were no tomorrow, which, in their case, is very possible’.

Some of the criticisms have had a broader, political or economic, base. The City can claim to do more international business in insurance, foreign exchange, shipping freights, Eurocurrencies, and several commodities than any other spot in the world. But it is also criticised for letting down British industry.

It earns no less than £1,700 million in foreign income every year and its foreign earnings per head are double those of British manufacturing industry. But it is also accused of deliberately speculating against the pound and pushing hard-earned British savings abroad as fast as it can.

It boasts of, and is admired for, its freedom from legal and government restrictions on its complex international deals, in contrast with New York, Tokyo and, especially, Paris. But statutory control and supervision are being urged by many people in prominent positions.

It is one of the few international centres where money can earn a rate of interest if left there overnight. But it is also said to attract needless millions of hot money from abroad, thereby adding to the instability of the whole economy.

These paradoxes highlight some of the main questions raised by people outside the City, and need careful scrutiny. Some are based on misunderstandings. Some are sincere criticisms. Some derive from political conviction. But, as I hope to show, they are not necessarily the only issues the City should be considering as it prepares itself for the 1980s. Equally important, in my view, are the questions that arise from the growing investment monies of the pension funds and the insurance companies, from the revival of fierce competition from New York and Chicago, and from the way the Eurocurrency market may be controlled in future. Will there be a viable Stock Exchange in ten years time? Will New York replace London as the centre of the Eurocurrency system? Is government direction of funds the only way to curb the power of the investing institutions? What is the best way of protecting the investing public? Can the City survive with a weak pound? Should speculation be encouraged as a lubricant of the commodity, security and money markets or curbed as a matter of principle?

To write about these issues from the inside is to run the gauntlet of being mistaken for a partisan by the outside world and a fierce critic by those inside. At a time when outside pressures are changing the fabric of City life more rapidly than ever before, this is a major hazard. But I shall try not only to describe how the City goes about its business, but to offer a realistic assessment of the criticisms now being levelled at it and to explain precisely where I think the truth lies.

Chapter 2

The Banks: A Vast Supermarket?

The streets of the City resemble some vast banking supermarket: there are more banks in London than in any other spot in the world. At the last count 325 different banks were competing for the domestic and foreign business that daily accumulates in the Square Mile. There were more American banks than in New York. The daily fight for business even extends well beyond the banks, for the competition for deposits brings in the building societies, the life insurance offices, National Savings, and the more recently established National Giro.

Banking changes over the past couple of decades have been quite bewildering. In that period:

• The London clearing banks have seen the building societies’ share of total deposits overtake their own for the first time. Their deposits now form less than a half of all funds held in liquid form.
• The number of foreign banks with branches or offices in London has shot up from under 100 to over 300 and the foreign bank share of total deposits has reached over £100 billion. The clearing banks have seen their share of total lending drop to well below half of the total, with the American banks alone carving out a 17 per cent share of total bank advances.
• With the London discount houses, British banks have created a vast new wholesale money market as a source for their lending, alongside the money flowing from their thousands of branches. As a result the clearing banks have lengthened the terms of their lending to industry to such an extent that about 40 per cent of their loans are now medium-term.
• The clearing banks have provided some £1,200 million of their own money to help finance North Sea oil developments, and have begun a major banking revolution, extending banking services to a mass market and paving the way for a cashless society.
• They have been forced to become an instrument of government monetary policy, restricting loans to customers in accordance with government wishes.
• They have also been accused of letting down British industry and of having an over dominant position in the economy, and have been threatened both with nationalisation and with a new publicly owned competitor based on the existing National Savings banks and the National Giro.

In short, new markets have been established, foreign and domestic competition has increased, banking services have been transformed, and government controls have been tightened. In the process the kaleidoscopic array of banks in the Square Mile has been given a vigorous shake, leading to a new pattern of relationships which are still sorting themselves out. To understand what has happened, it helps to know what a bank is and does, how many different kinds of banks there are, and what competition, both inside and outside the banking world, they are now having to face. This is what I want to concentrate on first, before looking at the foreign and domestic climate the banks have had to grapple with.

What do we mean by a bank? Is it an institution which raises deposits from the public? Building societies do that too. Is it confined to those institutions which lend money to the man in the street or to British industry? Pawnbrokers do one and the capital market and the insurance companies and pension funds, indirectly, do the other. The truth is that, whatever the textbooks say, until recently a British bank was a bank when the Department of Trade or the Bank of England said it was. And their decision could have been in connection with the use of foreign exchange, the soliciting of public deposits or the use of a name in advertising. As I write legislation has been passed which subdivides banks into two categories for the purpo...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Dedication
• Preface
• Table of Contents
• List of Tables
• Chapter 1 What is the City?
• Chapter 2 The Banks: A Vast Supermarket?
• Chapter 3 The Banks: Enough Help for Industry?
• Chapter 4 Insurance: World's Biggest Risks?
• Chapter 5 The Stock Exchange: Still Necessary?
• Chapter 6 Private Investors: A Vanishing Race?
• Chapter 7 Investing Institutions: Too Much Power?
• Chapter 8 Money Markets: A Billion a Day?
• Chapter 9 The Government: Does the City Help?
• Chapter 10 Commodities: Who Are the Speculators?
• Chapter 11 Ships and Planes: The World's Charterer?
• Chapter 12 Foreign Exchange: Where Are the Gnomes?
• Chapter 13 Sterling: How Important?
• Chapter 14 Euromarkets: No Controls?
• Chapter 15 Who Controls the City?
• Chapter 16 Survival: Challenge from New York?
• Chapter 17 The City in the 1980s: What Lies Ahead?
• Glossary City Jargon: What Does It Mean?
• Index