Friday, 13 May 2016

Britain's Financial Machinery

In 2004, Labour Chancellor Gordon Brown inaugurated the opening of Lehman Brothers’ London headquarters and gave Lehman fulsome praise for its contribution to ‘the prosperity of Britain’. Coming four years before Lehman’s implosion and a debilitating financial crisis, that statement now looks, how to put it, less than well judged. However, it was just one of the many accolades for the City given by successive British governments. It also reflects a longstanding reality: the City plays a key role in the world financial system and that system benefits British capitalism.
One sign of the financial system’s importance to Britain’s economy is shown by the balance of payments data for 2015. While the UK trade deficit in goods was £125bn – nearly seven percent of GDP – this was offset by £41 billion of net financial services revenues and another £15 billion from insurance and pension services. The current account still recorded the biggest ever deficit, a little over five percent of GDP, but it would have been much worse without these factors.
These points help explain UK government policy. While massive debts, bailouts and examples of financial excess lead people to see an injured ‘real’ economy as the victim of a ‘financial’ perpetrator, that perspective fails to understand how modern capitalism inevitably takes on a financial form. The City is better understood as a nerve centre of a troubled mechanism rather than as a cancerous tumour in an otherwise healthy body.
Britain has long had a trade deficit, even in the nineteenth century when it was the ‘workshop of the world’. Before 1914, these deficits were far more than offset by large revenues from shipping, insurance and other financial services, and by a huge income from foreign investments. The latter resulted in an annual current account surplus of some five percent of GDP from 1850-1914. However, two world wars, a reduction of foreign assets and a falling back of Britain’s position in world trade and finance destroyed that ascendancy.
In the decades after 1945, the City’s business slowly recovered, but it was principally through the newly developing ‘euromarkets’ for international loans and bonds, and by the City using the US dollar. The City was no longer the major provider of capital to international markets as it had been before 1914, but a dealing intermediary using other people’s money denominated in other countries’ currencies. Even after the removal of exchange controls in 1979, the sterling share of this business stayed small, and was less than 20 percent in 2013.
The US is the major power in world finance, with Fed policy driving global interest rates and US stock markets the largest and most influential. However, not many recognise that the UK is the biggest centre of international banking, the principal foreign exchange market, with more than twice the volume of US-based trading, and that it has close to half of the world’s trading of interest rate derivatives between banks and their customers.
London’s role as a major hub of global financial dealing was boosted by government policies from the 1980s, including the ‘Big Bang’ of 1986. This reflected wider trends in the world economy as other major countries were also liberalising their financial markets. The boom in dealing was not limited to financial companies. All big corporations are players in financial markets, managing their interest rate and foreign exchange exposures, issuing bond and equity securities or doing mergers and acquisitions to consolidate their market power. Demand for large-scale funds not easily available in domestic markets, the growth of international investment and the exigencies of today’s economy underpin such financial developments. While the deals clearly benefit financial companies, the underlying rationale is driven by the nature of modern capitalism.
Financial markets today mediate the ‘law of supply and demand’ for goods and services. A company’s market status is more readily shown in the value of its equities, the yield on its bonds and its access to finance, than in the demand for its products. Having financial clout is critical. In 2014, for example, Facebook bought WhatsApp, a company that had never even made a profit, for more than $19bn, largely paid for with its own shares. This was the price Facebook was able to pay to absorb a potential rival, given its existing market position. Such is the nature of contemporary markets. It is a mechanism that the City facilitates and from which the British economy profits.

Tony Norfield, 13 May 2016


  1. Hello Tony - my sincere thanks for your blog and for the straightforward, comprehensible writing style. A small question 1986 was a big year for British and European capitalism with the twin major events of the Big Bang of deregulation of the City combined with the Single European Act being forced through Westminster with barely a debate. 30 years on how is it that now a sizeable section of City opinion is now pro-Brexit when surely the SEA and Big Bang were mutually reinforcing events? Why have these views within the ruling class so diverged? Would you say that the expansion of British capital into the EU single market (freed from endless waits for lorry freight to get through Dover and Calais) has allowed a better link between real world value production on a larger pan-EU monopolised scale with access to financial global open markets capitalisation in the City? If so why is there even a debate within the ruling class about EU membership being totally in their interests?

  2. Black Scotland: Thanks ... Yes, the 1986 Big Bang and the SEA were important developments (covered in my book, The City, esp pp65-70). But I don't think a 'sizeable section of City opinion' is pro-Brexit. Some hedge funds are, and others who might even benefit from Brexit. The majority, although difficult to quantify, is pro-Stay. The pan-EU financial 'passport' for is more important for the latter, incl banks and insurance companies.

    There is a debate because: (a) a minority of ruling class opinion has always been anti-EU, partly based on fear of a loss of political power - a fear exacerbated by the growing role of a euro-member group within the EU; (b) the EU economy is in a big mess, so being 'outside' can look better; (c) there is a broader popular worry about immigration, and wanting to find something to blame for economic woes. Since the govt has opened up the question to a referendum, rather than sorting it out internally as they usually do, point (c) gives the Brexit side more momentum than it would otherwise have had.

  3. There is much debate on the left about the political and economic impact of migration and the function within capital of open or closed borders and the necessity of creating economic precarity for workers as a precondition for profitable value extraction. I argue categorically for open borders and against any political development that might close them - because it gives workers the chance to subvert the controls and domination practised by powers in Europe. How do financiers view migration and border control policies?

  4. "How do financiers view migration and border control policies?" ... No different from other capitalists, ie the usual freedom to hire who you want from wherever. Except the qualification that can also apply to ruling class policy generally: if border controls are part of the necessary mix for patriotism and keeping the working class loyal to the rule of capital in their own country, then maybe implement those to some extent as well.

  5. Economic migration was frowned upon in Britain's recent past. When we embraced neo-liberal economics in the 1970's, austerity and unemployment being the fundamentals, cheap, trained labour was and is still sought, from initially eastern Europeans. Xenophobia is used to distract critics of this shortsighted economic slavery.