If we ask you where St. Paul’s Cathedral is, what would your answer be? London? Well pretty close. However, the answer is not London but the ‘City of London’. Wait isn’t London and the City of London supposed to be the same thing? Well, not really. Whereas the term ‘London’ refers to the capital as a whole, The City of London refers to a smaller area close to Liverpool Street Station1. This area is also sometimes referred to as The City and the Square Mile. It operates more like a country in London, with separate City Halls, elects different mayors who collect separate taxes, and has a separate police to enforce separate laws. Moreover, it even has a flag as well as a crest of its own. It is this area that’s home to the financial district and consists of buildings old and new, most of which are offices.
The City of London competes with New York City's Downtown Manhattan as the financial capital of the world with major banking and insurance institutions such as the London Stock Exchange, Lloyd's of London and the Bank of England based in the City. Fun fact, the City has more Japanese banks than Tokyo and more American banks than Manhattan and over 40% of all the world’s foreign exchange transactions are made in this secret City of London.
The question now emerges: how did the City of London rise to being a major player in the international financial markets? Beginning from the beginning, it is said that the ascent of the City of London is strongly related to the rise of British imperialism. By the mid-18th century, Britain was internationally recognized as the leading commercial nation of the Industrial Revolution. The largest manufacturing centre of the world was thereby serviced by the largest financial centre of the world and this is how the City of London was at the heart of the British economy and the British empire.
The City of London provided its generous assistance to not only the ‘formal’ British empire but also to the ‘informal’ empire (Latin and Central America, for instance) which was being tutored by Britain unofficially. The City’s success was dependent upon people who had highly specialised knowledge of different parts of the world. As this was the no-internet generation, information was not easily accessible and hence people with specialised knowledge about different parts of the world became assets for managing investments overseas. The tumbling of British imperialism across the world should have led to the downfall of the City of London too. But it didn’t. In fact, then began what came to be known as the Second Empire of Britain. More informal and non-existent than before.
With the 1956-57 Sterling crisis, the Euromarket was established so as to dodge any of its harmful effects on the British Balance of Payments (BoP). The Euromarket referred to an informal agreement made between the Bank of England and the commercial banks of the City of London that any transaction between non-residents and in foreign currency, which was the US Dollar at that time, wouldn’t be subject to British regulations3. It was assumed that the transactions happening under the Euromarket would not impact the British BoP. In an unforeseen turn of events, such transactions were counted as not taking place in London which freed these transactions from being performed under the regulatory regime of the UK and/or elsewhere in the world. This led to the emergence of ‘offshore’. A new market was created. One where transactions could be performed by sidestepping key governmental regulations. Once banks realised this, the market grew fairly quickly in the early 1960s.
The City of London saw two kinds of transactions. First, those that were registered and carried out in the City of London. Second, those that were decided upon in London but were registered elsewhere. It is interesting to note that the major places where international lending or depositing is done, is either under British territory or has recently gained independence from British rule. Adding ex-colonies, the figure of international transactions going through British jurisdiction comes upto 40% which is four times that of the US.
To hegemonize the international financial markets (like all other markets), the US sought help from the Bank for International Settlements to re-regulate and renationalise the Euromarket. But as this plan went down in flames, the US reinvented its strategy and launched its own version of the Euromarket, known as the International Banking Facilities (IBF).
Moreover, deregulation of financial markets, which is said to have caused the 2007-08 Global Financial Crisis, was instead a consequence of it. While a large part of the international financial market was operating in an unregulated parallel market, the governments, in order to compete, had to open up their domestic markets too.
With the advent of the wall two millennia ago began the scaling of the conspiratorial City of London to conquer global financial markets. The City to which even Her Highness the Queen requires a permission letter to visit, is protected by dragons at the entrance. Not demarcated with clear borders, do look out for dragons on the street the next time you visit London to get a glimpse of the city within a city within a country within a country.
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