The last province of the empire

In an essay on the origins of the financial crisis, the late Peter Gowan described the “light touch” financial sector in London as “the place where you could do abroad what you could not do back home”. The City of London has long taken this role in the global economy. It is committed to the principle that free trade should take precedence over merely national jurisdiction. Its genteel permissiveness in a world characterised by nervously controlling government or outright lawlessness has been key to its success. As the Cambridge sociologist Geoffrey Ingham once remarked: “The City’s most distinctive activities have been involved with surmounting the substantive obstacles to absolutely free exchange which the existence of nation states presents.”

Financial Secretary to the Treasury Mark Hoban confirmed Ingham’s assessment in a speech at Chatham House in November 2010:

“Globalisation has reinforced London’s position as a truly global market place for financial services. In other parts of the world, financial centres generate the majority of their revenues from domestic activity. The UK, on the other hand, is a little different. Our thriving banking sector is not restricted by national borders – and indeed flows across national borders have made the sector thrive.”

A permeable membrane

The City’s horizons stretch far beyond the boundaries of its host, to encompass the world. It survived the end of formal Empire and, as the venue for the eurodollar market, found a new role as the enabler of US corporate capitalism’s more ambiguous needs. If the US fades, and China takes centre stage in the global system, London will make itself useful to the new dispensation. Its only special relationship is with the principle of absolutely free exchange.

In this sense it is a mistake to talk about “Britain’s financial sector”. It is more accurate to talk about the financial sector’s Britain. Just as Prussia in the 19th century was an army with its own government, contemporary Britain is a collection of globally oriented businesses with their own country.

And this explains why British politicians have been so slow to acknowledge the vast costs that come from playing host to the City. To be ambitious in Britain and hostile to the City is, practically speaking, impossible. As recently as October 2011, Shadow Chancellor Ed Balls was telling the readers of The Evening Standard that “financial services must and will have a vital role to play in London and Britain’s economic future. That is why I am determined that the City of London remains one of the world’s most successful financial centres”.

Since the late 19th century at least, finance has dominated the official mind in Britain. Yet though the politicians are unanimous in their desire to protect it, the benefits that this financial centre brings to the rest of the country are far from obvious. Indeed the evidence suggests that other sectors of the economy – not to mention society at large – have suffered from their proximity to the world’s financial capital.

The global orientation of the City left manufacturing with few sources of patient capital, as investors sought mouth-watering returns elsewhere. When it did notice domestic industry, finance increasingly saw it as a source of quick profits and fees. Pension fund managers and investment banks encouraged mergers and acquisitions that enriched themselves and a handful of senior managers, while loading companies with debt and leaving them less and less able to compete in the global economy.

Deprived of most of its overseas possessions, the City pursued instead a policy of imperialism in one country. The financial institutions sold inappropriate pensions, mortgages, insurance and derivatives. Financiers frustrated effective competition, poured credit into commercial and residential property and created a vast bubble in asset prices. When they thought no one was looking, they fiddled the LIBOR rate to make sure that someone else paid for their blunders.

High financiers

On any conventional measure, the financial sector has been a disaster for the majority of the country. The amounts devoted to saving the banks when the credit crisis began are so enormous that it is hard to grasp their significance – and we still don’t know what the final reckoning will be. But here’s a couple of facts that are simpler to grasp. Famously house-proud, the British now live in the smallest homes in Europe. They also have the largest banking sector relative to the size of the economy – British banks hold assets worth 500 per cent of GDP. This combination – big banks and tiny houses – is not a coincidence. It’s what you should expect if you live near an innovative and creative financial sector.

Fleecing the natives is only one side of the coin. The City’s core business remains globally oriented. It allows foreign banks to do things in London that would be forbidden in their home jurisdictions. Both JP Morgan and AIG reportedly used their London branches to evade oversight. As Carolyn Maloney, a Democratic representative from New York, has pointed out, there is a “disturbing pattern in the last few years of London literally becoming the centre of financial trading disasters”.

I’ve already written about the City’s offshore empire. Tax planning organised through the remnants of formal empire generates significant fees for accountants, lawyers and others. It is the foundation of the prime minister’s substantial private fortune. And tax planning shades imperceptibly into organised crime and grand corruption. Banks in London have had their share of money laundering scandals. Tellingly, they are usually brought to light by foreign authorities.

The US senate has just published a damning report on the activities of HSBC’s foreign subsidiaries. Apparently “the Mexican affiliate transported $7 billion in physical US dollars to HBUS from 2007 to 2008, outstripping other Mexican banks, even one twice its size, raising red flags that the volume of dollars included proceeds from illegal drug sales in the United States”. This follows revelations about the role of Wachovia’s London subsidiary in facilitating suspicious money transfers between Mexico and the US.

This shouldn’t surprise or shock us. Global capitalism is, after all, in key respects, a criminal endeavour. The financial sector in Britain is heavily involved in making this system work. It provides the means for organisations and individuals to escape from limits imposed by merely national law into an untaxed, unknowable ether. The City of London is the enabler of those who aspire to serious wealth and power.

And as the capital of global capitalism, the City must accept the corollary. Just as it was during the Atlantic slave trade and the opium trade with China, the City is the world capital of organised crime.

Dan Hind is the author of two books, The Threat to Reason and The Return of the Public. His pamphlet, Common Sense: Occupation, Assembly, and the Future of Liberty, was published as an e-book in March. He is also a member of the Tax Justice Network.

Follow him on Twitter: @DanHind