Т he cit y of London and its role as a financial center
Introduction. The Concept of the City of London.
Britain is a major financial centre providing a wide range of specialised services. The country’s economy has for a long time been directed through the great financial institutions which together are known as “The City”, capital “C”, and which are mainly located in the famous “Square Mile” of the City of London.
The “Square Mile” in the Roman Times historically emerged on the Thames as the business and industrial nucleus of the future London. Through centuries of business and religious developments the City assumed its role of the world commercial centre as it is known today . When in the 20th century Great Britain lost its empire and other financial centres got established in the world, the city adapted itself to changed circumstances to remain a world financial leader. The City of London has the greatest concentration of banks in the world (responsible for about a quarter of total international bank lending) , the world’ s biggest insurance market (with about 1/5 of the international market ), a Stock Exchange with a larger listing of securities than any other exchange, and it remains the principal international centre for transactions in a large number of commodities. A large proportion of Britain’s wealth has been invested by the City overseas. The City’s annual foreign income roughly double that of the British manufacturing industries. The above proves the City’s world significance as a financial centre. Geographically the City is a large office area bubbling with life at daytime and comfortably quiet outside the office hours. It’s historical sights like the Tower of London, St Paul’s Cathedral, the Museum of London, the Monument and others as well as the beautifully impressive architecture of the office buildings attract crowds of visitors. The only housing project, the Barbican, provides very expensive accommodation along with an arts centre, a school and some official premises.
Since after the mid - 80s financial and related services have started to expand outside the “Square Mile” though the City of London remains the symbol and actual reality of the country’s power.
C h a p t e r 2
Britain’s Economic and Financial Position Today at Home and Abroad.
Finance and industry of the British economy go hand in hand as industry requires a diversified network of financial institutions to develop successfully. Although Britain’s financial power today exceeds that of the country’s industrial achievement, the country was for years “the workshop of the world”. It still remains a highly industrialised country but the end of the 20th century saw tendencies for the economic decline.
Historically, after two world wars and the loss of its empire Britain found it increasingly difficult to maintain its leading position in Europe. The growing competition from the United States and later Japan aggravated the country’s position.
Britain struggled to find a balance between the governments intervention in the economy and almost completely free-market economy of the United States. The theories of the great British pre-war economist J. M. Keynes stated that capitalist society could only survive if the government controlled, managed and even planned much of its economy. These ideas failed to get Britain out of the image of a country with quiet market towns linked by steam trains puffing slowly through green meadows. Arrival of Margaret Thatcher, the Conservative prime-minister in office between 1979 and 1990, discarded these theories as completely wrong. Mrs. Thatcher claimed that all controls and regulations of the economy should be removed and a market economy should recover. Her targets were nationalised industries. She refused to assist the struggling enterprises of the coal and steal industries which were slimmed down in order to improve their efficiency. In the steel industry, for example, the workspace was reduced from 130000 people to 50000 by 1990s and the production of 1 ton of steel by 1990 took only 3,7 man hours instead of 12 man hours in 1980. The government believed that privatisation would increase efficiency and economic freedom would encourage private initiative. A lot of big publicly owned production and service companies such as British Telecommunications, British Gas, British Airways, Rolls Royce and even British regional Water Authorities were sold into private hands. Britain began to turn into a country of shareholders. Between 1979 and 1992 the proportion of the population owning shares increased from 7 % to 24%.
The Conservative government reduced the income tax from 33% to 25% as an incentive in production. This did not lead to any loss of revenue, since at the lower rates fewer people tried to avoid tax. At the same time the government doubled the VAT on goods and services to 15%. Today it is 17%.
Small business began to increase rapidly. In 1984 for example there was a total of 1.4 million small business though including “the black economy” the figure was nearer to million. Proportionately, however, there were 50% more of them in West Germany and the United States and about twice more in France and Japan.
Many small businesses fail to survive mainly as a result of poor management and also because compared with other European Community Britain offers the least encouraging conditions. But small businesses are important because they can grow into big ones and because they provide over half of the new jobs. It is particularly important because unemployment in Great Britain rose to nearly 2.5 million people and a lot of jobs are part-time.
Energy is a major component of the economy, which depended mainly on coal production until 1975, began to rely on oil and gas discoveries in the north sea. Coal still remains the single most important source of energy, in spite of its relative decline as an industry, so oil and coal each account for about one third of total energy consumption in Britain. Over a number of years British policy makers promoted the idea of energy coming of different sources. One of them was nuclear energy as a clean and safe solution to energy needs. In fact Britain constructed the world’s first large scale nuclear plant in 1956. However, there were a lot of public worries after the US disaster at Three Miles Island and the Soviet disaster in Chernobyl. Also nuclear research and safe technology is proved to be very expensive - by 1990 the real commercial cost of nuclear plant was twice as high that of a coal power station. Renewable energy sources such as wind or solar energy, are planned to provide 1% of the national energy requirements in the year 2000.
Research and development (R&D) in Britain are Mainly directed towards immediate practical problems. In fact British companies spend less on R&D than any European competitors. At the end of the 1980’s, for example 71% of German companies were spending more than 5% of their annual revenue on R & D compared with only 28% of British companies. As a result Britain has been automating more slowly than her rivals. In fact it may be the consequence of Margaret Thatcher’s views on public spending which includes medical service, social spending, education and R&D. “The Iron lady” argued that “if our objective is to have a prosperous and expanding economy, we must recognise that high public spending kills growth of industry”, as money is taken from the productive sector (industry) to be transferred to unproductive part of it. As a result in the 80’s only 6% of Britain’s labour had a university degree against 18% in America, 13% in Japan and 10% in Germany. Technical education has always been compared with Britain’s major competitors. According to government study “ mechanical engineering is low and production engineers are regarded as the Cinderella of the profession”. Very few school leavers received vocational training. Since 1980’s among university graduates the tendency has been to go from the civil service to merchant banking, rather than industry. And according to analysts resulted from the long-standing cultural roots. Public school leavers considered themselves “gentlemen” too long to adjust fast to the changes of time. Efforts are now taken by the labour government to boost technical and enterprise skills in schools. The 1999 Pre-budget report outlined a 10 million pounds for the purpose.
Despite the favourable effect of “Thatcherism” Britain’s economic problems in the 1990s seemed to be difficult. Manufacturing was more efficient but Britain’s balance of payments was unhealthy, imports of manufacturing goods rose by 40%, and British exports could hardly compete with those of its competitors. Car workers in Germany, for instance, could produce a Ford Escort in help the time taken in Britain. In the 90’s among the European countries British average annual productivity per worker took the 6th place. The revenue softened the social problems but distracted Britain from investing more into industry. Many analysts thought that much more should have been invested into engineering production, managerial and marketing before the North Sea oil declined.
The Labour government undertakes to improve the situation. In his Pre-budget report on 9 November 1999 the Chancellor of the Exchequer Gordon Brown set out new economic ambitions for the next decade. Under them Britain will raise its productivity faster than its competitors to close the productivity gap and a majority of Britain’s school and college leavers will go on to higher education.
In the 80s British companies invested heavily abroad while foreign investments in Britain increased too. Today in a speech in Tokyo on 6 September1999 the Foreign Secretary Robin Cook said that “Britain is a chosen country for more investment from Japan than anywhere else in Europe and more than thousand companies operate in the U. K.”
Mr. Cook added that the huge European Market of 370 million people was “the largest single market in the world, a market that is set to expand even further with the arrival of new member states”. In fact he said investment in Britain is the highest bridge into Europe.
Britain as a world leader in “high-tech” industries
One of the three British microprocessor producers was making 70% of British silicon wafers required for new information technology even in the seventies. On Nov.3.1999 Techmark, a new technology market, was launched at the London Stock Exchange. According to Gordon Brown, Chancellor of the Exchequer, Techmark will be the London Stock Exchange “market within a market” for innovative technological companies.
The specialised institutions are agencies created to meet the needs of specific groups of borrowers mostly industrial and commercial - which are not adequately covered by other institutions. They operate in both public and private sectors. In general they offer alternative funding to that provided by banks and building societies. Some of them were set up with Government support and with financial backing from banks and other financial institutions. Some public sector agencies offer financial support to industry in Scotland, Wales, and Northern Ireland.
The main private sector institutions are finance houses and leasing companies, factoring companies, finance corporations and Venture Capital Companies.
Finance houses are major suppliers of hire-purchase finance for the personal sector of short term credit and leasing to the corporate sector.
Leasing companies buy and own equipment required and chosen by businesses and lease it at an agreed rental rate.
Factoring companies provide cash for a company in exchange for the sums they owe. A factoring company buys up a client’s invoices as they arise and finances up to 80% of the value of the invoices; the rest is paid after a period, after deduction of administration and finance charges.
Finance corporations meet the need for medium and long term capital when such funds are not easily or directly available from traditional sources such as the Stock Exchange or banks.
Venture Capital Companies offer medium term and long term equity financing for new and developing businesses when such funds are not readily available from banks and other traditional sources. The British Venture Capital Association has 103 full members, which make up over 99% of the industry.
Financial markets is a collection of sophisticated securities, futures and options the money market, the euro currency market, Lloyd’s insurance market, the foreign exchange market and markets in bullion and commodities.
The Stock Exchange
The origin of the London Stock Exchange goes back to the coffee houses of the seventeenth century where those who wished to invest or raise money bought and sold shares in joint stock companies. Brokers later opened their own subscription Economy of the country has been directed through the City which is the nerve center of the national finance. The greater part of the country’s income comes from invisible exports - operations originating from the City and flowing through its channels.
A large proportion of Britain’s wealth has been invested by the City overseas. A number of banking institutions have their head offices in Britain but operate mainly abroad in particular regions such as Latin America or East Asia through extensive branch networks. The major bank in this sector is Standard Chartered. This shows how the City of London expands its activities beyond the country’s borders; the same goes for the influence of the London Stock Exchange and Commodities Exchanges (particulars of the City of London as a financial center will be dealt with in Chapter three).
The City of London as a Financial Center, its Main Institutions .
There has been a long tradition in Britain of directing the economy through the great financial institutions together known as “the City”, which until 1997 were located in the “Square Mile” of the City of London. This remains broadly the case today, though the markets for financial and related services have grown and diversified greatly.
Banks, insurance companies, the Stock Exchange, money markets, commodity shipping and freight markets and other kinds of financial institutions are concentrated in the solemn buildings of the City and beyond its borders. The City of London is the largest financial center in Europe. London is also the world’s largest international insurance market and has the biggest foreign exchange market.
Britain’s financial service industry gives about 6.5 % of its gross domestic products (GDP) and contributes some 35 thousand million pounds a year. The largest contributors are banks, insurance, institutions pension funds, and securities dealers. To help Britain’s financial services to respond to the competition and at the same time to protect the public investment, the Government introduced 3 pieces of legislation to supervise financing the industry: the Financial Services Act (1986), the Building Societies Act (1986) and the Banking Act (1987). Under these acts investment businesses need to be authorized and they have to obey rules set in the legislation. The main responsibility to supervise were the Bank of England, the Building Societies Commission, the Treasury and the Department of Trade and Industry. The Serious Fraud office was set up to investigate and prosecute significant and complex fraud.
The Bank of England.
The Bank of England was established in 1684 by Act of Parliament and Royal Charter as a corporate body. Its entire capital stock was acquired by the Government under the Bank of England Act in 1946. It is the heart of the City of London and Britain’s central bank. The Bank’s main functions are to execute monetary policy, to act as banker to the Government, to issue banknote and to provide central Banking facilities
for the banking system that is the Bank is responsible for the financial system as a whole; it is “lender of last resort”. The Bank’s main objective is to support the Government in achieving low inflation. Unlike some other central banks the Bank can not act independently of the Government. Decisions on changes in the interest rates are taken by the Chancellor of Exchequer. The Bank’s role is to advise the Chancellor and to carry out his decisions. The 1999 (November) interest rate was 5.5%.
As banker to the Government the Bank of England is responsible for managing the National Debt. It has the sole right in England and Wales to issue banknote. The note issue is no longer backed by gold but the Government and other securities. The Scottish and Northern Ireland Banks have limited rights to issue notes and those must be fully covered by holdings of the Bank of England notes. Coins can be provided by the Royal Mint.
The Bank of England can influence money market conditions through discount houses. If on any day there is a shortage of cash in Banking system, the bank relieves the shortage either by buying bills from the discount houses or lending directly to them.
The Bank of England is responsible for supervision of the main wholesale markets in London for money, foreign exchange or gold bullion.