The Conservative government had still not completed its first six months in office when it presented the City with an extraordinary opportunity. Without warning, on 23 October 1979, the
Chancellor of the Exchequer,
Sir Geoffrey Howe, announced the scrapping of all remaining exchange controls. These restrictions on foreign investment had been imposed as an
emergency measure at the outbreak of the Second World War and, in one form or another, had remained in place for the thirty-four years since Hitler’s demise because of the Treasury’s
fear that if Britons were allowed to take significant sums of money out of the country they would surely do so, triggering sterling’s collapse. What this meant for the British tourist and
small investor is described above,
EN33
as is the role of North Sea oil revenue in negating the risk of a flight from sterling. For the City, the
removal of the restrictions meant that decisions could finally be made to invest wherever in the world there was the hope of making the best return. This had profound consequences for the domestic
economy. UK-based companies seeking City finance would henceforth find their competitiveness judged by global rather than purely national comparisons. Naturally, this removal of financial
protectionism was condemned by the Labour front bench and by those who feared either that there would be a withdrawal of British investment from British companies, or else that continued investment
would become conditional on the driving down of wage costs to the level of the cheapest competitor, which would have dire consequences for the British worker’s standard of living. That, after
all, was the logic of capital without borders seeking the best return. And the money appeared to follow the logic. While the City’s net investment in UK securities increased from £1.9
billion in 1978 to £2.4 billion in 1982 (a rise of 26 per cent, which was negated by inflation), in overseas securities it soared from £459 million to £2.9 billion (up by 531 per
cent). The foreign assets of British portfolio investors increased from £12.6 billion in 1979 to £215.2 billion in 1989.
22
Accordingly, these assets became one of the most important factors in the national wealth. By the end of 1988, the UK’s net external assets represented one fifth of GDP, a higher proportion
than for any other front-rank economy apart from Japan.
23
Was this offshore prosperity garnered at the expense of those trying to run businesses and create jobs on the mainland? The extent to which a continuance of exchange controls during these years
might have diverted investment from abroad to the UK cannot be easily assessed, partly because it is not a zero-sum equation. In so far as exchange controls would have damaged overseas
opportunities, they might have curtailed the amount of new capital available to invest at home and thus proved wholly counterproductive. What was more, removing barriers fostered reciprocity. Much
as British overseas investment soared during the eighties, so did investment by foreigners in Britain. Portfolio investments by foreign investors in the UK increased from
£10.4 billion in 1979 to £110.7 billion in 1989.
24
By 1992, foreign companies (particularly American, but also European
and Japanese) accounted for one third of investment in British manufacturing and one fifth of its output.
25
Nationalists and socialists were
prominent among those who believed such unrestrained free trade increasingly placed the country’s economic base at the mercy of decision-makers in distant lands. In 1988, widespread public
outrage greeted the news that the Swiss chocolatier Nestlé was to be permitted to buy Rowntree’s of York. This astonished the trade secretary, Lord Young, who mused that ‘an
outside observer would have formed the impression that chocolate was a strategic raw material’.
26
Then again, Kit Kat and Quality Street
were perhaps not the bow tie-wearing minister’s principal daily treat. When the government considered offers for Land Rover in preparation for privatizing British Leyland, the possibility of
the car and van manufacturer passing into American ownership was met with vociferous opposition from the Labour Party. Ultimately, it was Norman Tebbit who offered the exasperated response to those
who campaigned against foreign ownership that ‘surely it is better for the British people to buy Japanese cars made by British workers than to buy German cars assembled by
Turks?’
27
In Tyne and Wear, where by 1989 over twenty Japanese companies had contributed a large share of the £825 million of foreign
investment that was finally rejuvenating the area, the chief executive of the region’s local development company admitted that the national gulf in attitudes seemed greater than the
international one: ‘Getting firms in from the South-East,’ he said, ‘had proved much, much harder than getting them from the Far East.’
28
This foreign investment was not just a matter of attracting capital and securing jobs. The ensuing change in the nature and ownership of British companies opened them up to
new approaches and different workplace cultures. As with the money underwriting it, management was internationalized.
In helping to unshackle global capital markets, the abolition of exchange controls further exposed the British economy to what at the time was often pejoratively described as ‘hot
money’ – the rapidly shifting flow of finance between different markets and across national borders in search of the most favourable return. A concomitant development was the birth of
the London International Financial Futures and Options Exchange (LIFFE) which was established in the restored Royal Exchange building adjacent to the Bank of England in September 1982. There, the
dealing in options and futures proved as vibrant as the multicoloured jackets worn by its famously uninhibited traders. Operating in a less restrictive manner, LIFFE was autonomous from the Stock
Exchange and the speed with which ‘hot money’ appeared to be driving the integration of financial markets raised questions as to whether the Stock Exchange’s rules, regulations
and traditional culture were hopelessly out of touch with how global capital wished to do business.
In the early eighties, any person or institution wishing to buy or sell gilts (fixed-interest UK government securities) or shares in Stock Exchange-listed companies needed
to do so through a stockbroker, who would act as their agent. The broker then approached a stock-jobber. Jobbers stood on the floor of the Stock Exchange close to their ‘box’ – a
hexagonal pavilion providing telephone booths (mobile phones were not generally available until 1985 and not in wide circulation until 1987, and then primarily as car-phones), along with the latest
market information – where they would offer brokers buying and selling prices for shares. Trading on their own account, jobbers made money through the ‘spread’ (the difference
between the buying and selling price), while brokers made money by charging their clients commission for negotiating the deal. Under the Stock Exchange’s rules, brokers could not be jobbers
(or vice versa), nor could brokers compete with one another on the basic commission they charged their clients, the minimum rate for which was set by the Stock Exchange. Both regulations were
widely presumed to be as old as the Stock Exchange itself, though in fact they dated from 1908 and 1910, respectively. With transactions in shares and gilts restricted to jobbers and with brokers
accorded the privileges – including a stamp tax concession – conferred upon them by Stock Exchange membership, merchant banks and foreign competition were shut out from participating
directly in the UK securities market.
In the City, there were about ten thousand stockbrokers and one thousand jobbers, the latter employed by just twelve remaining firms (down from 411 in 1920).
29
For the firms’ partners, the benefit of retaining the existing structure was that it assured them a large cut of the profits (albeit with unlimited liability for the
losses). The problem was that partnerships organized on this model had access to far less capital than was at the disposal of the vast US investment banks which dominated the securities market on
Wall Street. If the rules were changed to let such investment banks trade on equal terms on the London Stock Exchange, they would speedily reduce the traditional partnerships to the status of
impotent spectators. It was a reality that emphasized how the self-interest of the existing market-makers no longer served the wider interests of Britain’s financial sector. It explained why,
of the approximately $200 billion raised on global securities markets in the course of 1985, only $8 billion was raised through the London Stock Exchange.
30
Not only had London slipped behind its rivals on Wall Street and in Tokyo, it had even been surpassed by a second New York exchange, NASDAQ, which had been founded as
recently as 1971.
Left to its own devices, the Stock Exchange seemed content to carry on regardless. Time, however, was running out for such insouciance. The warning shot had been fired as early as 1973 when the
passage of the Fair Trade Act had widened the Office of Fair Trading’s powers of investigation
into restrictive practices to include the service sector. The subsequent
Labour government duly initiated the OFT’s inquiry into the Stock Exchange. Yet, even allowing for the complexity of the issues and the OFT’s other distractions, the stay of execution
had proved remarkably long and it was not until January 1984 that the case was scheduled to be heard in the Restrictive Practices Court. In the meantime, the status quo’s defenders drew hope
from the arrival in power of the Conservative Party. In 1980, the Stock Exchange’s chairman, Sir Nicholas Goodison, tested the waters by calling upon John Nott, the trade secretary, and
asking him to call off the OFT’s inquiry. Nott refused. Frustratingly, it seemed the Conservatives meant what they said and actually intended to attack anti-competitive practices wherever
they might be found. As Nott summed it up: ‘I did not see how we could apply one law to capital and another to labour, given that we were about to launch an attack on the restrictive
practices of the trade unions.’
31
Understandably, the defenders of the Square Mile’s closed shop grew more alarmed as the date for the
denouement in the Restrictive Practices Court drew nearer without any sign of ministerial intervention. The last prospect of salvation appeared lost when, in June 1983, Thatcher installed Cecil
Parkinson as trade and industry secretary. The grammar school-educated son of a Lancashire railway worker, Parkinson had little instinctive sympathy, as he later put it, for an institution
‘which had more in common with a gentleman’s club than a central securities market’, and which ‘would become as redundant as the Manchester Stock Exchange unless we really
opened it up to the big players’.
32
Parkinson, however, wanted to see the reform properly embedded rather than imposed with the sudden force of a tornado. The latter was more likely if the Stock Exchange fought its corner in court
and lost. Thus when Goodison went to see Parkinson he found him receptive to a compromise solution. The government would call off the OFT’s inquiry on the condition the Stock Exchange
fundamentally reformed itself. The central plank was the abolition of fixed minimum commission on share trading, but after that first step all the other major restrictions fell away. The division
between brokers and jobbers would end. Stock Exchange membership rules would be relaxed. Where previously only individuals were entitled to membership, now corporate entities could belong. In
particular, British merchant banks and foreign investment banks would be free to engage fully in the securities market – an invitation likely to ensure the annihilation of the traditional,
and woefully under-capitalized, brokerages and jobbing firms.
Some of Goodison’s colleagues were incredulous, believing that he had effectively surrendered without a fight and had agreed to implement everything that the OFT could have insisted on
only if it had won outright. At the same time, Parkinson’s critics thought he had been hoodwinked by a City cabal making hollow promises to reform itself. Having been happy to let the
Stock Exchange face the consequences in court, Thatcher was among those who needed persuading that her trade and industry secretary had not gone soft.
33
In fact, the Goodison–Parkinson deal made perfect sense. Its terms would change the City as much as if the OFT had won its case against the Stock Exchange, but
instead of only having the mandatory nine months to implement the revolutionary change, three years had been secured to provide the necessary period of adjustment. That time would run out on 27
October 1986, a day whose gravity earned it the soubriquet ‘Big Bang’.
In the three years between the Goodison–Parkinson accord and Big Bang, the City underwent the most fundamental transformation since the First World War disabled global capitalism and, with
it, London’s role at its heart. The loosening of the Stock Exchange’s restrictions heralded the creation of integrated firms in which merchant banks were able to combine their
traditional capital-raising, underwriting and asset management functions with the ‘market-making’ securities trading which had previously been the preserve of brokers and jobbers. For
the British merchant banks, this meant having to learn how to become huge, multi-disciplinary and highly capitalized investment banks on the American model. Motivation was provided by the
realization that American giants like Salomon Brothers, Morgan Stanley and Goldman Sachs already enjoyed the benefit of decades of experience of this sort of investment banking and could
potentially run their
ingénue
British competitors out of the City if the latter failed quickly to master the art.
The process inspired mixed emotions for the partners of the old brokerages and jobbing firms. On the debit side, the venerable businesses to which they had, typically, devoted their adult
careers, were about to cease trading as independent entities, swallowed up by the new generation of investment banks. Extinguished were such once familiar and evocative names as the brokers Kitcat
& Aitken and the stock-jobbers Bisgood Bishop and Pinchin Denny. Mergers erased other finance houses, too, including the splendidly Dickensian-sounding bank of Charterhouse Japhet. On the
credit side, premium prices were offered by purchasers seeking to outbid their rivals in the rush to acquire the pick of the partnerships. The best traders were paid salaries vastly exceeding their
previous remuneration. The agreeable succour for the partners – of which there were roughly five hundred – was that they were able to depart as millionaires. In purchasing Akroyd &
Smithers and Rowe & Pitman, the merchant bank Warburg’s was generally assumed to be restructuring itself into an investment bank capable of taking on the big guns of Wall Street. And
unlike in the United States, where between 1933 and 1999 the Glass-Steagall Act prevented ‘high-street’ commercial banks from being also investment banks, Britain’s clearing banks
were free to join the fray. Of the ‘big four’, only Lloyds resisted the temptation to develop a
significant investment banking division. Barclays created its own
investment arm, BZW, by buying the brokerage of De Zoete & Bevan and the jobbers Wedd Durlacher Mordaunt for a sum reportedly in the region of £150 million. This was a generous valuation
considering that only three years earlier the combined capitalization of all the City’s brokerages was estimated at £150–200 million.
34
Gripped by a mood that resembled panic buying, banks made almost $0.5 billion of such acquisitions in the lead-up to Big Bang.