In 1971 Richard Nixon set in train the sequence of events that has given the contemporary capitalist world its distinctive structure. What we now know loosely as ‘globalization’ began in earnest with the removal of the lynch pins of the Bretton Woods international monetary system—the breaking of the gold–dollar link in 1971 and, in 1974, the abolition of all exchange controls on capital movements to and from the US. The money market, as Schumpeter accurately observed, is the headquarters of capitalism, and Nixon’s actions were in part intended to ensure that it remained, if not geographically within US jurisdiction, then at least firmly under the control of its financiers. By the late 1960s, a view had formed in the US that the post-war international financial system was no longer in its interests. On the one hand, a revitalized Wall Street, riding on the backs of US multinational corporations, pressed for the global reach it had desired since the 1920s; it was now in a fit condition to throw off the Bretton Woods fetters. On the other hand, this ambition coincided with a re-definition of the American state’s own interests. An unimpeded inflow of capital, it was now argued, could finance the hegemon’s spiralling expenses. Doubts were also raised about the costs that global monetary responsibility might bring. Robert Gilpin’s influential view, later expressed in his US Power and the Multinational Corporation: The Political Economy of Direct Foreign Investment (1975), was that Britain had been weakened by its management of the international monetary order, and that this had played a part in its loss of dominance in the twentieth century. In 1944, the US had had little choice but to accept the hegemon’s burden; but by the early 1970s, things were beginning to take on a different complexion.
The severance of the link between the dollar and gold created a regime of floating exchange-rates and made the successive abandonment of the exchange controls on international capital-flows by the other major capitalist states almost inevitable. It should also be pointed out, however, that with the revival of the world economy after 1945, Bretton Woods had become increasingly difficult and costly to implement. By the 1970s, over a quarter of the Bank of England’s staff was employed in monitoring and enforcing the controls; a similar number in the banks and markets were doubtless busy devising schemes by which to evade them. The existence of formal exchange controls had also provided a basis for the growth of unofficial currency markets. The most important of these was the informal, parallel capital-market in Eurodollars—the result of the City of London’s ingenuity in creating and exploiting a loophole in the Bretton Woods system, by which resident non-nationals could trade in the huge stock of dollars that US deficits had placed in the hands of its foreign creditors. In the 1960s, hampered by their own domestic controls and, at this juncture, by continued US support for the Bretton Woods regime, American banks followed the dollars and established bases in London. The colonization that would lead to the eventual extermination of the City’s native ‘gentlemen’ had begun.
Nixon’s abandonment of the dollar–gold standard and the opening of the weakened financial sluice-gates wrought further rapid transformations in all sectors of the money market. Restrictive practices within the closed, locally embedded stock markets had been sustained by the Bretton Woods system. Their ‘deregulation’ was the corollary of a regime of floating exchange-rates. A global market in equities/securities had now become possible but first, these old social and legal structures had to be swept away. ‘May Day’—May 1, 1975—saw the abolition of barriers to entry and fixed commissions on the New York Stock Exchange. With no controls on capital movements to the US, foreign investment—British included—flowed into Wall Street. Overnight, the London Stock Exchange, along with all the rest, became globally uncompetitive and increasingly restricted to poor-grade domestic securities. The US action set off a tidal wave of responses: ‘competitive deregulation’ swept around the world during the 1980s; by 1992, even the Japanese were pushed into a grudging and very gradual relaxation of their ‘closed shop’ stock-exchange rules. As in all previous hegemonic extensions of the market, the odds were that the strongest players would, as intended, dominate the ‘levelled’ playing field—although before the implosion of the Japanese economy, the outcome was by no means certain. Since the mid-1990s, however, US firms have inexorably come to dominate the global money and capital markets.
The early threat that London’s stock market might be reduced to a local and declining backwater had moved even the beleaguered Labour government of the late 1970s to issue a lawsuit against the London Stock Exchange, alleging that its modus operandi was in ‘restraint of trade’. The ‘winter of discontent’ and subsequent electoral defeat in 1979 saved Labour the trouble of assuming the then uncharacteristic role of market deregulator. Thatcher’s first act was to follow the US lead and to abolish all remaining exchange controls, before zealously setting about the outstanding matter of Stock Exchange rules.
It is at this juncture that Philip Augar takes up the story. Armed with a Cambridge doctorate in history, Augar—presumably wearing the ‘shoes with laces, trousers with braces’ described in chapter 4—had entered the world of stockbroking at Fielding Newson Smith in 1978, and subsequently worked at Natwest and then Schroders investment bank, quitting in 2000 after its sale to Citigroup. The Death of Gentlemanly Capitalism is a thoughtful, intelligent work, rich in personal insight and anthropological detail, laying out a distinctive narrative of the City’s decline. The book’s opening section portrays the ambience in the City on the eve of Thatcher’s reforms as reminiscent of a ‘boarding school, officers’ mess or the junior combination room of an Oxbridge college of the 1950s’, with brokers distinguished from merchant bankers by style of cufflinks, shoes and ties; by sporting interests and weekend haunts. Augar documents the regional and class antagonisms—the public-school ethos and predominantly Home Counties origins of the merchant bankers and brokers; the grammar-school training and provincial backgrounds of the clearing (retail) bankers. He captures well the shocks administered to the ‘twilight world of gentlemanly capitalism’ by the arrival of computerized trading floors and extended working days, and by the disruption of such deeply entrenched class hierarchies.
Augar’s account charts the striking disappearance of almost all the elite family firms and partnerships of merchant bankers and stockbrokers that had, for centuries, been at the heart of the world’s dominant financial and commercial centre. Only Cazenove, Lazards and Rothschild now remain, as small and peripheral ‘niche’ players. The cream of Britain’s clearing banks—Barclays, NatWest and Lloyds—showed both an unwillingness and, more importantly, an abject inability to operate in the harsher environment after 1986. Augar deplores what he sees as an ‘unnecessary’ loss of control over national economic destiny, writing presciently (in late 1999) that the first serious bear market of the twenty-first century would see the ‘downsizing’ of activity in London, as Citigroup, Morgan Stanley et al withdrew to their native core. While conceding that US power and the loss of autonomy brought about by deregulation would inevitably have diminished domestic involvement and control, Augar stresses that it is only British firms that have disappeared, or strategically withdrawn, from global investment banking. Continental competitors such as Deutsche Bank, SBC and ING maintain a strong and growing London presence.
How did what Augar terms ‘one of the most abject surrenders in business history’ come about? The Big Bang of 1986 abolished the Stock Exchange’s closed-shop membership restrictions, the requirement that its members act in a ‘single capacity’ (that is, as either brokers or jobbers, but not both) and its fixed commissions. Before deregulation, the trading of securities/equities on the London Stock Exchange bore scant resemblance to microeconomic-textbook models of a perfectly competitive ‘market’. The ‘sell-side’ comprised a vertically segregated hierarchy of merchant banks, brokers and jobbers, embedded within structures of social solidarity, informal custom and practice (based on the Exchange’s own rules), under the watchful but genial eye of the Bank of England. In other words, the stock market was governed by a local ‘self-regulation’, held together by the face-to-face contact of status equals whose common social origins eased the informality of its operation.