Why is the City in London?

Just why is the globe\’s international financial centre on a rainy island off NW Europe? Sure, we could argue that it\’s some remnant of Empire, could argue about language, all sorts of things.

We could also note an interesting historical point: there have been two great bursts of globalisation. 1880 ish to 1914 and 1980 ish to today. Both times Germany has, in the international division of labour, specialised in heavy manufacturing, the UK in finance.

I\’ve long argued, not particularly seriously mind, that it\’s to do with the Common Law. We have a legal system which is flexible enough to incorporate the complexities of financial contracts and financial innovation.

I might not be all that far wrong either:

Here is the actual Irish legislation which is just one page; the main action is in the attached schedule which is the Intercreditor Agreement signed between the Eurozone countries excluding Greece that governs the overall loan.  Here’s a little irony –

This Agreement and any non-contractual obligations arising out of or in connection with it shall be governed by and shall be construed in accordance with English law.

Thus, as with the day-to-day operating language of the Eurozone, when it came time to need a legal architecture for an agreement among the countries, it is supplied by its most prominent non-member.

7 comments on “Why is the City in London?

  1. There is the location as well. Mid way between the American markets and the Asian markets so able to transact with both.

  2. Common law has a couple of other advantages:
    a) Following precedent makes decisions relatively predictible.
    b) Civil law is relatively paternalistic and may favour the weaker party on principle. This frightens commercial interests.
    c) English courts work relatively swiftly.
    d) English judges (in commercial disputes at any rate) are experienced, skilled and impartial. These are prized characteristics.

  3. But if the merits of the legal system were the central issue, disputes would all be settled under Scots Law.

  4. History has a very important role I think. Inertia means that cities can retain a role as financial centres for a very long time provided nobody does anything really stupid to drive the business away or external forces (military) intervene. New York has been the US financial centre since the C19 at least. If my memory serves right we took over from the Dutch in Europe about three hundred years ago, have never really lost our preeminence. I think of it as the Harley Street effect – that is where the best doctors are / have been for years and it generates a virtuous circle.

  5. Sorry Tim, but the “City” does not exist. It is an offshore of Wall Street. Goes more or less like this:
    – Wall Street wants to base their European operations in London, mostly because their expats are comfortable with the language;
    – Wall Street wants to attract pan-European workforce to its European headquarters;
    – Pan-European workforce wants to be in London because of favorable tax regime (non-dom rule especially)
    – Wall Street happy.

    This is a virtuous circle which the previous government is doing its best to screw up, and apparently the new administration is planning to continue.

  6. Or, slightly in slightly longer form “95%+ of the activity that takes place in the City has absolutely cock-all to do with the European activities of Wall Street firms, so your last comment is about as wrong as wrong can be.

    London is more internationalised than any financial centre outside of Middle East/Asia, which is why most Wall Street firms base their European operations there. But it’s also why most big European firms base their investment banking operations there, why vast numbers of independent funds are based there, why many firms of all nominal nationalities base particular global trading departments there, etc, all of which vastly outnumber intra-Europe business carried out by Wall Street firms.

    As an American, it’s easy for you to get the impression that the big Wall Street firms are crucial to, rather than just an important but minor part of, the global financial system (since they more or less own your government) – but they haven’t had that importance *globally* for many years, if ever…

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