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How the City of London Shaped Modern Finance

November 6, 2018 • FINANCE & BANKING, Banking Innovation

The City of London occupies a divisive role in our collective aspirations and viewpoints. For some, it is the global epicenter of dynamism, influence, and power, while for others it serves as a reminder of all that is wrong with post-2008 finance, with the unabated deregulation and rampant inequality that is its hallmark. One thing that everyone can agree on is that the City of London, in spite of the disruptions of recent years, remains the center of global finance and is the economic powerhouse of the world.

Even similar financial behemoths such as Wall Street, Frankfurt’s Bankenviertel, and the La Defense district of Paris are eclipsed by the influence of the Square Mile. While The City owes its domination to a lot of factors, it is mainly down to the role it has played in shaping global finance as we know it today. Here’s how.

 

The Original Champion of Deregulation

Image Source: www.express.co.uk

With the 2008 economic crash making all of us more wary of the dangers of an unregulated financial sector, it can be hard to imagine that this was not always the norm. Following the post-war period, London was languishing as an indebted financial backwater, while New York and Zurich were ascendant. What changed all of this was the “Big Bang” of the 1980s, implemented by then prime minister Margaret Thatcher.

Before this development, which amounted to the greatest deregulation of finance in human history, all of the big financial centers were closely controlled by the government. Capital controls existed even in laissez-faire America, and foreign exchange was tightly monitored, while costly and time-consuming licenses were needed for all kinds of trade. Thatcher’s reshaping of The City paved the way for global deregulation, as London skyrocketed and other financial centers had to adapt to survive. This legacy lives on today.

 

The Creator of Innovative New Products and Services 

Few people know that many of the financial products that are traded around the world. today were in fact created in the City of London. For example, contracts for difference or CFD, are today one of the most popular and widely-traded derivatives on the planet. However, they only came into existence during the early 1990s, when two City traders from UBS Warburg invented them to allow big hedge funds to hedge their exposure to stock on the London Stock Exchange.

Similarly, London was the pioneer for foreign exchange trading, at a time when Wall Street was still occupied with stock trading, despite the clear decline ahead. The first major foreign exchange trading companies opened in The City, and today almost $3 billion of foreign exchanges occur within the Square Mile every day, eclipsing competitors.

 

City of London Skyline At Sunset, United Kingdom

 

Making the Case for Globalization

To conclude, the most important way that London has shaped global finance is through how it has acted as a force for globalization on a scale never before seen. This stretches all the way back to when The City was the center of the British Empire, and continues today, with London being by far the most international center for finance. Whatever happens in the future, this will likely always be the case, as it always has been.

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