LONDON AND PARIS AS INTERNATIONAL FINANCIAL CENTRES IN THE TWENTIETH CENTURY pot

Nonetheless, the Banque de l’Indochine, Banque de l’Alge´rie,and the Banque Impe´riale Ottomane were all major financial institutions.4In 1913,London was also host to some thirty foreign

LONDON AND PARIS AS INTERNATIONAL FINANCIALCENTRES IN THE TWENTIETH CENTURY

This page intentionally left blank

London and Paris as International Financial

Great Clarendon Street, Oxford ox2 6d p

Oxford University Press is a department of the University of Oxford.

It furthers the University’s objective of excellence in research, scholarship,

and education by publishing worldwide in

Oxford New York Auckland Cape Town Dar es Salaam Hong Kong Karachi Kuala Lumpur Madrid Melbourne Mexico City Nairobi New Delhi Shanghai Taipei Toronto

With offices in Argentina Austria Brazil Chile Czech Republic France Greece Guatemala Hungary Italy Japan Poland Portugal

Singapore South Korea Switzerland Thailand Turkey Ukraine Vietnam Oxford is a registered trade mark of Oxford University Press

in the UK and in certain other countries Published in the United States

by Oxford University Press Inc., New York

ß Oxford University Press 2005 The moral rights of the author have been asserted

Database right Oxford University Press (maker)

First published 2005 All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without the prior permission in writing of Oxford University Press,

or as expressly permitted by law, or under terms agreed with the appropriate reprographics rights organization Enquiries concerning reproduction outside the scope of the above should be sent to the Rights Department,

Oxford University Press, at the address above

You must not circulate this book in any other binding or cover and you must impose this same condition on any acquirer

British Library Cataloguing in Publication Data

Data available Library of Congress Cataloging in Publication Data

London and Paris as international financial centres in the twentieth century /

edited by E ´ ric Bussie`re, Youssef Cassis.

p cm.

ISBN 0–19–926949–1 (alk paper)

1 Financial institutions, International–England–London 2 Financial institutions, International–France–Paris 3 Banks and banking, International–England–London.

4 Banks and banking, International–France–Paris 5 International finance.

I Bussie`re, E ` ric, 1955- II Cassis, Youssef.

HG3944.L66 2005

332 1’5’094210904–dc22 2004024144 ISBN 0–19–926949–1

1 3 5 7 9 10 8 6 4 2 Typeset by Kolam Information Services Pvt Ltd, Pondicherry, India

Printed in Great Britain

on acid-free paper by Biddles Ltd., King’s Lynn, Norfolk

in Britain and France: The Age of the Corporate Economy (Oxford, 1995)), and a second,

on ‘Les Strate´gies de commercialisation et de marketing’, in Paris in October 1995.The need was felt by scholars in both countries to compare the financial sector inBritain and France from a business history perspective, and the theme of ‘Londonand Paris as international financial centres, 1890–2000’ was chosen for the thirdconference

The editors would like to thank the many people who have helped them in theirendeavours They are particularly grateful to Kathleen Burk, Forrest Capie, Fran-c¸ois Crouzet, Patrick Fridenson, and Terry Gourvish for chairing the conference’sfive sessions, as well as to Franc¸ois Caron, Maurice Le´vy-Leboyer, Piere de Long-uemar, Roger Nougaret, Geoffrey Owen, John Plender, Geoffrey Wood, and theothers who attended the conference and enhanced the quality of the debates Theyare also grateful to Pascal Boris (BNP Paribas), David Green (Financial ServicesAuthority), David Kynaston (London), David Lascelles (Centre for the Study ofFinancial Innovation), Philip Mallinckrodt (Schroder Salomon Smith Barney), andFre´de´ric Pe´rier (Paris Europlace) for participating in the round table, chaired byMartin Dickson from the Financial Times, which provided a highly stimulatingconclusion to the conference Dr Christophe Revillard, of the University ofParis IV, skilfully edited the final manuscript, Dr J C Whitehouse translatedChapters 3, 11, 13, and 15, and Mr Owen Leeming Chapter 5, from the French.Sonia Copeland efficiently dealt with all organizational issues The editors wouldalso like to express their gratitude to the funding organizations which generouslysupported the conference, namely the Bank of England, the Banque Vernes Artesia,BNP Paribas, the Caisse des De´poˆts et Consignations, the European Association forBanking History, Euronext, and N M Rothschild & Sons

Y.C

This page intentionally left blank

1 Introduction: Comparative Perspectives on London and Paris

as International Financial Centres in the Twentieth Century 1Youssef Cassis

Pa r t II: ‘Go l d e n Ag e’, 1890–1914

4 The City of London and British Imperialism: New Light on

Niall Ferguson

5 Paris, London, and the International Money Market:

Marc Flandreau and Franc¸ois Gallice

6 London Banks and International Finance, 1890–1914 107Youssef Cassis

7 Banking Alliances and International Issues on the

Samir Saul

Pa r t III: Fr o m Gl o b a l Re a c h t o

Re g i o n a l Wi t h d r a w a l, 1914–1958

8 Established Connections and New Opportunities: London

as an International Financial Centre, 1914–1958 153

P L Cottrell

9 The Challenged Competitiveness of the Paris Banking

Hubert Bonin

Pa r t IV: Th e Ro a d t o Gl o b a l i z a t i o n , 1958–1980

10 Crisis and Opportunity: The Policy Environment of International

Catherine Schenk

11 The International Opening-up of the Paris Bourse:

14 London as an International Financial Centre, 1980–2000:

Richard Roberts

15 The Future of the Paris Market as an International Financial

Centre from the Point of View of European Integration 313Andre´ Straus

List of Figures

4.1 British overseas investment earnings as a percentage of

4.2 Overseas investment as a percentage of British GNP, 1856–1913 63

4.3 Value of colonial and foreign government bonds quoted on the

London Stock Exchange as a percentage of GDP, 1853–1913 64

4.5 Debt–revenue ratios for Egypt and Turkey, 1876–1913 70

4.7 Capital flows from Britain to Egypt and Turkey, 1865–1914 71

4.8 Anticipated and actual returns on eleven governments’

4.9 Anticipated and actual returns on nine governments’

5.2a Paribas ‘pure’ foreign portfolio, 1885–1913 88

5.5b Assets nostri: share of foreign and Anglo-foreign

5.7a Liabilities lori: geographical distribution, 1885–1913 96

10.1 Annual growth rate of Eurocurrency market

10.3 Share of total Eurobond issues by type of borrower 211

11.1 Average monthly transactions on foreign securities

compared with those on French securities in the

11.2 Admission of foreign securities to the official

12.1 Foreign banks in London, 1870–1980 (direct representation) 249

12.3 Percentage of deposits to total deposits, by origin 260

14.1 Employment in wholesale financial services

15.1 Borrowing requirements of public administrative bodies 318

15.2 Ratio of foreign share transaction to total transaction 319

List of Tables

4.1 Cumulated flows and stocks of British overseas capital 65

4.2 Measures of indebtedness in Fenn’s Compendium, 1887 67

4.3 Anticipated and actual returns on a selection of

5.1 Stylized ‘monetary’ sub-balance of Paribas 85

7.3 Stock issues for capital to be used in France 124

7.4 Foreign stock issued by the syndicates studied 126

7.7 Underwriting syndicates for Scandinavian loans 136

8.1 Overseas capital issues made on the UK capital market,

12.3 Ratios of deposits of domestic banks and deposits

12.6 Ratio of deposits to total deposits, by origin 259

12.7 Advances by British and foreign banks to UK

12.8 Investment of foreign banks’ liquid reserves 262

13.1 The achievements of Paribas on the international

13.2 Cre´dit Lyonnais: a comparison of the results obtained

in the international issues field, 1964–1965 270

13.3 Co-operation with British and continental banks 272

14.1 London wholesale financial services activities, 2000 293

14.3 International cross-border bank lending, market share, 2000 294

14.5 Number of foreign companies listed on selected exchanges, 1999 294

14.6 Average daily turnover of OTC derivatives, 1998 296

14.7 Holdings of institutional equities in leading financial centres, 1999 296

15.1 Ratio of foreign share transactions to total transactions 320

Notes on Contributors

m a e b a k e ris a lecturer at the University of Leeds

h u b e r t b o n i n is a professor at the Institut d’E´ tudes Politiques de Bordeaux

E ´r i c b u s s iE `r eis a professor at the University of Paris IV

y o u s s e f c a s s i sis a professor at the University of Geneva and a visiting fellow atthe Business History Unit, London School of Economics

m i c h a e l c o l l i n s is a professor at the University of Leeds

p l c o t t r e l lis a professor at the University of Leicester

o l i v i e r f e i e r t a gis a professor at the University of Rouen

n i a l l f e r g u s o nis a professor at the University of Oxford

m a r c f l a n d r e a uis a professor at the Institut d’E´ tudes Politiques de Paris

f r a nC ¸o i s g a l l i c e is a researcher at the University of Paris X-Nanterre

r a n a l d m i c h i e is a professor at the University of Durham

a l a i n p l e s s i sis a professor emeritus at the University Paris X-Nanterre

r i c h a r d r o b e r t sis a reader at the University of Sussex

s a m i r s a u lis a professor at the University of Montre´al

c a t h e r i n e s c h e n kis a senior lecturer at the University of Glasgow

a n d rE ´ s t r a u sis a research fellow at the CNRS

This page intentionally left blank

Introduction: Comparative Perspectives

on London and Paris as International Financial Centres

in the Twentieth Century

Yo u s s e f Ca s s i s

Throughout the ‘long nineteenth century’, London and Paris were the world’s twoleading financial centres Whether an international financial centre is defined as acluster of financial service providers serving the requirements of either a region, acontinent, or, indeed, the whole world, or as a central location where an area’sfinancial transactions are coordinated and cleared,1the British and French capitalswere at the forefront in fulfilling these tasks Their financial markets were ahead ofthose of other European centres—Amsterdam, Brussels, Hamburg, Frankfurt, and,from 1870, Berlin—as well as New York This hierarchy changed during thetwentieth century with the rise, first, of New York and, later, Tokyo AlthoughLondon, Paris, and New York competed during the 1920s, New York’s globaldominance had become clearly established by 1945 While London from the 1960sre-emerged, and Tokyo from the 1980s emerged, as global financial centres along-side New York, Paris, despite some attempts during the 1960s, remained in the

‘second division’, behind Frankfurt and Zurich in Europe, and Hong Kongworldwide Only in the closing years of the twentieth century did Paris appearcapable of re-establishing itself as a prime European financial centre

The destinies of the two centres thus followed parallel courses until the 1950s,thereafter diverging, although significant differences, and similarities, can be ob-served during both eras The main differences during the first sixty to seventy yearssurveyed by this volume, say from 1890 to 1958 (and even earlier during the nine-teenth century), were a matter of size and international outlook London was alwaysthe larger, by a significant margin There are no available statistics for the magnitude ofinternational financial centres, especially before 1960, and, indeed, no clear criteriaregarding the basis on which to rank them Nevertheless, all the suggestive indicatorsfor 1913, a convenient vantage point for an approximate quantitative comparisonbetween the two centres, clearly point to London’s advantage

In terms of financial capacity, Britain was by far the larger exporter of capital,with a stock of foreign investment reaching some $18.3bn (about 42 per cent of the

world’s total) as against $8.7bn for France (20 per cent and second only toLondon).2Many more foreign issues were floated in the City, whether for govern-ments or private companies, than in Paris, and London’s banks, primarily themerchant banks, were more likely to lead international syndicates The bulk ofworld trade was financed through the medium of bills of exchange drawn onLondon, with Paris only playing a supporting, parallel role, primarily withinEurope London’s huge discount market hardly had any equivalent in Paris TheLondon Stock Exchange was nearly twice as large as the Paris Bourse, with thenominal value of the securities quoted on the two markets being respectively

£11.3bn and £6.2bn in 1913

The largest French bank, the Cre´dit Lyonnais, was on a par with the leadingthree British clearing banks (London City & Midland Bank, Lloyds Bank, andLondon County & Westminster Bank), with deposits of c £100m in 1913 It hadonly been rivalled as the world’s largest bank since the turn of the century.Although it had a network of foreign branches, including a powerful presence inthe City, the Cre´dit Lyonnais’s stature was a consequence of its domestic, ratherthan its international, affairs In any case, British international banking was primar-ily conducted by merchant banks and corporate overseas banks, which numberedthirty-one in 1913 and had collectively 1,387 branches abroad.3There were fewerFrench overseas banks (a dozen), since the large deposit banks mostly undertookthis type of business Nonetheless, the Banque de l’Indochine, Banque de l’Alge´rie,and the Banque Impe´riale Ottomane were all major financial institutions.4In 1913,London was also host to some thirty foreign banks from twelve different countries,including the four largest French banks (Cre´dit Lyonnais, Socie´te´ Ge´ne´rale, Comp-toir National d’Escompte de Paris, Banque Nationale pour le Commerce etl’Industrie), three of the four ‘D’ German banks (Deutsche Bank, Dresdner Bank,and Disconto-Gesellschaft), and major American trust companies (Equitable TrustCompany of New York, Guaranty Trust Company of New York, Farmers’ Loanand Trust Company, International Banking Corporation).5 There were somefifteen foreign banks in Paris in 1913, from seven countries, including five British(Lloyds Bank, London County & Westminster Bank, as well as the Anglo-EgyptianBank, the London & River Plate Bank, and the Hong Kong & Shanghai BankingCorporation), but (for political reasons) no German banks.6

London was also more international, or truly global, as opposed to Paris’ssomewhat regional specialization British capital flowed to nearly all parts of theworld, though with a clear preference for the Americas (34 per cent for NorthAmerica and 17 per cent for South America), the balance being more or less equallydivided between Europe (13 per cent) Asia (14 per cent), Africa (11 per cent), andAustralasia French investors, on the other hand, favoured Europe (includingRussia) and the Middle East (Ottoman Empire and Egypt), which togetherabsorbed 60 per cent of their foreign investment And, while the British Empiretook up 40 per cent of the metropolis’s overseas investment, the smaller andgeographically more restricted French empire received a not insignificant 13 percent.7These differences were largely reflected in the geographical distribution of

the securities quoted on the London Stock Exchange and the Paris Bourse.However, both were highly internationalized markets, with foreign securitiesaccounting for more than 50 per cent of stocks traded As we have just seen,foreign banks established in London and the London-based multinational bankscame from, and went to, a greater number of countries.

It should be emphasized that, on most if not all these counts, Paris was secondonly to London The differences that have been highlighted must be consideredalongside the intense vibrancy of Paris as an international financial centre during thebelle e´poque, the French Edwardian Age, when its financial market is aptly described

in this volume by Alain Plessis as a ‘‘noteworthy number two’’ Nevertheless, evenduring this era of broadly parallel developments, the gap between the first andsecond international financial centres was substantial, and this had more to do withLondon’s exceptional position than with any failings on Paris’s part

The financial capacity of both centres was weakened by the impact of the FirstWorld War, though more so in the case of Paris, not least as a consequence of theRussian losses in 1917, than in that of London While the pound struggled to return

to gold at its pre-war parity, eventually accomplished in 1925, the franc sufferedtwo severe crises in 1924 and 1926 before being officially stabilized in 1928 at a fifth

of its pre-war value French financial institutions were severely weakened byinflation and the depreciation of the franc In real terms, the Cre´dit Lyonnais’stotal balance sheet did not regain its 1913 level before 1931.8In terms of size, theFrench big deposit banks were no longer in the same league as their Englishcounterparts In 1929, the total assets of Lloyds Bank, the largest British bank bythis measure, reached £431m and those of the National Provincial Bank, thesmallest of the ‘Big Five’, £307m as against £112m for the Cre´dit Lyonnais and

£108m for the Socie´te´ Ge´ne´rale.9 A similar difference is observable in the twocountries’ long-term foreign investments While Britain’s total overseas investmentreached $22.9bn in 1938, France’s had shrunk to $3.9bn., behind the United States($11.5bn.) and even the Netherlands ($4.8bn.).10

It thus appears that during a period when both London and Paris lost someground in terms of international status and influence, the gap between the twomarkets actually increased The challenge to London’s world leadership came fromNew York, not from Paris, and this contest over primacy only gradually developedbecause, if capital was henceforth more plentiful in New York, experience andexpertise remained in London.11However, the role of Paris should not be over-looked, especially after 1926, once Poincare´ had de facto stabilized the franc Despite

a conscious attempt at creating an acceptance market, Paris was never able todevelop the range of financial services that would have enabled it seriously tochallenge London However, the Banque de France’s gold reserves and sterlingassets put Paris in a strong position vis-a`-vis London and enhanced its internationalstatus, particularly during the immediate aftermath of Britain’s departure from gold

in 1931 (in many respects the real turning point in the City’s history) This led thefinancial journalist Paul Einzig to write of a fight for financial supremacy betweenLondon, Paris, and New York during the early 1930s.12 The depression of the

1930s and withdrawal into regional spheres of influence would put an end to thisrivalry.

The divergent paths which London and Paris took during the second part of thetwentieth century increased the gap separating these two centres with regard totheir roles as providers of international financial services Yet, the overall conditionsprevailing within their two host countries were in many respects similar For banks,the legacy of the war meant, as far as their business operations were concerned, ashift from commercial to government lending Furthermore, state interventiontook a further step after the war In France, this led to the nationalization of theBanque de France and the four major deposit banks (though not the banquesd’affaires), adding to a public sector that already included the Caisse des De´poˆts etConsignations (the recipient of most of the assets of the savings banks) In Britain,only the Bank of England was nationalized, but the Big Five remained under strictofficial control, receiving precise instructions from the Treasury concerning notonly their liquidity but their lending priorities; as Keynes had reflected, they hardlyneeded to be nationalized In both countries, currency convertibility was onlyofficially reintroduced at the close of 1958 And, since the 1930s, the two imperialpowers had withdrawn into their colonial empire and zones of influence Thepound remained the world’s second leading currency after the dollar thanks in largepart to its role within the sterling area, while the franc remained the anchor of thesmaller zone franc

As is well known, the revival of the City of London during the 1960s was a result

of the emergence of the Eurodollar market.13This is not the place to discuss theorigins of these transactions in dollars outside the United States, which have to dowith the United States’ overseas investment and banking regulations, in particularthe so-called Regulation Q (dating back to 1933 and enabling the Federal ReserveSystem to put a ceiling on the rate of interest that banks paid on domestic deposits)

As foreign banks, initially British banks, were able to offer a higher rate, dollarswere attracted to London In the context of a comparison between London andParis, it is of anecdotal interest to note that the first such dollar deposit is tradition-ally considered to have been made in Paris—at the Banque Commerciale pourl’Europe du Nord, a Russian bank whose telegraphic address was Eurobank, hencethe appellation ‘Eurodollar’ However, the Eurodollar market found its home inLondon, not in Paris, for reasons mainly connected with the amount of expertiseexisting in the City, its tradition as a global financial centre (which had notdisappeared with the depression and the war), the English language, and themonetary authorities’ relaxed attitude towards this new market

Thereafter, the gap between the two centres grew much wider as Londonregained its position, alongside New York, as the world’s leading financial centre.Indicators of size and performance are no more perfect for the late than for the earlytwentieth century, but those available are telling International banking activity wasfar more intense in the United Kingdom than in France The share of the former,measured by the foreign assets held by the country’s deposit banks, was 17.1 percent in 1965 and 25 per cent in 1970, as against 4.3 and 6.8 per cent for the latter.14

The number of branches of foreign banks in London rose from 54 in 1955 to 118 in

1970, as against 16 to 18 in Paris during the same period.15A wide array of figures isavailable for the very recent years in Richard Roberts’s chapter in this volume,which compares London with other leading financial centres with regard to anumber of key activities The contrast between London and Paris is striking.There were 481 foreign banks in London in 2000 as against 187 in Paris Thatsame year, the United Kingdom’s share of international cross-border lending was

19.5 per cent, as against 6 per cent for France In 1998, London had a 32 per centshare of the average daily turnover in foreign exchange trading, as against 4 per centfor Paris In 1999, 499 foreign companies were quoted on London Stock Exchange,

as against 169 at the Paris Bourse

These broad quantitative comparisons should assist to place the chapters thatfollow in an overall perspective Throughout the twentieth century, there havealways been substantial differences in both the scale and the scope of the operations

of London and Paris as international financial centres Moreover, these have beengreater than those prevailing in most industrial sectors, which until the 1960s werefar from insignificant.16And, unlike most sectors, and, indeed, the economy as awhole (whether measured by GDP or GDP per head), there has been no conver-gence between the size and overall influence of London and Paris as internationalfinancial centres since 1945 The two markets were in fact closer when thedifference between the sizes of the British and the French economies was at itsgreatest (Britain’s GDP was 69 per cent higher than France’s in 1913), and furtherapart when this difference was at its narrowest (about 3 per cent in favour of France

in 1989, and 8 per cent in favour of Britain in 2003)

This raises the question of the comparability of the two centres and, moregenerally, of the conditions under which comparative history can be undertaken

In a previous discussion of the matter, I had observed that comparative historywould flourish when two alternative conditions were met: on the one hand,when the countries had a relative homogeneity—in terms of size, level of develop-ment, historical experience; and, on the other hand, when comparing a countrywith the leading power of the day, in order to measure the gap separating it fromassumed best practice As far as Britain and France are concerned, the first conditionwas met from the beginning of the seventeenth to the end of the nineteenthcentury Thereafter, especially in the field of economic and business history, themotivation for Anglo-French comparisons weakens since the two countries were,

in turn, overtaken by new competitors—the United States, Germany, and laterJapan.17

From this perspective, London and Paris as international financial centres presentsome peculiarities in comparison with the two ‘host’ countries’ general courses ofeconomic and business development It is, for example, significant that the dis-course on the performance of the financial sector, whether by contemporaries or byhistorians, contains no reference to two popular though increasingly discardedconcepts used to analyse the two countries’ respective business and economicperformance: French backwardness and British decline This could be explained

by the fact that both centres enjoyed what was undoubtedly their golden ages whenBritain and France were no longer the world’s two leading economic powers.Nonetheless, their standings were not identical Before 1914, London’s pre-emi-nence rested on Britain’s position as a ‘dominant economy’, even though it hadbeen overtaken as an industrial power by the United States during the 1880s and byGermany at the turn of the century London’s, and Britain’s, position derived fromstrengths in foreign trade, services, and finance as well as discharging roles at thecentre of the multilateral payments system.18 Paris’s rank as number two waspossibly less in line with France’s economic power and international influence Inboth countries, there were discussions of a mature or rentier economy and concernsexpressed about excessive capital exports to the detriment of domestic industrialinvestment, though they have been dispelled by historical research.19 However,from a business history perspective, the emphasis has been on the dynamism andentrepreneurship of British and French bankers and financiers and, whateverdoubts might have been raised, on the efficiency of their capital market.

The issue of decline has been discussed in connection with both centres, after theFirst and, especially, the Second World War, but in a context quite different fromsimilar debates related to other fields of business activity or to the two countries’overall economic performance Interestingly, the theme of entrepreneurial failure israrely found in analyses of the performance of London and Paris as internationalfinancial centres The concept, admittedly, has become less fashionable in businessand economic history, though it has far from entirely disappeared and is still referred

to in different guises, whether structural or cultural As far as London and Paris areconcerned, the causes of decline have been considered as primarily exogenous: war,inflation, the sale of foreign assets, constraints on the balance of payments, stateintervention and regulation—which all played in favour of the new main con-tender in world finance: New York Criticisms have been made of financial insti-tutions, but they do not necessarily apply to financial centres taken as a whole.Paris’s lacklustre role as an international market after the Second World War has notbeen attributed to any failure on the part of the French banks but rather to theconstraints resulting from the ‘overdraft economy’ (financing through banks ratherthan capital markets) established by the authorities Conversely, the fact thatvirtually all the merchant banks, once the flower of the City, have been takenover by foreign banks during the last fifteen years of the twentieth century could beconsidered as a case of entrepreneurial failure, though this does not affect the globalsuccess of the City, which is enjoying a position reminiscent of its pre-1914 ‘glorydays’

Whatever these common features, the experiences of London and Paris have alsopresented, as we have seen, a sharp contrast over the course of the twentiethcentury This raises the question: why has there not been a greater convergencebetween the size, range of services, and international openness of the two centressince 1945? The question is relevant given, as we have noted above, the ‘compar-ability’ of Britain and France and the convergence that has taken place with regard

to most other aspects of their economies Moreover, financial activities have always

played an important role in France’s economic life, and repeated attempts havebeen made to promote the role of Paris as an international financial centre andchallenge London’s pre-eminence The most serious contest was mounted duringthe 1860s, when France, spurred by the dynamism of the Pereire brothers and theirrivalry with the Rothschilds, was exporting more capital than Britain, and Napo-leon III seized the opportunity to launch the Latin Monetary Union and a proposalfor a monetary unification.20Paris had no real possibility of supplanting London,but the ambition was there, as it was to be, as we have seen, in the 1920s and, again,

in the 1960s During the latter decade, a series of liberalizing measures intended toenhance the importance of Paris as an international financial centre, in particularwithin the context of the Common Market, were taken However, as in the 1920s,they remained short lived and partially implemented, and any chance of success wasthwarted by the events of May 1968

The reasons for the diverging paths followed by London and Paris over thesecond half of the twentieth century are to be found in both the two markets’capabilities to rise to real global status and the strategic choices made by political andbusiness leaders As far as capabilities are concerned, although the two centresdeclined from 1914, London had fared better, being the much larger centre duringthe 1950s, supplying a far wider range of services and international connections But

it was somnolent For Lord Franks, chairman of Lloyds Bank between 1954 and

1962and a former academic and senior civil servant, ‘it was like driving a powerfulcar at 20 miles an hour’.21Yet the power, inherited from more than a century ofworld dominance, was there and, certainly, in greater abundance than in Paris orany other European centre Making it run at full capacity, however, could nolonger be done on the British economy’s dwindling strength This could only beattained through internationalization, starting with the birth of the Eurodollarmarket and culminating in ‘Big Bang’ in 1986 The choice of opening up theCity was in many respects deliberate, though it was taken in several steps extendingover two decades and it is doubtful whether all its implications, ultimately leading

to the ‘Wimbledonization’ of the City in the 1990s, had been foreseen

Paris did not have the same opportunities for growth during the 1950s and 1960s.Convergence in the financial sector took place during the Trente Glorieuses, butmainly in domestic banking as measured, however imperfectly, by the size of theFrench big deposit banks These institutions, by the early 1970s, caught up withtheir British counterparts and then overtook them a decade later But not ininternational banking The dirigisme of the French state certainly played a role inthis, though liberalizing measures were taken from the late 1950s However, thedegree of control exerted by the British Treasury over the financial sector shouldnot be underestimated Nonetheless, a distinction was made between retail domes-tic banking, denominated in sterling, where exchange controls remained in placeuntil 1979, and wholesale international banking, denominated in foreign curren-cies, above all in dollars, which the Bank of England, unlike other European centralbanks, including the Banque de France, was prepared to leave mainly unregulated.When deregulation took place in all major financial centres during the 1980s and

1990s, London had already asserted its position, with New York and Tokyo, as one

of the world’s three global centres

Strategic choices were thus partly dictated by existing opportunities and, viceversa, in permanently changing conditions But they are also the result of idiosyn-cratic economic and political cultures, which are different though not diametricallyopposed—and thus comparable—in Britain and France Be that as it may, Frenchfinancial leaders have tended to favour institutions, whether publicly or privatelyowned, over markets French banks have been more successful internationally thanParis as an international financial centre, despite the crisis experienced by Cre´ditLyonnais in 1994 When faced with the same opportunities, it is doubtful whetherthe French authorities would have been prepared to open up the Paris markets tothe extent that their British counterparts eventually did—no doubt a heritage ofBritain’s world role In the same way, the global role traditionally played by theCity can be contrasted with Paris’s more European tradition, reflected in theleading French banks’ European strategies There is also a specific financial culturewhich, though present in France and within the Parisian business elite,22has beenpervasive in Britain since the eighteenth century This point arises whether oneconsiders the ‘weight’ of finance in the British economy or the position of thefinancial elites in British society,23a peculiarity well described by the concept of

‘gentlemanly capitalism’ coined by Peter Cain and Tony Hopkins in the

mid-1980s.24

In the end, Paris appears to have been more in the ‘norm’ than London, if the

‘norm’ is for a country to have an international financial centre more or lesscommensurate with its ‘host’ economy’s size and international influence In thatrespect, the City is far more an ‘offshore’ centre than Paris, bringing nonethelessenormous benefits to London and south-eastern England, and to the Britisheconomy as a whole However, the risks associated with such a status remain to

be properly assessed On the other hand, the City has been increasingly uting to the economy of the European Union, with a 55 per cent share of itswholesale financial services in 2000 It has been estimated that a fragmentation ofthis concentration would result in severe losses not only for London but also for theentire European economy.25There remains the question of why Paris, given thedeeper international financial traditions existing in France than in Germany and theconvergence between the French and German economies, has not managed to steal

contrib-a mcontrib-arch upon Frcontrib-ankfurt The contrib-answer will hcontrib-ave to be left for contrib-another volume,though Paris’s ascendancy might have taken place by the time it is published

In the meantime, this volume concentrates on London and Paris, and it should

by now be clear that this bilateral comparison is a worthwhile undertaking.Multilateral comparisons or other bilateral comparisons could be equally or possiblyeven more interesting, but they would serve a different purpose As much as acomparison between London and Paris as international financial centres, this bookintends to be an Anglo-French comparison; in other words, to consider, throughthe prism of finance, several aspects of the two countries’ economic, business,social, and political histories This is undertaken in a ‘parallel’ rather than in a direct

comparative way The following chapters are not in essence comparative; eachprimarily deals with either London or Paris, or with an aspect of either centre’sfinancial activities The objective of this Introduction has been to give the reader afew comparative keys with which to link together the national studies rather thansummarize them In addition, a broad chronological and interpretative framework

is provided in the first two chapters, by Ranald Michie and Alain Plessis, who offer

an overview of the long-term development of each centre from the late nineteenth

to the late twentieth century

For the rest of the book, the comparison between London and Paris has beenconceived as a contrast between two eras of globalization: the pre-1914 years (withfour chapters) and the last four decades of the twentieth century (with six chapters),while two chapters deal with the intervening period of national and regionalwithdrawal Throughout, each chapter on the City is matched by one concernedwith Paris and, for the periods 1890–1914 and 1958–80 (which each comprise offour chapters), two primarily concerned with the functioning of the capitalmarkets, and two with the networks of relationships and the strategies of the leadingprotagonists Nevertheless, differences in both content and approach still remainbetween parallel chapters, with archive-based case studies—more frequent in thecase of Paris—occasionally matching literature surveys Such differences are un-avoidable given the uneven state of historical research on the subject in the twocountries and their idiosyncratic historical questioning, not to mention the authors’personalities These should not deter from the capturing and comparing the nature

of each centre and its market and institutional surroundings at a given period, andfrom better understanding the political economy of Britain and France in thetwentieth century

2 United Nations, International Capital Movements during the Interwar Period (New York, 1949)

3 G Jones, British Multinational Banking1830–1990 (Oxford, 1993)

4 E Kaufmann, La Banque en France (Paris, 1914), 181–201; H Bonin, ‘L’Outre-mer,marche´ pour la banque commerciale de 1875 a` 1985 ?’, in La France et l’outre-mer Unsie`cle de relations mone´taires et financie`res (Paris, 1998), 437–83

5 Y Cassis, La City de Londres1870–1914 (Paris, 1987), 40–2

6 Kaufmann, La Banque en France; L Dufourq-Lagelouse, Les Banques e´trange`res en France(Paris, 1922)

7 M Simon, ‘The Pattern of New British Portfolio Investment, 1865–1914’, in

A R Hall (ed.), The Export of Capital from Britain1870–1914 (London, 1968), 15–44;

J Bouvier, R Girault, and J Thobie, La France impe´riale 1880–1914 (Paris, 1982),

99; J Marseille, Empire colonial et capitalisme franc¸ais Histoire d’un divorce (Paris, 1984),

100–1

8 O Feiertag, ‘Le Cre´dit Lyonnais et le Tre´sor Public dans l’entre-deux-guerres: lesressorts de l’e´conomie d’endettement du XXesie`cle’, in B Desjardins et al., Le Cre´ditLyonnais1863–1986 (Geneva, 2003), 809

9 Banking Almanac (1929)

10 C H Feinstein and K Watson, ‘Private International Capital Flows in Europe in theInter-War Period’, in C H Feinstein (ed.), Banking, Currency, and Finance in Europebetween the Wars (Oxford, 1995), 97

11 K Burk, ‘Money and Power: The Shift from Great Britain to the United States’, inCassis (ed.), Finance and Financiers, 359–69

12 P Einzig, The Fight for Financial Supremacy (London, 1931) See also P Coste, Les GrandsMarche´s financiers: Paris, Londres, New York (Paris, 1932)

13 A recent discussion of the various aspects and implications of the phenomenoncan be found in S Battilossi and Y Cassis (eds.), European Banks and the AmericanChallenge: Competition and Cooperation in International Banking under Bretton Woods(Oxford, 2002)

14 IMF, International Financial Statistics Yearbook (1981, 1988)

15 C Schenk, ‘International Financial Centres, 1958–1971: Competitiveness and mentarity’, in Battilossi and Cassis (eds.), European Banks and the American Challenge, 75

Comple-16 For comparative data, see Y Cassis, ‘Divergence and Convergence in British and FrenchBusiness in the Nineteenth and Twentieth Centuries’, in Y Cassis, F Crouzet, and

T Gourvish (eds.), Management and Business in Britain and France: The Age of the CorporateEconomy (Oxford, 1995), 1–29

17 Cassis, ‘Divergence and Convergence in British and French Business’, 1–2 See also

Y Cassis, Big Business: The European Experience in the Twentieth Century (Oxford, 1997)

18 See F Crouzet, L’E´ conomie de la Grande-Bretagne victorienne (Paris, 1978)

19 See S Pollard, ‘Capital Exports, 1870–1914: Harmful or Beneficial?’, Economic HistoryReview, 38 4 (1985); M Le´vy-Leboyer, ‘La Balance des paiements et l’exportation descapitaux franc¸ais’ in M Le´vy-Leboyer (ed.), La Position internationale de la France,XIXe–XXesie`cles(Paris, 1977)

20 See J Autin, Les Fre`res Pereire Le Bonheur d’entreprendre (Paris, 1984), B Gille, Histoire de

la maison Rothschild, 2 vols (Geneva, 1965); L Einaudi, Money and Politics: EuropeanMonetary Unification and the International Gold Standard (1865–1873) (Oxford, 2001)

21 Quoted in A Sampson, The Money Lenders (London, 1981), 121

22 See for example L Bergeron, Les Capitalistes en France1780–1914 (Paris, 1978); A Plessis,

‘Bankers in French Society 1860s–1960s’, in Cassis (ed.), Finance and Financiers, 147–60

23 See Y Cassis, ‘Financial Elites Revisited’, in R Michie and P Williamson (eds.), TheBritish Government and the City of London in the Twentieth Century (Cambridge, 2004)

24 P J Cain and A G Hopkins, British Imperialism: Innovation and Expansion1688–1914and British Imperialism: Crisis and Deconstruction 1914–1990 (London, 1993) Theconcept of ‘gentlemanly capitalism’ first appeared in Cain and Hopkins’s two articles:

‘Gentlemanly Capitalism and British Expansion Overseas, I The Old Colonial System,

1688–1850’, Economic History Review, 39 4 (1986), 501–25 and ‘Gentlemanly Capitalism

and British Expansion Overseas, II: New Imperialism, 1850–1945’, ibid 40 1 (1997),

This page intentionally left blank

P A R T I London and Paris in Long-Term Perspective,

This page intentionally left blank

by that of Germany, which came to be the dominant force in Europe, but thatwas not accompanied by a similar status for either Berlin before 1939 orFrankfurt after 1945 Instead, London remained the most important financialcentre in Europe, by a large margin, throughout the twentieth century This wasdespite the process of European economic, political, and monetary union after

1945that left Britain on the fringes Similarly, in world terms, the United States’economy came to dwarf that of Britain, as did that of Japan, but Londonremained an international centre of, at least, equal importance to both NewYork and Tokyo Clearly there is a paradox to be explained here which cannot

be ascribed simply to inertia, because New York did appear to have displacedLondon as the dominant financial centre in the world as a result of the SecondWorld War The revival of London as a global financial centre after 1960suggests that not only did the City of London possess underlying strengths,unrelated to general economic and political forces, but also that these strengthswere sufficient to allow it to recover its position in the global hierarchy Inertiaalone could not have achieved that.1

Although it is by no means clear what criteria should be used to measure therelative importance of financial centres, there appears to be no doubt that the City

of London was the most important financial centre in the world by the beginning of

the twentieth century.2

To contemporaries, it appeared obvious because Londonpossessed more banks, issuing houses, investment companies, and brokerage firmsthan anywhere else, as well as larger and more active financial markets AfterCharles Turner had toured the streets of the City of London in 1902 he was in

no doubt that

London is the chief abode of the great god money, whose throne, visible to all men, is theheart of the City From here the greatest and most numerous of his activities areconducted; for London, in spite of the rivalry of New York and the growing importance

of Paris and Berlin as money centres, is still paramount as a headquarters of exchange andbanking.3

On the eve of the First World War the City of London continued to occupy thisposition, possessing as it did the largest money, capital, and securities markets in theworld and the only ones with a truly international role In 1912/13 L D Wilgress, aCanadian banker with both New York and Paris open to him, noted that ‘London

is the word’s financial centre, and is the clearing house for international payments.’4

Similarly, in 1914/15 another Canadian banker, W W Swanson, observed that

‘although New York, Berlin and Paris have become great money centres they havenever been able, despite the adoption of every expedient they could think of, toseriously threaten the paramount position of London as a world market’.5

Theseviews of contemporaries have been endorsed by financial historians who also seethe City of London as the dominant financial centre of the pre-First World War era,only disagreeing on the degree to which it was being challenged by others, mostnotably New York, Paris, and Berlin.6

Nevertheless, though the City of London was the most important financialcentre in the world, finance did not completely dominate its activities Londonremained a major port, and thus home to a host of commercial, marine, and relatedactivities before 1914 The City of London as a financial centre was taking shape inaddition to the City of London as a commercial centre, not instead of it What weredisappearing in the City were residential and manufacturing activities, as the spacethey had filled and the employment they had once provided could no longercompete with the rents and incomes generated by trade and finance At the sametime, the City of London had become an increasingly cosmopolitan centre asinternational rather than domestic activities dominated its activities In London,for example, were to be found representatives of banks from every country in theworld while activity on the money and other markets was both responsive to, and amajor influence upon, international financial forces Similarly, merchants, brokers,dealers, and others in the City provided an essential link in the matching of supplyand demand worldwide, aided by the ability to communicate quickly and reliablyaround the globe using the telegraph The development of international telegraphyhad allowed the City to emerge as the central market for numerous commodities,permitting positions to be adjusted on a continuous basis and so avoid suddenshocks by the anticipation of problems and the sharing of risk Furthermore thecontinuing importance of international commerce in London remained a major

spur for the development of other activities in the City The insurance market,Lloyd’s, was principally engaged in the insurance of ships and the cargoes theycarried, irrespective of nationality, while activity on the Baltic Exchange wasconcerned with the employment of ships internationally Similarly, the growth ofthe City of London as a centre for the world mining industry was related both tothe role it played in the international distribution of minerals and metals and to itsimportance as a financial centre Generally, the City was one of the few centres, ifnot the only one, that possessed the range and depth of expertise, connections, andmarkets that was required to organize, evaluate, and finance major projects in suchfields as transport and mining, considering the risks and uncertainties involved.7

Lying at the heart of the City of London as a financial centre in this period werethe numerous individuals and firms that undertook an enormous variety of financialbusiness The composition of these was continually changing as some groupsdeclined in importance or disappeared, like the private bankers, while othersgrew steadily in importance, such as joint-stock banks operating both domesticallyand overseas Generally, what was driving the City forward as a financial centre wasthe continual turnover of personnel and firms as the new replaced the old, theforeign replaced the British, the public replaced the private, and the balancebetween enterprising and conservative waxed and waned Most marked of all wasthe degree of functional specialization that existed in the City in this periodcompared to other financial centres, including long-established ones in Europelike Paris and Berlin Only a financial centre of the size and connections of the City

of London could support the degree of specialization evident by the late teenth/early twentieth century By 1913 there were some 226 banks and quasi-banks with offices in London These ranged from the merchant banks and discounthouses to the major British joint-stock banks or the branches of large Europeanbanks British banking, for instance, was increasingly dominated by a small number

nine-of banks run from City head nine-offices but operating nationwide branch networks,while the City was also home to a number of banks that operated branch networks

in Australia, New Zealand, South Africa, Latin America, and Asia In contrast,there were also numerous small privately owned banks in the City that survived byfocusing on specialist niches like trade credit and new issues In turn, those bankswith a presence in the City were linked to thousands of other banks and financialintermediaries all over the world not only through their own offices but alsothrough agencies and correspondents The result was to make London the pay-ments centre of the world economy, for through these connections it was possible

to settle almost any international transaction there Hence the fact that the ‘bill onLondon’ was the near universal currency of international trade and finance,whether it involved transactions between China and the United States or Franceand Australia.8

The fact that London was the payments centre of the international economy hadmajor implications for its money market As payments were always being made orreceived in the City, the result was that it was home to money from around theworld which was temporarily idle as it awaited employment Thus it was not

surprising that the London money market was both very large and internationallyimportant In addition, as the practice of banking spread around the world so didthe need for banks to employ temporarily but profitably the huge sums of moneythat they had to keep idle in case of general demand, either in the form ofwithdrawals by depositors or borrowing by regular customers British banks hadlong been accustomed to send such funds to the London money market The verysize and sophistication of that money market permitted banks to lend very largesums and recall them when otherwise required, as the reduction of supply by onebank would be matched by the increase of another because the overall levelgenerally remained stable This process was greatly aided by the Bank of Englandfor, with its large reserve of cash, it acted as lender of last resort when a shortage diddevelop Thus it was only to be expected that as banking systems developedelsewhere in the world they would avail themselves of such a facility Also, themore use that was made of the London money market the better it became atemploying money for short periods at positive rates of return, so attracting moremoney from around the world In turn the City of London had to find uses forthese funds that would permit interest to be paid to those that lent them, whilebeing sufficiently flexible so that any amount could be employed or withdrawnwhenever required Consequently, the City was at the very hub of internationaltrade finance, for there was a constant need to provide the short-term creditrequired in order for producers in one country to receive payment before theirproducts were eventually delivered and sold in another Before 1914, the exportsand imports of countries like Australia, Argentina, South Africa, and Japan werelargely financed in London, no matter the source or destination of the trade, whileeven countries such as Germany and the United States relied on the City for tradecredit Though other financial centres possessed large and active money marketsbefore 1914, such as Paris, Berlin, Amsterdam, and New York, none was as largeand important as London.9

However, even this dominant position in international trade finance was notsufficient to absorb all the short-term funds seeking employment in London and sothey were increasingly used for long-term investment, but in such a way as to allowtheir easy recall Railway companies, for example, had an enormous demand forfunds in order to build and equip transport systems all over the world For thispurpose they issued securities such as shares, stocks, bonds, and debentures.Though not redeemable these were transferable, and with the development ofstock exchanges they became easy to buy and sell, so allowing them to be held usingshort-term funds By the First World War the London Stock Exchange was, by far,the largest and most international in the world, providing a market for securitieswith a paid-up value of £11.3bn., of which at least half was foreign.10

Thisinternational commitment of the London capital market, however, has led to thecharge that so successful was the City as a global financial centre before 1914 that itignored the financial needs of the British economy This view is part of a constantdebate that sees not only benefits to Britain from hosting such an importantinternational financial centre, through the employment and profits generated,

but also costs in terms of the diversion of domestic funds abroad Clearly, anyinvestigation of the London capital market for this period does reveal it to beheavily orientated towards the issue of securities for foreign governments andrailways rather than British business, for that was largely left to provincial centres.This has been seen not as some natural division within the capital market but assystematic bias against domestic finance within the City, leaving British industryshort of the finance required to fund new enterprises, especially in such techno-logically important areas as the production of motor vehicles and chemicals and theprovision of electricity and telecommunications However, detailed investigations

of City–industry relations over this period reveal strong and flexible links and anabsence of any financing difficulties from either bank lending or new issues ofsecurities Consequently, there appears little evidence that the City of London’sdevelopment as a financial centre before 1914 was, itself, directly detrimental to thegrowth of the British economy, including manufacturing industry.11

Instead, whatemerges is how wide-ranging and sophisticated was the capital market in London inthose years Arranging large loans for foreign governments and corporations was acomplex business, requiring a great deal of expertise and effort and the acceptance

of considerable risk It also took place in a competitive environment both withinthe City, with new firms always ready to challenge the old, and internationally, asrival centres such as Paris and New York could exploit any reluctance or excessiveprofit-taking by London Equally complex and risky was the tailoring of finance forsmaller industrial concerns but that was also not neglected in the City at this time,even extending abroad when the opportunity arose A growing demand fromCanadian industrial companies for finance met a ready response in London, forexample, with Canadian financiers migrating there to handle the business.12

Though there can be no doubt that the City of London flourished before 1914,offering a range and depth of financial services and markets—unrivalled anywhereelse in the world—by focusing on particular areas of the City, there have also beensuggestions that it was becoming less dynamic Especially through a focus confined

to the merchant banking houses the impression is gained that a closed elite ingly dominated the City, and that this financial elite, through education andmarriage, was being absorbed into the long-established landed elite of southernEngland, losing its dynamic drive in the process, though gaining sufficient politicalinfluence to ensure that government policy was in its exclusive interest.13

increas-Certainly,evidence of the fusion of wealthy families in the City with those from the landedaristocracy can be found to corroborate this trend However, the City of Londonwas a much larger and more varied place than one populated by merchant bankingfamilies with connections to the landed gentry, for very few were in that position.14

Instead, it was both open and cosmopolitan with a continuous entry and exit ofindividuals and firms As such, it is difficult to accept that a handful of families could

so influence its structure or so direct its affairs for it to ignore the opportunities open

to it The evidence points otherwise Similarly, evidence is lacking to support theview that those in the City were sufficiently powerful, or even interested, to have

an effect on policy-making, for the conclusion that emerges is that all they wanted

was to be left to get on with their business.15

Generally, it is clear that on the eve ofthe First World War the City of London stood at the very pinnacle of its importance

as a financial centre, even though commerce continued to be an important elementwithin it, and competition existed for it from other financial centres in Britain andaround the world As Mira Wilkins has observed, ‘There was something veryspecial about London,’ while a recent econometric study of one aspect of theCity’s activities noted, ‘Britain had the largest and most liquid capital market in theworld in the early 20thcentury.’16

On the eve of the First World War, the City of London was the leading financialcentre in the world, with a quantitative and qualitative lead over all of its rivals It wasalso the most important commercial centre in the world, being at the very centre ofinternational trade and shipping Thus, it was inevitable that an intense and pro-longed war between the major economic powers of the world, and involving theirfar-flung empires, would have serious consequences for the City of London TheCity was always vulnerable to financial crises anywhere in the globe, given itsposition as the international financial centre, but ways and means to avoid, diffuse,and minimize these had been devised over the years What could not be devised wasany simple means of preventing a crisis created by the outbreak of hostilities on thescale that began in late 1914 Such a conflict not only shattered the payment flowsthat took place continuously between the countries involved, in response to com-mercial and financial transactions, but also destroyed the trust upon which so muchlending and borrowing, buying and selling, took place.17

The result was a down in the international payments mechanism, which had become essential if theworld economy was to continue functioning successfully, and was the basis of theCity of London’s role as a global financial centre With the collapse of both thatmechanism, and trust generally, the First World War was a major blow to the City ofLondon for it undermined one of the most important advantages it possessed It wasalso not easy for the City to recover during the continuance of hostilities In order tomobilize the savings of its population for the war effort the British governmentincreasingly monopolized the London money and capital markets through a com-bination of appeals to patriotism and official/unofficial controls Altogether, theNational Debt, for instance, rose from £706.2m in 1914 to £7,481.1m in 1919.The result was to deny access to the London markets to those whose needs were notwar related, so greatly reducing the City’s ability to finance international trade andinvestment As financial transactions between nations continued despite the war, theconsequence was the development of alternative arrangements and the use offinancial centres other than London Financial transactions were re-routed, encour-aging the use of local centres and direct links between economies once served byLondon intermediaries Alternative financial centres were also favoured, as withAmsterdam in the neutral Netherlands or New York in the United States, which wasfar removed from hostilities and did not go to war until 1917 Foreign companies andgovernments ceased to borrow in London, unless permitted to do so because theywere allies, while much international trade not involving Britain or the shipment ofwar supplies had to be financed elsewhere.18

Compounding the City of London’s difficulties was the forced disposal of thehuge holdings of American securities, which had been slowly built up by Britishinvestors, as the British government desperately needed dollars in order to completeits purchase of vital war materials in the United States Around £850m or $4.0bn.

of these securities were sold during and immediately after the war In addition, theBritish government also borrowed extensively in the United States during the war

as a direct means of obtaining the currency required to make purchases there Totalsuch borrowing had reached £1.4bn by the end of the war.19

As the economy ofthe United States was booming at this time American investors were in a positionboth to buy back those securities held abroad and purchase those being issued byforeign governments, while US banks were able to provide the credit needed tofinance the country’s international trade This greatly enhanced the position ofNew York as a financial centre compared to London as the City lost most of itsAmerican business As New York was already a major financial centre before theFirst World War, dominating the money and capital markets of North America, itpossessed the personnel, banks, brokerage houses, and markets that were able toreplace the services once provided by London, not only in the United States itselfbut also in areas such as Latin America It was the First World War that made NewYork into an international financial centre.20

The City of London was not destroyed during the First World War, havingsuffered little physical damage, while Britain both escaped invasion and emergedvictorious One informed contemporary, R C Wyse, writing in the EconomicJournal in 1918, was of the opinion that the City of London remained the pre-eminent financial centre in the world, though accepting that its position had beenconsiderably undermined.21

Thus, the City emerged intact if diminished from thewar, ready to rebuild its position, despite the increased importance of New York.The rapid growth of a foreign exchange market in the early 1920s, for example,indicated the City of London’s continuing ability to exploit new opportunities andprofit from adversity In the face of post-war monetary turmoil the value ofcurrencies was no longer stable against each other, as it had been under the pre-war gold standard, creating a need both to trade currencies and to minimize therisks of rapid depreciation/appreciation The response in London was rapid withthe development of the largest and most active market in currencies, utilizing thelatest communications and information processing technology and attracting nu-merous brokers and dealers from among the City’s financial community ‘As itexists today the London foreign exchange market is very largely an after-wardevelopment,’ was the view in 1922 of one participant, Dudley Ward of the BritishOverseas Bank.22

During the 1920s the City of London also tried hard to reassert itsposition in the financial activities and markets in which it had been so importantbefore 1914 This was being gradually achieved in the money market, encompass-ing such activities as trade credit and foreign exchange, but London had lost itsposition as the centre of international finance to New York During the 1920s it was

to New York that most of those wishing to borrow resorted, as access to Londonfor other than imperial borrowers remained restricted American investors and

financial institutions possessed a far greater capacity to meet demands than did those

in Britain Thus New York replaced London as the capital market of the world,with all that meant for the investment banks and the stock exchange Even withinEurope, though centres such as Berlin, Frankfurt, and Vienna had been crippled bythe war and the immediate post-war political and economic difficulties, Amster-dam, Zurich, and Paris were serious rivals benefiting from the neutrality of the firsttwo and the prosperity of France in the 1920s for the third.23

Nevertheless, London remained a financial centre of the first rank in the 1920s Itrivalled New York’s money market, was more important in areas such as com-merce, shipping, and marine insurance, and was only outclassed in terms ofthe capital market Even then major traditional borrowers returned to the Londoncapital market, such as Australia which had £525m outstanding there by 1930,while new ones also appeared as in the case of German companies faced with thecollapse of domestic savings due to hyperinflation Generally, foreign financialinstitutions continued to see it as important to have a presence in London Thefinancial agent of the Russian communist government—the Moscow NarodnyBank—opened a London office in 1919, the Bank of China established its firstoverseas branch there in 1929, while four Japanese banks set up operations inLondon during the 1920s No other centre could offer such a number and range

of international connections as could London, and so it continued to act as amagnet for those needing direct access to the world’s payments system In turn,that continued to create a demand both for the traditional facilities of the moneyand capital markets and for new requirements like the foreign exchange market.24

At this stage there was little substantial change in the structure and composition ofthe City, for it still remained both a commercial and financial centre, and one with avery pronounced international orientation This was despite the growth in import-ance of domestic finance, whether in the form of the British government’s greatlyincreased short- and long-term borrowing requirements, or the needs of Britishbusiness to tap the London capital market because of the effects of low profitabilityand high taxation upon internal and informal sources of funds In response to theseneeds there was a significant reorientation within the City towards domesticopportunities Activity in the discount market, for example, was dominated bythe government’s borrowing requirements in the form of Treasury bills rather thaninternational trade finance Similarly, many finance houses in the City, whethernew or old, became involved in the conversion of established British firms intopublic companies as well as the flotation of entirely new enterprises, especially infields involving new technology and new products Especially, in the late 1920sthere was a flurry of such companies attracting the interest of numerous newinvestors who had first acquired securities during the war as a result of the WarLoans issued on behalf of the government As a result the London Stock Exchangebecame an increasingly important market for the shares of British companies,ranging from both established national concerns to small, speculative ones, bringing

it into conflict with the provincial markets.25

However, the focus of the City remained international in the 1920s for there wasthe expectation that the global business on which it had thrived before the warwould revive At the same time London-based firms and markets faced strongcompetition in the field of domestic finance from provincial centres, for these hadlong-established expertise and connections in these areas In the wake of the 1931financial crisis, when Britain had to abandon the gold standard, the City of Londonwas forced to accept that there was to be no rapid and general revival of inter-national business The events of 1931 dealt a damaging blow not only to theimportance of sterling as an international currency but also to London as a globalfinancial centre, because the pound was no longer freely exchangeable for gold at afixed exchange rate and so its value in terms of other currencies was not guaranteed.For those foreign banks using London to employ their idle balances remunerativelythere was no longer the certainty that the value of their money would remain thesame, unless they were in the sterling area, and that it could be easily and quicklyreclaimed when needed As a consequence there was now a greater risk attached toemploying spare funds in London, as well as lending and borrowing there, if thetransaction might require the conversion into and out of sterling The 1931monetary crisis represented a turning point for the City of London as an inter-national financial centre for it destroyed much of the confidence that had continued

to be placed in it by the international community in the 1920s, despite the problemsthat beset the British economy at that time Britain’s leaving the gold standard in

1931provoked a more serious financial crisis around the world than had the WallStreet Crash of 1929 The result was to usher in a period when the role ofinternational financial centres, including London, was greatly diminished, for themovement of money from one country to another became circumscribed bygovernment-imposed controls, and there was a wariness among banks and investorsabout placing money abroad because of the greater risks they now ran A number ofBritish merchant banks with strong connections with Germany almost collapsed,for instance, when that country’s government declared a standstill on the repay-ment of foreign loans in the early 1930s, so illustrating the risks being run ininternational finance Similarly, the French bank Socie´te´ Ge´ne´rale ran down itsoperations in London during the 1930s, though still maintaining its branch there.26

In the face of the exchange controls, embargoes, preferential agreements, barterarrangements and cartels that became standard practice in the international econ-omy in the 1930s the scope for the City of London to operate as a global commer-cial and financial centre was considerably reduced As Richard Roberts hasobserved, ‘Overall, the 1930s were little short of calamitous for most aspects ofthe City’s international activities.’27

However, as this was a general phenomenonthat worked against all international financial centres in the 1930s it was not to theparticular disadvantage of London Otherwise, it would have further underminedthe City of London’s position As it was, the operations of all financial centres were

so circumscribed by internal and external controls that if became impossible forthem to displace the City of London from its long-established position Such wasthe severity of the crisis following the Wall Street Crash that the US government

intervened to restrict the operations of both banks and the financial markets, whilecontinuing turmoil in foreign exchanges forced the United States off the goldstandard in 1933 As a result many financial observers, like Einzig writing in 1933,

or Truptil in 1936, were of the opinion that London remained the financial centre

of the world economy, despite the challenges from Paris in Europe and New Yorkinternationally Similarly, those who have looked either at rival financial centres or

at international finance generally in the 1930s have continued to stress the tages that London possessed compared to all others, especially in terms of its moneymarket No other centre, for example, could yet match the extensive links thatLondon possessed not only throughout the Empire, and with those countries thathad tied their currencies to sterling, but generally in the world One estimate for

advan-1932/3 suggested that over two-thirds of the world’s banks possessed a branch, anagent, or a correspondent in London, while in 1938 London was also the headoffice for twenty-four British overseas banks with 2,315 branches spread around theglobe, and this placed it in a position far superior to any other financial centre in theworld in terms of international connections.28

Nevertheless, despite these advantages the level of international business taken in the City of London was greatly reduced in the 1930s One illustration ofthat was the issue of securities in London on behalf of overseas borrowers Thesewere running at £150m per annum in 1927/8 but fell to £50m in 1931 and thencollapsed to £21m by 1935 before recovering slightly to around £30m in 1937/8

under-As this was echoed in other areas of the City there was no alternative but to try andgenerate more domestic business, and this is what took place in the 1930s Issues ofdomestic securities, for example, held up much better than those on behalf offoreign borrowers during the collapse of the early 1930s, and then grew stronglythereafter, before declining as the Second World War approached In 1935–7 suchissues were averaging around £165m per annum Both established houses and newfirms turned to the finance of British industrial firms as an alternative to theinternational business that now appeared permanently lost Similarly, the moneymarket was increasingly concerned with meeting the short-term financial needs ofthe British government rather than providing the credit required for internationaltrade, which remained very depressed In insurance the covering of risks for Britishmotor car drivers flourished, as automobile ownership grew, while marine insur-ance languished because of the depression in world shipping due to the collapse ofinternational trade Throughout the 1930s the City of London appeared to grow as

a major financial centre, judging from the increased numbers reported as workingthere, but that success masked a collapse in international business and a growth ofdomestic activities This switch was achieved in competition with other financialcentres in Britain and was to their disadvantage as they lost business, personnel, andfirms to London during the 1930s.29

Throughout all these events the government had an increasing influence over theCity, having become involved with the outbreak of the First World War and thefinancial crisis that accompanied it What was established during the war was a closerelationship between the government, the Treasury, and the Bank of England that

was much more intimate than in the past, when the Bank acted as the government’sfinancial agent Now the government, through the Treasury, was using the Bank ofEngland to influence or direct the City in line with changing policy requirements.Thus the government intervened in the City’s money and capital markets to ensurethan its own financing requirements were given priority What this meant was thatother borrowers, whether British or foreign, were either denied access completely,

as with overseas companies, or faced major restrictions, especially when it involvedthe use of foreign exchange The government even went so far as to requisition thosedollar securities held by British investors, so that they could be sold in New York andthe proceeds used to purchase vital war materials from the United States Thoughcontrol over the City was lessened after the end of hostilities, the pressure remained,being exerted through the influence the government possessed as the largest singleplayer in the London money and capital markets This was especially the case in theperiod leading up to the return of sterling to the gold standard in 1925, at the pre-warparity to the dollar, as it attempted to maintain the value of the pound After 1925 theintervention of the government in the affairs of the City did decline, though indirectcontrols and influence remained through the Bank of England The Bank of Englandwas even drawn into assisting the reorganization of troubled sectors of Britishindustry in the late 1920s as it sought to respond to the concerns of government.With the financial crisis of 1931 government intervention became more explicitagain, with the introduction of exchange controls managed on its behalf by the Bank

of England The result of the role played by the government in the 1930s, especiallythe introduction of exchange controls, was to make the City of London much lessresponsive to needs outside Britain and much more aware of the requirements of thegovernment itself.30

Perversely, the result of the City’s growing involvement with both the Britisheconomy and the British government between the wars was to attract criticism as itwas blamed by many for the economic difficulties experienced at that time Much

of this criticism stemmed from the unfavourable view reached by the appointed Committee into Finance and Industry.31

government-This reached the conclusionthat, despite the excellence of the London money market, there were noticeableweaknesses in the capital market with regard to the finance of smaller and medium-sized businesses While criticism of this kind was restrained and technical there alsobuilt up a general view, especially on the left of the political spectrum, that those inthe City cared little about the plight of the British economy, which was identifiedwith northern manufacturing industry, and that the only remedy was even greatergovernment control One Labour politician, Douglas Jay, writing in 1938, went sofar as to state that

Few in the City care whether it is socially desirable that this or that industry should beenabled to develop Any such motive our financiers would regard as ‘political’ Instead, theystick to ‘business’—which means the attempt to outwit one’s neighbour by cunning, luck,inside information or the deliberate spreading of false rumours Small wonder that scandalsabound, savings are mis-invested, and the small investor continually robbed.32