The City of London
History
London is one the three largest financial markets in the world with New York and Tokyo. London originally grew as an international trading centre in parallel with the expansion of the British Commonwealth and then the establishment of its position at the centre of the international bills of exchange and gold markets. The bill of exchange and, in particular, the ‘Bill on London’, became the most important form of payment in international trade and finance for almost three hundred years. The value of international currencies was also fixed against the price of gold for over two hundred years under the ‘Gold Standard’.
London remains a leading national and international financial centre. Rather than constitute any single market, London is made up of a number of separate markets and sub-markets. The main domestic markets are the wholesale money markets with the commercial and retail banking and securities markets. The principal international markets are the Eurodollar, the foreign exchange and the financial derivatives markets. London is also the centre of number of other commodity related markets (including the oil and metal markets) which trade product related financial instruments.
The City of London has always been recognised as one of the most important and most individual of international financial centres. Despite political and military successes and crises over a large number years, London remains a vital location for global financial markets and financial services. While money and banking did not originate in London as such, it has made a significant contribution to their evolution and development, at least, since the 17th century. Even as financial markets and financial innovation have continued to change and adjust during the early years of the new century, London remains a key centre both for traditional banking and financial services as well as a new markets and services, electronic dealing and trading platforms and products.
(1) Origins
The financial centre of London is referred to as the 'City of London' which is approximately one square mile (274 hectares) around the Bank of England in Threadneedle Street. The City stretches from the Law Courts on the Strand in the West to the Tower of London on the East and from the Thames River in the South to Liverpool Street, Spitalfield and the Barbican in the North. London has also since expanded into Canary Wharf in Docklands in the east, where many of the largest investment banks operate, and into the West End, to where many hedge funds and new boutique institutions have moved. Many of the largest financial institutions in the world including a number of the main markets are based within these three small areas.
London had initially been occupied by the Romans until 410 A.D. London then consisted of an area of some 330 acres enclosed by a wall some of which remains by ‘London Wall’ in Moorgate. The original Roman wall was approximately 3¼ miles long with six gates. London grew quickly as a national and international trading centre with the sea access being provided through the River Thames. London was then ravaged by the Great Fire in 1666 which destroyed almost two-thirds of the City. The old centre was then rebuilt and by 1700 London emerged as the world's large city. The main commercial and trading areas during the 18th century were the warehouse districts near the docks in the east. London then grew as an international trading centre with the expansion of British trading interests overseas and the British Commonwealth (Clarke, How the City of London Works (2008)).
The early City layout had not been planned and was organised on earlier mediaeval street lines. A significant building programme was undertaken in the 1820s which attempted to create a more modern commercial city. This was further stimulated by the completion of the main railway lines into London with the main Victorian railways stations. This metropolitan expansion was further stimulated with the creation of the underground railway system and the introduction of hydraulic lifts in many of the buildings. While much land ownership remained with the main aristocratic families, the church and City livery companies until the beginning of the First World War, the Corporation of London then expanded as a major landowner after the Second World War (Clarke, How the City of London Works (2008)).
(2) Gold Standard
London originally emerged as an international trading centre due to its port access and position within the British Commonwealth. London also grew during the 18th century as one of the largest financial centres especially with the international bill of exchange market and the emerging acceptance and discount markets in London. London would then become the main international centre for bills of exchange and letter of credit related finance.
International currencies were also for almost 200 years based on the gold standard with the gold market being managed out of London. The Bank of England then acted as the main counter party in the international gold market against which the values of all of the other currencies were set. The original Gold Standard was then replaced by the 'Gold Exchange' standard during the early 20th century under which sterling was fixed to gold and other currencies valued against sterling.
Following the Second World War, the dollar replaced sterling as the main international reserve currency which position was formalised under the Bretton Woods system of fixed exchange rates. This was signed at the Bretton Woods Conference in July 1944 which provided for the value of gold to be set against the US dollar (at $35 per ounce) and the other currencies fixed against the dollar. This continued until the collapse of the Bretton Woods system between 1971 and 1973 after which international foreign exchange were dealt with on a fluctuating basis.
It was in response to the new volatility both in foreign exchange and interest rate risk that the collapse of Bretton Woods created that led to many of the new financial derivatives products developed and early derivatives markets being set up as well as the general structure and operation of the modern international financial system within which global markets operate. The modern international financial market place can then generally be considered to have begun with the main currency and related changes that took place during the early 1970s.
(3) Continuing Importance
London remains one of the most important financial centres of the world due to the continuing availability of a number of the earlier attributes that led to its original expansion and subsequent development. These provide the key characteristics of the London commercial and financial practice place and culture within which business and finance have been conducted. Relevant factors include relative political stability, central communications and transport, compact size, liberal economic and financial system policy, open competition policy, central time zone and the quality of the supporting legal, accounting and other professional services available. These essential attributes have allowed London to continue to act as a central player in the construction of a new international trading and financial system and a new global economic infrastructure.
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Recommended Reading William Clarke, How the City of London Works (Thompson London 7th ed. 2008); Stephen Valdez and Philip Molyneaux, An Introduction to Global Financial Markets (Macmillan, London, 6th ed. 2010); Richard Roberts, Inside International Finance (Orion London 1999). See also Alexander Davidson, How the City Really Works (Logan Page 3 ed 2010); and Christopher Stoakes, All You Need to Know About the City (2009/2010 Lomgtail). On the development of the City of London more generally see also, David Kynaston, The City of London (Chatto & Windus London) 4 Volumes.
