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Nigel Harris

A Big Bang?

(April 1986)

From Socialist Worker Review, No.86, April 1986, pp.8-9.
Transcribed & marked up by Einde O’ Callaghan for the Encyclopaedia of Trotskyism On-Line (ETOL).

ON 1 MARCH, the rule that no more than 29.9 per cent of a member firm of the London stock exchange could be owned by a non-member was ended (an event called in the City ‘the little bang’). On 27 October of this year, fixed commissions paid to stock exchange members for trading will end. The level of commissions will become competitively decided. This is known as ‘the Big Bang’.

What is the meaning of these apparently trivial events? They come as the culmination of a long drawn out process which, in sum, is as revolutionary as anything else that has occurred in world capitalism. Most people in the City think that the big bang will constitute a major transformation, but nobody knows what the final results will be.

In the long boom in the world system up to 1974, private financial markets grew much faster than the official reserves of governments. This was especially true of the Eurocurrency market which expanded twenty times over between 1970 and 1983. One of the symbols of an officially supervised system was the maintenance of fixed exchange rates by governments. In 1971, the private offshore markets had attained such domination that they swept away the fixed exchange rate system. The combined efforts of the leading states of the world could do nothing to stop it.

Financial instability was considerably increased. The weakness of public finance could only be offset by permitting private finance to flow freely between countries. In 1974, the United States and West German governments dismantled the main controls over the flow of finance between themselves and the rest of the world to encourage short term inflows to strengthen currencies. In 1979, Britain and Japan followed suit. As a result, finance capital flowed freely between those four establishing what is now recognised in the textbooks as ‘perfect mobility of capital’.

The British were only just in time. London handles the largest share of the Eurocurrency market, but it could lose that swiftly if conditions for inflow and outflow of finance were more restrictive than in other markets. 1979 was a belated attempt to match 1974 on Wall Street and in Frankfurt.

Once linked to a global market, some surprising things happened. For now finance capital could, in principle, dispense with any particular country. More narrowly, competitive commissions (introduced in the United States in 1975) narrowed margins and forced concentration, the merger of firms at the same time as global integration was taking place.

On the one hand, finance companies tried to diversify into all sectors in order to balance profit earnings and match their competitors; on the other, they tried to create new giant global general companies, operating in all financial centres on terms of equality with the natives. Out of the Wall Street changes have emerged some new giant general finance companies, poised to take over London and Tokyo: Merrill Lynch, Salomon Brothers, American Express, Shearson Lehman.

In Britain diversification is now well advanced. The banks moved into insurance broking, house mortgages, property development. The building societies moved into banking, and foreign exchange dealing. The trustee savings banks became ordinary banks and ran credit cards. Department stores are set to sell stocks and shares and lend money. Industrial companies – for example, BP and GEC – set up banks (but outside Bank of England control because they do not accept deposits from the public). The small partnerships that used to dominate the stock exchange are being converted to limited liability companies. And overall, in the turmoil of reorganisation the desperate search for staff is bidding up pay to astonishing heights (most recently, Chase Manhattan lost its 13 Eurobond sales and trading staff, bribed with higher pay to other companies).

Key elements in this dissolution of traditional sectors has been both the great increase in competition and radical changes in new technology plus the means to transfer information. The isolated areas of expertise have disappeared as all relevant global data becomes available on one small screen – and prices in all major markets can be presented in one instantaneous format. This is one of the reasons why companies that deal in the hardware of information (for example, British Telecom) or have traditionally transmitted information (for example, Reuters) have also moved into financial activities. The growth sector of Reuters’ work is now transmitting share prices globally.

People foresee the emergence of general money centres or financial supermarkets: single companies that handle all types of transactions, from the transmission and storage of financial information, distribution of cash, transfer of credit, retail sale and purchase of stocks and shares, insurance, mortgages, gold and commodity dealings and so on. Some leading companies are well along that road.

One element of this has been the integration of the markets in different countries for trade in stocks and shares. The Eurobond market started the trend twenty years ago, but in the last five years, the value of international equities traded in London has increased from 2½ to 10½ billion dollars. Much of this trade does not go through the established stock exchanges. It is handled by 24 hour telephone markets maintained by the largest security houses and automated trading systems. If the trend continued, it would spell the end of stock exchanges.

This was the reason to break the ancient monopoly (17 jobbers and 200 brokers) of the London stock exchange and open it up both to competition and to foreign entry. For the non-exchange markets which provide the basis for evading the stock exchange have come to dwarf it. The 1982 Eurobond turnover was double the value of the transactions of the New York stock exchange and seven times that of London. With decontrol, the large finance houses are swarming into the London exchange in order to add the vital link in global control between Tokyo and New York. Furthermore, the changes affect all units of capital – industrial companies can now move their stock trading to wherever it is most profitable. Thus, sixty per cent of ICI’s stock is now traded in New York.

On 1 March the Californian bank, Security Pacific, was the first into the London stock exchange by increasing its share of the ownership of an exchange member, Hoare Govett, from 29.9 to 80 per cent (Security Pacific already have their own London merchant bank and operate on the Eurocurrency market). Phillips and Drew became part of the Union Bank of Switzerland. Nomura of Japan and Merrill Lynch of New York are next in line.

The pre-eminence of London in global finance can only be secured by increased Internationalisation. Japanese banks – with overseas assets in 1985 at 640 billion dollars – have just overtaken United States banks (at 580 billion dollars). It is entirely appropriate that, owning 23 per cent of all the banking assets in Britain, Japanese banks are just about to overtake the position of British banks in Britain.

The stock exchange has been driven to liberalise by the pressure of the world financial markets. But it is still very nervous. It could fail to capture the new global equities market. The New York stock exchange has just applied to become a ‘self-regulatory organisation’ on the London exchange in order to keep an eye on its New York members. The two stock exchanges are colluding to try to ensure they keep what they have. The joint statement of the two exchanges speaks of their new relationship as ‘a major step in the revolutionary development of a global trading system’ (in finance – NH); they then add bravely, ‘within the framework provided by the world’s leading stock exchanges.’

They ought to be nervous since, with new technology, the world market need not be in any particular place at all. Perhaps this observation underlies a certain amount of movement away from the City – Morgan Guaranty to Stratford; Citibank to Lewisham; Chartered Consolidated to Ashford; Sun Life to Bristol; Midland to Sheffield, and Barclays to Poole. But there are still queues of the world’s banks to get into the City (the number of foreign registered banks in Britain was 114 in 1967, and is now over 400).

The scale of operations is far beyond the control or regulation of any particular government or any likely combination of governments. As the Financial Times put it recently: ‘The national frontiers which once ensured that national markets would remain broadly self-contained and thus responsive to national supervision are becoming completely permeable.’ National regulations become unenforceable where companies can slip out of the national net to another centre. Companies cannot be suspended from trading if they trade in many centres.

This is part of the reason for the recent spate of City scandals – in Lloyds, the stock exchange, the tin market and the ramifications of a staid and respectable bank, Johnson Matthey, dabbling in gold speculation in order to rob the government of VAT. As institutions combine, prices can be made to rise or fall before you buy or sell. A recent enquiry into these ‘insider deals’ by the stock exchange concluded:

‘Time and again our investigations have run up against a brick wall of an offshore company, whose true ownership we cannot discover. We can track down the small insider deals which are done in this country, but the big fish go offshore.’

Gingerly the government is trying to formulate new rules and regulatory agencies. It is a difficult business because the rules must balance the degree of order and honesty required to safeguard the validity of transactions against restrictions that will deter dealings in London or allow overseas markets to outbid London for the deals. The Eurocurrency market came to London originally because Wall Street’s rules were more restrictive. The reverse process can happen, or there can be movements to other offshore markets – in the Caribbean, Luxembourg, or Singapore. The flurry of scandals, sudden changes, the disappearance of well known landmarks in the system, are the symptoms of momentous changes. Understanding them is constantly clouded by an archaic nationalism. For the changes are not about the takeover of the City by ‘US banks’, or ‘Japanese banks’ so much as the use of London as a key element in the transactions of the new world capital.

In the long history of capitalism, there have been changes in the law or regulations which have been forced by a long prior process of evolution but which then precipitate even more radical changes. The 1862 Companies Act is of this kind. It allowed a capitalist to borrow and operate with capital other than his own. A joint stock company under limited liability gave the capitalist access to an unknown multitude of lenders (that henceforth played no role at all in the management and control of the firm – they simply drew, as it were, a rent on their loan). As Hilferding put it, commenting on a similar change in Germany, the emergence of the corporation – ‘The corporation can draw upon the whole supply of free money capital’. The legal change signified the emergence of the class of capital as opposed to a group of individual capitals and capitalists. Accumulation no longer depended solely upon short term returns or the profits of the individual company.

But that was national capital, whether British or German. What we are now witnessing is the escape from simply national capital to a global pool of capital, the source of which in terms of countries is unknown. It is a change even more momentous than the establishment of national pools of capital.

It is quite unclear what phases the emergence of world capital will go through, what methods will be used to establish order in an unsupervised market, what will be the complex patterns of relationships between the international interests of world capital and the national interests of States. Can the competing clusters of global capital maintain an order while subordinating the States to the administration of localities.

So the big bang on 27 October does have some significance.

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