Study of London’s Fiscal History Speaks Volumes

LONDON —  The City of London, the square-mile district that is one of the world’s great financial centers, has become an arena where the flair and drive of foreigners overshadow the locals.

That’s the conclusion of historian David Kynaston, who has just completed his four-volume study of the finance center’s past two centuries.

It’s much like the Wimbledon tennis championship, he quips. “We provide the courts and the foreigners provide the champions.

“It’s all happened in the past 20 years. Most of the merchant banks have been taken over by foreign banks,” he said.

Kynaston’s “The City of London” series is a 1.3 million-word epic tracing the development of the district from its development as a global money hub.

The four volumes’ subtitles neatly encapsulate the times: “A World of Its Own 1815-1890,” “Golden Years 1890-1914,” “Illusions of Gold 1914-1945,” and “A Club No More 1945-2000.”

“I began with 1815, as it’s as plausible a starting point as any,” Kynaston said in an interview.

“Before then, London was largely commercial, and the stock market consisted of government bonds. Only after Waterloo [Napoleon’s defeat in 1815] did Britain start to export capital, and that’s the character of an international financial market.”

His story is a riveting read of the rich and famous, the powerful and the toilers, con men and crooks. The English Historical Review, an academic journal, called it “a significant piece of scholarship . . . a picture of the evolution of the city greatly superior to anything known before.”

Kynaston, 49, a historian of business and finance who also writes on cricket, delved deeply into the archives of the banks and finance houses and the records at Guildhall, seat of the Corporation of the City of London, which governs the district.

From the outset of his story, foreigners were significant players in the City. Kynaston highlights three--Nathan Rothschild, Sir Ernest Cassel and Siegmund Warburg.

“All three men were outsiders, German Jews. None was liked by the city establishment, but they were so determined and gifted that the city had no alternative but to accept them,” he said.

Nathan Rothschild was the banking family’s leader in London in 1810-1836, when Britain’s capital took over from Amsterdam as the leading international financial center.

Cassel was financial advisor to King Edward VII and epitomized the pre-1914 golden age when London was the richest financial center the world had ever seen.

Warburg shook up the financial establishment and pioneered the Eurobond market in the 1960s, which saw London retrieve the international role it had lost in 1914 with the onset of World War I.

Kynaston interviewed Henry Grunfeld, Warburg’s right-hand man. Both fled from the Nazis, and Warburg started Siegmund Warburg and Co. in 1946.

Grunfeld said he and Warburg liked the efficient way the city did business--the trust, the lack of bureaucracy and paperwork. He said the city was a smooth, efficient machine because people kept their promises, as in the London Stock Exchange motto: Meum dictum meum pactum (My word is my bond).

However, Grunfeld was also struck by the British bankers’ conservatism and lack of imagination and entrepreneurial instinct.

“It seems to me,” Kynaston said, “that the city often needed outsiders like Warburg to bring in some dynamism because it was introverted and clubbish and didn’t encourage meritocracy. It was old school, tie-at-the-top merchant banks, and it really was Old Etonians who ran things.”

Americans have been significant players from the start.

“When Barings were looking for a new man in the 1820s they recruited the Boston merchant Joshua Bates and he was a big figure in taking them up to a new level,” Kynaston said.

The American George Peabody, the virtual founder of Morgan Grenfell, was London-based in the 19th century.

In the late 1980s, an American woman, Kim Albright, promoted a new contract for trading in derivatives in German government bonds. She pushed hard and it gave the London International Financial Futures Exchange a big lift.

“Morgan Stanley, Goldman Sachs, Credit Suisse, First Boston and Merrill Lynch have all been heavy American influences. The city has been a great machine, but it needed people at different times to raise its game,” Kynaston said.

Offshore markets developed in the 1960s. They could have gone to Zurich or Paris or Frankfurt, but they came to London. One reason was the English language, but also the pool of skilled labor. The crucial thing was that regulations were easier and the Bank of England’s attitude was one of benign neglect.

“When American bankers came to London in the 1960s to exploit the financial markets, the Bank of England let them get on with it,” Kynaston said.

One result is a tougher, more American atmosphere, he said, “ruthless and soulless, very long hours, a Faustian pact of fantastic rewards for some but no job security, hopeless in terms of family life. Loyalty has been squeezed out. Most people used to stay with one firm, but now they are loyal only to themselves.”

But there is a good side too. The city has “become much more positive,” he said. “Class and the old school tie have gone. It’s open to women and probably cleaner because it’s more highly regulated. There was a lot of insider trading in the old days which wasn’t talked about openly.”

Kynaston said the city’s fortunes are not dependent on the British economy, so the city is like an offshore island.

“At least 80% and perhaps 90% of the city’s work is servicing the world economy. Average earnings in the city are over double the national average, so it’s become separate from the rest of Britain,” he said.

Kynaston’s four volumes, published by Chatto and Windus and in paperback by Pimlico, haven’t appeared in the United States. He is working on a single-volume edition that he thinks might be more acceptable across the Atlantic.