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nevertheless powerful conclusions do emerge. The golden age shows that it is quite possible for countries, and the world economy, to grow quickly and steadily while under the influence of widespread and even bureaucratic curbs on the flow of capital, and high taxes. China carefully and systematically restricts inward and outward investments and other flows of capital, and at the time of writing it is growing fast. Clearly these kinds of controls, unfashionable for so many years, ought to be a policy option. Mainstream thinking on this is, at last, shifting a little: In February 2010 the IMF issued a paper24 outlining what would have been considered heresy just a few years earlier, arguing that capital controls are sometimes “justified as part of the policy toolkit” for an economy seeking to deal with surging inflows. Very often countries can, as Keynes believed, get along perfectly well with their own domestic credit systems and localized capital markets, without exposing themselves to the killer seas of global offshore finance.

What has happened since the golden age ended is not simply a return to the free movement of capital but financial liberalization on steroids. The offshore system that tore financial controls apart from the 1970s has been both an accelerator for flighty financial capital but also a distorting field, bending capital flows so that they end up not necessarily where they can find the most productive investment but where they can find the greatest secrecy, the most lax regulations, and freedom from the rules of civilized society. It would seem sensible to take our foot off the accelerator.

Quite soon after Keynes’s death a new ideological insurgency took hold, based on an idea of the near infallibility of free financial markets, which overthrew Keynes’s ideas. The Chicago economist Robert Lucas would write in 1980 that “at research seminars, people don’t take Keynesian theorizing seriously anymore; the audience starts to whisper and giggle to one another.”

The latest financial crisis, which, I will show later, had its roots substantially in offshore finance, has helped resuscitate Keynes’s ideas, at least in some circles. “If your doctrine says that free markets, left to their own devices, produce the best of all possible worlds, and that government intervention in the economy always makes things worse, Keynes is your enemy,” wrote the economist Paul Krugman. “And he is an especially dangerous enemy because his ideas have been vindicated so thoroughly by experience.”

Parallel with the ideological changes, however, something else began to emerge, even before the golden age ended. It first appeared in the City of London, before being embraced by Wall Street and spreading across the globe. Ideology mixed liberally with cash would create the conditions for the construction of a new world of offshore.

4

THE GREAT ESCAPE

How Wall Street Regained Its

Powers by Going Offshore to London

AS THE BRETTON WOODS SYSTEM THAT KEYNES helped design got properly under way after the Second World War, Wall Street was tied down at home with domestic regulations, many dating from the Great Depression. Financial flows across borders were constrained, taxes were high, and the U.S. economy was growing very nicely indeed. Across the country working people were buying refrigerators, televisions, and new cars for the first time.

Wall Street bankers wanted an escape route. They found it in a new offshore market in the City of London, the financial district at the geographical center of the greater London metropolis.

Nobody quite agrees when this new strain of offshore activity first emerged, but it was probably first spotted by a financial regulatory authority in June 1955 when staffers at the Bank of England, the UK’s central bank, noticed some odd trades going on at Midland Bank, now part of the globetrotting HSBC.1 Exchange rates in those days were mostly fixed against the dollar, and banks in London were not supposed to trade in foreign currencies unless it was for financing specific trades for their clients,