Treasure Islands - Nicholas Shaxson [40]
As the empire crumbled, the pound—then fixed against the U.S. dollar at $2.80 per pound—began to totter and with it the whole edifice of solid, dependable imperial finance.9 Coming less than a decade after Henry Morgenthau, the U.S. treasury secretary, had declared his intention to “move the financial center of the world from London and Wall Street to the U.S. Treasury,” it was almost too much for the whiskery old gentlemen capitalists in London to bear.
In 1957 the British authorities, in a last-ditch attempt to rescue sterling’s old imperial role, raised interest rates and applied new curbs on overseas lending to protect the pound. But the London banks, having noticed that the Bank of England had decided not to stop Midland’s trades, sidestepped the new curbs by shifting their international lending away from sterling and into dollars, in this new market. And here is the crucial part: The Bank of England not only did not stop Midland’s trades, but it actively decided not to regulate the market either. It simply deemed the transactions not to have taken place in the UK for regulatory purposes. Since this trading happened inside British sovereign space, no other regulatory authority elsewhere was allowed to reach in and regulate it, either.
Banks in London began keeping two sets of books—one for their onshore operations, where at least one party to the transaction was British, which was regulated, and one for their offshore operations, where neither party was British.
A new offshore market had been born, which would become known as the Eurodollar market or the Euromarket.10 It was no more than a bookkeeping device, but it would change the world.
The new unregulated Euromarket that emerged amid the dust and fire of Suez would grow explosively and become nothing less than the heart of a new British financial empire centered on the City of London. It would raise the City to even greater financial glories, provide a new playground for U.S. banks, and prove the key to resurrecting an old alliance between the City of London and Wall Street, helping each break the grip of their governments at home and restore them to their full powers.11
“As the good ship Sterling sank, the City was able to scramble aboard a much more seaworthy young vessel, the Eurodollar,” wrote P. J. Cain and A. G. Hopkins, the leading historians of British imperialism. “As the imperial basis of its strength disappeared, the City survived by transforming itself into an ‘offshore island’ servicing the business created by the industrial and commercial growth of much more dynamic partners.”12
Modern histories of the City of London’s growth as a financial center point to the “Big Bang” of 1986—the sudden deregulation of London’s markets under Prime Minister Margaret Thatcher—as the moment when London really took off in its modern form. But Tim Congdon, one of the City of London’s most experienced spokesmen, spotted the real story. “The Big Bang,” he wrote in 1986, “is a sideshow to, indeed almost a by-product of, a much Bigger Bang which has transformed international finance over the last 25 years. The Bigger Bang is—on all the relevant criteria—a multiple of the size of the Big Bang.”13 “An extraordinary situation has arisen where the Euromarket, which has no physical embodiment in an exchange building or even a widely recognised set of rules and regulations, is the largest source of capital in the world.”14
The scholar Gary Burn put it in a different light. The market’s emergence, he said, was “the first