The ostensible reason is the two IRA bombs that have wreaked havoc there in the past 15 months, but underlying the proposal is the realisation that the car is wreaking its own form of havoc daily, clogging streets and creating an atmosphere that does nothing to enhance the status of London as a world financial capital.
The plan involves a large part of the City being closed to all but buses, taxis and vehicles with permits. The enclosed area - the boundaries of which have not yet been exactly determined - would be divided into five zones, with access to each through one point only, guarded by security staff. There would be several exits along one-way streets.
Buses and taxis would be allowed through without stopping, as would service vehicles for part of the day. Other vehicles would be turned back unless they had a legitimate reason to enter. This would undoubtedly deter the IRA, even if not all vehicles were stopped, but motoring organisations are already beginning to lobby against the idea.
To be fair to the Corporation of London, the recognition of how ludicrous it is to allow unrestricted traffic into the narrow streets of Britain's financial capital is not just the result of the IRA bombings. Two years ago the City commissioned research into local transport needs and discovered that road transport was largely irrelevant. Only 4 per cent of commuters used cars to get to work and a further 4 per cent used buses. The rest travelled to work either by tube or British Rail. Although the City's planners and councillors had expected rail to be dominant, they had not realised just how dominant.
Despite these surprising findings, there is a permanent traffic jam around the heart of the City for much of the working day, while the pavements are so full of people that they often spill out on to the roads, risking life and limb. Yet only 9 per cent of motorists driving into the central area have any business there; what is clogging up the City is traffic passing through.
Given that walking is the main form of transport in the City, the Corporation has an appalling record of catering for the pedestrian. It need not have been so. After the war, a plan to reconstruct the City put forward by William (later Lord) Holford and Charles Holden suggested that the pedestrian should be at the centre of the area's transport policy. They wanted many of the medieval alleys and squares closed to traffic, which would have created a busy and lively atmosphere like found in many European cities.
However, the plan was hijacked by Modernists, whose planning ideas were in the ascendancy at the London County Council, and pedestrians' needs were ignored. Throughout the Sixties, planners preferred to do away with pedestrians altogether at street level. Michael Hebbert, director of the town planning programme at the London School of Economics, explains: 'The City wanted to build a 32-mile network of walkways at first-floor level, leaving the streets to cars and lorries. Historically, the City engineer has been a very powerful character and has tended to be very pro-roads.'
Developers were forced to incorporate walkways into their plans. The remnants of that programme can be seen at the Barbican and in Lower and Upper Thames Streets, but as the architects of similar 'walkways in the sky' on council estates quickly discovered, nobody ever uses them. Worse, to complete the walkway scheme would have involved the destruction of much of the existing historic street plan. Every byway and alley remained open to cars, used mainly by canny cab drivers as short cuts.
In the Seventies, developers began to balk at the high price of constructing walkways and conservationists finally managed to kill the schemes towards the end of the decade, when many buildings were listed. A street- based design philosophy became fashionable. Belatedly, the City began to look at car use - for example allowing only one car-parking space for every 12,000 sq ft of new offices - and at ways of restricting traffic, but came up against great difficulty in convincing retailers that their businesses would be boosted by pedestrianisation.
Michael Cassidy, chairman of the Corporation's policy and resources committee - in effect, the City's top politician - says it took years to close off one small street, Bow Lane, because of objections. 'Retailers have the right to object if the road being blocked off is their only access and then there has to be a public inquiry.'
Already the City has begun a covert war against through motorists. It is restructuring its traffic light system so that they face more red lights, in an effort to deter them from using the area as a short cut.
There are, however, a number of problems with the City's limited-access scheme which, as Mr Cassidy stresses, is only a plan that will initially be put out for public consultation. The major one is its effect on neighbouring boroughs. Not only will traffic gravitate to them - so will the IRA. Westminster, Southwark, Islington and Tower Hamlets will all put up strong resistance.
As will motoring organisations. Edmund King, the RAC's campaigns manager, says: 'The City isn't an independent state. It is part of London and there are 32 other boroughs. It can't just unilaterally ban cars, because they will just go elsewhere.'
This was demonstrated by the recent completion of the Limehouse Link in Docklands, which has encouraged cars to use Upper and Lower Thames Streets. Blocking off the City would put further pressure on those same streets.
The other major obstacle is the need for legislation. The City of London Police have already admitted that they are at the limit of their powers in imposing the existing system of armed road blocks that they hope will deter the IRA from making another attack. It may not be an insuperable barrier. Mr Cassidy says he has talked to John Major, and to Kenneth Clarke, when he was Home Secretary, about restricting access to the City and they were prepared to consider allowing legislation.
Nevertheless, the need for legislation means that in the interim, the Corporation will have to use other methods to deter terrorists. The current system of rolling road blocks will be stepped up with the help of an extra 100 City of London police officers who have been recruited since the first bomb in April 1992.
The increasingly heavy use of road blocks will, in effect, be the first stage of restricting traffic in the City. People will get used to the idea of avoiding the Square Mile because they will not want the hassle of being stopped and so may be less resistant to Mr Cassidy's grand plan.
Mr Cassidy is an astute politician, pushing the City Corporation to the forefront, in the absence, since the abolition of the Greater London Council in 1986, as a voice for London as a whole. There is a strong element of self-interest in the plan. The City cannot hope to fill all its office space by letting to companies providing financial services, as this is a declining sector. It will have to attract other firms and, to do so, the environment must be improved. Some transport commentators suggest that eventually cars, buses and taxis could disappear completely, leaving the way open for trams and even auto rickshaws for short journeys around the City.
Nevertheless, if the City scheme gets the go-ahead, even in a truncated form, it could be the start of a reappraisal throughout Britain of the way that cars are allowed to dominate urban centres.
Martin Bradshaw, president of the Royal Town Planning Institute, says: 'The City is a prime candidate for this sort of scheme. Pedestrianisation would help to break it up, getting away from the single dominant culture of the financial world. A few restaurant tables on the streets would do wonders. But the scheme would have to be done very well.'
As John Whitelegg, head of geography at Lancaster University put it: 'The City is so small that it is the best place in Britain to create a really favourable environment for pedestrians and public transport.'
He thinks it could be the first stage in creating a car-free zone, as is happening in several European cities such as Aachen, Lubeck, Bologna and Amsterdam. It is a sad commentary on British transport policy that it took the IRA to start the debate on these issues.
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