For in the early hours of yesterday, David Cameron made it clear that the well-being of London's financial community was a vital element in Britain's economic well-being. So crucial, in fact, that it formed the key reason – or was it just a convenient excuse? – for the decision to ruin our relationship with the European Union, and above all with its dominant forces, France and Germany.
Cameron's veto of the EU treaty change needed to save the euro could prove an exceedingly expensive gamble, politically and economically for him – and indeed for the whole country. It also turns the spotlight on what the City can do in return for the Prime Minister's loyalty. In theory, it should lead the City to help the rest of a country that has taken such a risk on its behalf. But this would set a historic precedent in 2,000 years which, unfortunately, show that London has always been a selfish, insular place invariably independent from the rest of the country, looking abroad for its living, and perfectly capable of ignoring the wishes of successive governments up-river in distant Whitehall, let alone the needs of the wider economy by providing funds for industrial development.
The City's neglect is based on a fundamental inability to think long term, for the Square Mile has always been a home for traders rather than investors. The tradition of trade and finance has been reinforced by a steady stream of immigrants reaching back over the past two millennia. In Roman times, they came from as far as North Africa. Since then, the City has always flourished because of incomers, Dutch and Danes, Huguenots, Jews – and, today, as many as 300,000 young Frenchmen.
For centuries, the greed and short-sightedness of the City's denizens have made them a target: in the 18th century, Jonathan Swift described the jobbers as "traders waiting for shipwrecks in order to strip the dead". Alexander Pope was just as sharp: "There's London's voice, 'get money, get money'." The industrial revolution emphasised that the rest of the country lacked any real business connection with London. In the 19th century, great manufacturing cities – Birmingham, Manchester, Middlesbrough – boomed thanks to local finance. The biggest absorbers of capital, the railways, were originally financed by Quakers in the north east and by what was called the "Liverpool interest". As soon as the City got involved, there was the usual pattern of recurrent financial crises. For most of London's company promoters were crooked. During the 19th century, the London markets became steadily less connected with commercial reality. As the great Nathan Meyer Rothschild put it: "I am no trader in goods." By the end of century, the City was investing money everywhere from US railroads to the railway networks of Argentina, often with disastrous results, rather than at home.
There has been one previous attempt to fill the historic finance gap left by the City's reluctance to rally round. In 1945, the newly elected Labour government founded the ICFC (Industrial and Commercial Finance Corporation), funded by the clearing banks. The corporation aroused intense hatred in the City; the clearers declared that it was unnecessary, while the merchant banks hated it because it undercut their fees. Nevertheless, it provided a lot of money to worthy industrial borrowers.
In the early 1970s, the City taught a previous Tory prime minister, Edward Heath, not to rely on it – indeed, demonstrated clearly the damage that it could do to British industry. The damage was the work of a horde of adolescent asset strippers whose antics – mostly in the form of insider trading – destroyed many "ordinary" companies which provided actual goods and services. The leader of the pack – Jim Slater of Slater Walker – put their attitude clearly: "Let's face it: none of us here are interested in management." Their antics infuriated Ted Heath – and contributed to his downfall. As Anthony Sampson pointed out, by the 1980s "the Square Mile of the City has become like an offshore island in the heart of the nation".
Not surprisingly, the Thatcher years led the ICFC astray. In 1987, the banks sold their shares. It was renamed 3i, floated on the stock market, abandoned its former role and mutated into just another private equity fund investing more abroad than at home. Its story shows clearly how the very success of the City in the past 30 years has merely accentuated its irrelevance to the vast majority of British businesses. The City's inhabitants simply became richer, greedier – and more arrogant – fleecing any business foolhardy enough to look to place its shares on the stock market, or simply for capital for investment purposes.
If history was anything to go by, the arrival of a Labour government in 1997 should have helped. Sadly, Gordon Brown took his personal reaction against Old Labour to an extreme degree. Worse, he was obsessed by the City, which he saw as the only possible saviour for the economy and Fred Goodwin of RBS as his beau ideal of a businessman, and we know what that led to. Not surprisingly, barely any manufacturing jobs were created in the West Midlands, traditionally the heartland of the country's manufacturing sector, during his decade at the country's economic helm.
It was only in January 2009 that the improbable figure of Peter Mandelson resuscitated the idea by allocating the pathetic sum of £75m to a new enterprise fund. In the past year, Messrs Cameron and Osborne, the sons of a leading stockbroker and a wallpaper manufacturer respectively, have provided financial help to Britain's small and medium-sized businesses in the form of £1.5bn grant to the regional growth fund. But this was only a pilot scheme which will require the City to put up far more money to salvage manufacturing.
In theory, this week's demonstration of the City's power should at least persuade it to change the habits of two millennia and make a positive contribution to the economic welfare of the majority of the country which provides the nine-tenths of British economic life for which the City is not responsible. There will be an early test of a possible new relationship as the Government tries to persuade investors to provide long-term finance for long-neglected crumbling infrastructure. But the City is such a short-termist community that it may well not show any such gratitude. In fact, its inhabitants may even resent Cameron's support. Just remember the old saying: "Why do you hate me? I have never tried to help you."
Amol Rajan
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