Catastrophes need causality. We even call earthquakes acts of God. There’s something about us that needs to find the whys and the hows of the bad things that happen to us. This is common sense, as we’d like to avoid another catastrophe, if we can.
When it comes to financial catastrophes, it turns out we can’t avoid them, and we can’t quite figure out what causes them. Crash Bang Wallop is the latest in a series of books looking at the recent financial crisis through the lens of history. In this case, the subject under review is the history of the Square Mile of the City of London.
We are brought hundreds of years into the past, to the life of Thomas Gresham, who founded the Royal Exchange in 1565, and we watch as the City vies with Antwerp and other capitals to become the capital of financial innovation in the developed world.
Despite the fact that the City missed the Industrial Revolution completely – it was financed by more local concerns in the West Midlands, mostly – there was just so much money to be made that it kept on developing, a singular institution in a rapidly changing London.
Along the way, from 1565 to the 1980s, where our story stops, there were crises at the rate of about one every 15 years, and a really bad one every 60 years or so.
The work of economic historian Moritz Schularick and his colleagues shows us that once the scallywags who make the financial markets tick are allowed unfettered access to the world’s savings, they tend to overextend themselves periodically, with taxpayers paying the cost.
This happened in France as well, with the machinations of the Irish economist John Law, a Renaissance trickster so swashbuckling I’m surprised Hollywood hasn’t told his story yet.
Martin’s writing keeps the story of the City humming along nicely. His style is crisp and elegant, with an eye for an interesting, slightly plummy personal detail. I must admit, I’m a sucker for this stuff.
An example from page 60: Winston Churchill was such a bad investor that his broker bought every time Churchill wanted to sell, and sold every time he wanted to buy. This was how some of the great man’s fortune was preserved even after the markets collapsed in the 1930s. His broker was decent about it – he even paid Churchill’s commissions.
We race quickly through the post-war period as the City is eclipsed by Wall Street, then copes with the dissolution of the Empire, and adapts to the social changes of the 1960s and 1970s – we learn it was not until March 26, 1973, that a woman was allowed to trade on the City’s floors. At a clip, we see the dissolution of the Gold Standard in the 1970s, and the deregulation of finance in the 1980s. Here our narrative slows down, and the meat of the book emerges. Martin has conducted extensive interviews with those involved in the Big Bang of 1986, when the City made its historic jump to electronic trading.
This is the causal story Martin wants to tell us. By allowing the Big Bang, global financial capital was free to sow the whirlwind we would eventually reap in the late 2000s. We meet Margaret Thatcher as she starts treating the besuited City grandees like “an upmarket trade union”, which is to say, she gave them a kicking, forced them to open up, removed exchange controls, which allowed an influx of capital and a resultant foreign ownership of many City brokerages.
Opening up the City in a real way meant it could facilitate companies’ expansion plans or restructuring with other repackaging, refinancing, and distributing that debt.
A mergers and acquisitions boom followed junk bond busts. Everyone was getting paid, big time, along the way. Salaries and coke habits exploded. We are now in the mid-1980s. This is red-suspender braces, Harry Enfield Loadsamoney time.
The writing is often very funny. An example: “The old-school British moneymen already long had a reputation among their American cousins for laziness, and those late stats and languid lunches were the nub of it. Never has the different meaning attached on either side of the Atlantic to the word ‘pissed’ mattered more.” You get the idea.
Luckily for the City’s old boys, Thatcher’s need to bust their cosy cartel was overcome by her need to privatise much of Britain’s state-owned infrastructure.
These were the days of the Great British Sell-Offs, and she needed the old boys to float the new companies. So they did.
Crash Bang Wallop is an exciting story, told with verve. You can hear the voices of the people Martin has interviewed. You understand that none of them meant for things to get so out of hand. Each of them was trying their best, with their own limited information, to make the best of things. That’s called the invisible hand.
When the City went electronic, the potential for a crash became much, much worse, because the magnitude of risk-taking increased exponentially. But we know that now.
The Big Bang contributed to the October 1987 meltdowns, the currency crises in 1992 and perhaps to the 2007 crises. Innovations create and they destroy.
Martin’s book illustrates how many tiny steps along the way created the innovation of electronic trading; and shows us that the City, which has survived now for 451 years, will weather the innovations to come.
Stephen Kinsella is an economist and columnist for The Sunday Business Post