Originally published on Wings Over Scotland.
We all know there’s something strange about Britain. Germany and China have their factories, France and Japan their nuclear power plants. America has Google and Apple and the world’s largest navy. But how is it that Britain, a country that closed its mines and shuttered almost its entire manufacturing industry, is still a major world economy?
The answer is Britain’s best-kept economic secret. It links Grangemouth, the obscene cost of housing in London, the Royal Mail sell-off, Channel Island tax havens and George Osborne’s disregard for the poor, and explains why an incomprehensible financial crisis triggered by bad American mortgages led to the closure of municipal libraries and swimming pools across the UK and a programme of permanent austerity.
And more to the point, it explains why only London, not Scotland or Wales or Yorkshire or Wearside, matters to the British political class today.
Our story begins in the years after WW2. The great British economist John Maynard Keynes and his American counterpart Harry Dexter White built a new international financial system designed to prevent a repeat of the Great Depression of the 1930s. This system made it difficult to move money between countries.
As late as the mid-1980s, there were strict limits on carrying cash out of Britain. The effect was that money moved into a country had to stay in that country, encouraging investors to pick long-term profitable enterprises like manufacturing over short-term speculation in the stock market and housing. It also gave governments the freedom to tax the rich (the very top rate in the UK was over 90% for most of the 50s and 60s, and 83% as recently as 1979) and invest that money in health, education and industry.
London bankers hated it, and set about undermining the system. From the 1950s, Midland Bank (now part of HSBC) began to make trades in London in US dollars. The Bank of England chose not to regulate these trades, and the so-called Eurodollar market was born – a completely unregulated banking system. By 1997, 90% of all international loans were made through this system, with London at the heart of it all.
Governments were forced to compete with this unregulated, untaxable system. Thus, London fired the starting pistol on a race to the bottom that dragged down tax rates and worker’s rights across the world. The wholesale deregulations under Thatcher (the “Big Bang”) and Blair merely completed the process.
Through British-controlled tax havens such as the Channel Islands and the Cayman Islands, London cast a fishing net over the world financial system. If you’re a speculator building a business empire on debt, like Grangemouth owner Jim Ratcliffe, the British Overseas Territories are probably where you borrow the money, and London itself, particularly the property market, is where much of the profits probably end up.
The tax haven system helps to explain Grangemouth’s suspicious-looking £10m-a-month losses. If you own a petrochemical plant, you can under-price its products, resulting in no profits and no taxes in the host country. You sell to a subsidiary in 0% tax Bermuda, and that subsidiary sells on at an inflated price to yet another subsidiary, say a chemicals plant in Europe. All the profit is apparently made in a small accountant’s office offshore, where you pay no tax on it.
Another trick is to make a big loan from your tax haven subsidiary to your petrochemical plant – the loan repayments won’t count as profits. By 2012 the global network of tax havens and unregulated banks, called the shadow banking system, was worth somewhere between $67 trillion and $100 trillion – more than the value of all goods and services produced in the entire world that year.
It was this system that transmitted a crisis in the American mortgage market to every country in the world in 2008. London is at the centre of the whole system. Its financial fishing net of dependencies and ex-colonies holds over half the world’s bank deposits. In 2009, the UK received financial inflows of an astonishing £195 billion from the Channel Islands and the Isle of Man alone.
(That’s more than the entire GDP of Scotland, despite the islands having a combined population of less than 250,000 and little in the way of industries.)
And as easily as that, we answer our question. Despite vast debts and a crippling deficit, the UK remains a major economy because it’s the world’s (dodgy, tax-avoiding) banker. Grangemouth, the Post Office and the NHS no longer matter to London because where a normal country needs industry, infrastructure, and a healthy, educated workforce, London only needs bankers and people to serve lattes to bankers (that’s the rest of us). London property prices are so comically deranged because houses in London aren’t a place to live, they’re an asset for storing funny money from Russian oligarchs and Middle Eastern oil men.
The notion of a Labour victory at Westminster in 2015 turning around this fundamental nature of the British economy is a farcical one. The party is every bit as in thrall to the City Of London as the Tories are. But next year Scotland has a unique (and final) opportunity to escape from it. We can reindustrialise around renewable energy, and be a normal country again rather than one built on a gigantic financial swindle.
We should of course pity the English regions, Wales and Northern Ireland, and the poor of London, all of whom are trapped in the madness. It’s lucky we’re planning a liberal immigration policy, and have lots of room.