British banking authorities may be too confident that London can maintain its status as a global leader in finance despite punitive taxes and regulations.
Andy Haldane, the Bank of England’s head of financial stability, seems to believe that the threat of bankers fleeing is a bluff. And he means to call them on it.
While he believes that hedge funds and smaller financial firms can leave, he seems to think that inertia will keep big banks in place. But will it?
Haldane may want to look to history to examine the proposition that financial capitals can maintain their status amidst adverse circumstances. In particular, he ought to examine the history of Philadelphia’s Chestnut Street. For the early years of the American Republic, Chestnut Street was the nation’s financial capital. It was the Wall Street of its era. And then it lost to Wall Street.
Between the late 1770s and early 1820s, the financial community gathered on Chestnut Street built the most dynamic and robust engine of finance in the New World. It excelled at that activity at the heart of finance—connecting the savings of people with the projects of entrepreneurs.
As told in Robert Wright’s book, “The First Wall Street,” Philadelphia’s fall from preeminence was mainly due to the fact that the cost of doing business in New York was marginally lower than that of Philadelphia. Even back in the nineteenth century, capital flowed toward the port of call with the lowest transaction costs. The failure of Philadelphians to construct a rival to New York’s Eerie Canal contributed to a loss of trade. The destruction of the Second Bank of the United States, which had been based in Philadelphia, sapped much of the city’s centrality to banking. Once the national capital moved to Washington, Philadelphia lost its political clout.
London has already sacrificed much of its political clout to Brussels. The Bank of England remains, but the Euro has made the role of the Bank of England less important than it once was. Punitive taxes that raise the cost of running a financial business from London may finally tip the scales toward a capital flight—of people, of funds, and of firms.
Policies based on the inertness of capital or banks can only be justified on the basis that this time things will be different. But that kind of magical thinking led to much financial pain in this decade. It’s a shame it has not been fully discredited.