I

The term ‘Big Bang’ refers specifically to a single event that took place on 27 October 1986. On that day the London Stock Exchange switched from floor-based trading, where brokers and dealers met to buy and sell, to a screen-based system linking a network of market makers located in separate bank offices. At the time the Financial Times described the event as a ‘City Revolution’ and continued to do so from then on.Footnote ¹ The verdict of many historians has endorsed this view of Big Bang, stressing the contribution it made to the transformation of the City of London into an internationally competitive global financial centre (Roberts and Kynaston Reference Roberts and Kynaston2001, pp. 19–21). Reflecting the importance of Big Bang, a seminar was held in 1996 that brought together many of the key players that had been involved ten years before, so that they could reflect on the role that they had played. However, at the end of the seminar, the convener, Professor Kathleen Burk, concluded that, important as these key players were, ‘it was the abolition of exchange controls and the general international trends that were actually more important in terms of forcing the changes’.Footnote ² This suggests that, with the benefit of hindsight, Big Bang was not that significant compared to the longer-term trends that were forcing the pace and direction of change, especially technological developments and the process of globalisation (O'Brien Reference O'brien1992; Michie Reference Michie1997). Even among those who accept the primacy of events over trends rival claims have been made to explain the renaissance of London as an international financial centre after the destruction caused by World War II. Amongst those, many date the beginning of the recovery to the late 1950s and early 1960s, when the Eurocurrency and Eurobond markets were developed in London (Kynaston Reference Kynaston2002, pp. 696–8; Institutional Investor 1988). Niall Ferguson, in his recent biography of Siegmund Warburg, claims that it was he who had ‘made possible the resurrection of London as the world's principal centre for cross-border banking’ (2010, pp. xiv, 204, 210–11). Another group have looked across the Atlantic to Wall Street and identified 1975 as the key year. It was then that the New York Stock Exchange, under pressure from the Securities and Exchange Commission, ended fixed commission rates and that eventually forced all other stock exchanges to change the way they operated (Vogel Reference Vogel1996). There are also many who favour 1979 as the year when the revolution in UK financial services began, as that was when UK exchange controls were discontinued, exposing the City to international competition (Talani Reference Talani2012). There are also those who trace a more gradualist process in which government officials played an important role (Wilks Reference Wilks1999, pp. 157–8; Reid Reference Reid1989, pp. 20–1). Forrest Capie, in his history of the Bank of England from the 1950s to the 1970s, suggests that the senior staff at the UK central bank deliberately promoted London as an international financial centre (Capie Reference Capie2010, pp. 780–3; Ferguson Reference Ferguson2010).Footnote ³

Nevertheless, important as both long-term trends and prior events and processes were, Big Bang retains its significance as a Tipping Point, being ‘that one dramatic moment . . . when everything can change all at once’ (Gladwell Reference Gladwell2000, p. 9). The development of modern securities markets around the world continues to be attributed to Big Bang, for example (Woycik Reference Woycik2011 pp. 129–32). It is also noted that the 1980s was the only peacetime decade during which the productivity of British financial services grew more rapidly than that of the economy as a whole, despite the weak performance in manufacturing during the 1960s and 1970s, and this could be attributed to the consequences of Big Bang because of the increased competition it generated (Broadberry Reference Broadberry1997, p. 393; Reference Broadberry2006, pp. 30, 32, 67, 149, 218, 283, 362; Crafts Reference Crafts2011, pp. 2, 11–15). For those reasons many remain convinced that Big Bang was important and search for its causes. From one perspective Big Bang was an ideological revolution engineered by the Conservative government of Mrs Thatcher in the 1980s with the deliberate aim of restoring the City of London to its position as the leading international financial centre (Moran Reference Moran1990; Fishman Reference Fishman1993; Laurence Reference Laurence2001). According to Swary and Topf ‘financial deregulation and reform was promoted as part of the broader “Thatcherite revolution”’ (Reference Swary and Topf1992, p. 141).Footnote ⁴ The other perspective is to see those same politicians as mere pawns being manipulated by powerful City interests seeking to establish the primacy of finance over manufacturing industry (Talani Reference Talani2012, pp. 18–19). Supporting both these views were the statements of participants for, once the success of Big Bang seemed assured, many were eager to claim credit for it.Footnote ⁵ Though many of the economic reforms of the Thatcher era did produce positive gains, such as increases in competitiveness and productivity, they also had negative consequences including the destruction of major industries and the creation of areas of high unemployment and social deprivation. Also there was no ambiguity associated with Big Bang unlike other policies which involved an inevitable compromise between state intervention and market liberalisation that pleased neither set of proponents. In contrast, Big Bang appeared to be a clear example of the benefits that flowed from setting markets free in the form of a successful and internationally competitive financial sector (Jackson Reference Jackson2010). That, at least, was the position until the financial crisis that began towards the end of 2007. As explanations were sought as to why that financial crisis had taken place, a re-examination of the consequences of Big Bang began. To Big Bang was attributed the reckless behaviour among bankers which many believed had caused the financial crisis. It was also Big Bang that had made possible the creation of banks that combined the risk taking of the investment banker with the conservatism of the retail banker, leading to the triumph of ‘casino capitalism’. Additionally, banks had been allowed to become ‘Too Big to Fail’ because of their size, complexity and interconnections, forcing a taxpayer-funded rescue by the UK government (Augar Reference Augar2009, p. 15; Kynaston Reference Kynaston2011). Thus, whether viewed positively or negatively, by the media or historians, all can agree that Big Bang was a transformational event. This makes it important to understand why and how it came about (Konzelmann et al. Reference Konzelmann, Fovargue-Davies and Schnyder2012, pp. 497, 509). However, establishing the historical record is only one of the reasons why Big Bang needs to be revisited. In the aftermath of the financial crisis of 2007/8 a combination of politicians, regulators, academics and practitioners have struggled to design a more resilient financial system that was also capable of providing the credit and capital required by business. Lessons can therefore be learnt from the process leading up to Big Bang that can be incorporated into that planning so as to avoid the mistakes of the past.

Now available, for the first time, to help in this discovery are the official government papers covering the events leading up to Big Bang. These can complement the material produced at the time, contemporary media comment, the later reflections of those who were involved, and the access given to the papers of the London Stock Exchange. Only the documents generated at the time by those in government, including politicians and civil servants at all levels, can provide the detail necessary to identify what influenced the decisions that led to Big Bang. Nevertheless, it is important to recognise that even this official record contains omissions, distortions and inaccuracies that have to be factored in when they are used. Also many meetings and conversations left no record, or only a brief note of the decisions reached but no audit trail of the process by which they were arrived at (Lowe Reference Lowe1997, pp. 240–53). The other serious problem associated with the use of government records is, in the words of Hood and Margetts, ‘the bewildering complexity of modern government's operations’ (Reference Hood and Margetts2007, p. 11). Governments pursued so many contradictory policies simultaneously, whose outcomes were both uncertain and unfulfilled, that it is difficult to establish intention and then link that to the results achieved. Though government policy can be examined from numerous perspectives, the aim here is to focus on those which had a bearing on Big Bang and establish whether the intended outcome was the transformation of the City of London into an internationally competitive global financial centre (Hood and Margetts Reference Hood and Margetts2007; McFarlane and Anderson Reference Mcfarlane and Anderson2011, pp. 162–4).Footnote ⁶ The official record does provide a means of testing what people said at the time, and some explanation of why, against statements made later when the outcome was known or by those observing what was taking place from the outside. In the final volume of his history of the City of London, published in 2002, David Kynaston admitted that it was still impossible to write a definitive account of Big Bang because all the relevant material was not available, especially that relating to the activities of politicians and civil servants (Kynaston Reference Kynaston2002, pp. 616, 624). Though it is probably impossible to capture the level of detail required to know what those taking the vital policy decisions that led to Big Bang really thought, as required by Bevir and Rhodes (Reference Bevir and Rhodes1998), the additional documentation now available does mean that it is possible to get closer to this ‘official mind’ than in the past (Bevir Reference Bevir2011, pp. 184–92).

II

Central to the process leading to Big Bang was the relationship between the British government and the City of London. This is frequently viewed through the connections between the City and the Treasury intermediated through the Bank of England. The ability of the City to influence policy was a well-established view before Big Bang. In 1979 Longstreth stated that, ‘The City has, in other words, largely set the parameters of economic policy’ (Longstreth Reference Longstreth and Crouch1979, p. 161), while Gamble, writing in 1981, identified the close relationship between the Bank of England and the Treasury as the route through which this influence was exercised (Gamble Reference Gamble1981, p. 128). However, the classic accounts of this ‘core institutional nexus’ appeared at the time of Big Bang. In 1984 there appeared Ingham's book, Capitalism Divided, which took the long-standing City/Industry divide into the realm of government policy formation through the operation of the core institutional mechanism, the City/Bank/Treasury Nexus. That was then followed in 1988 by Newton and Porter's book, Modernization Frustrated, which traced the policies followed by successive governments in the twentieth century to the interests of the Bank of England and thence the City of London (Ingham Reference Ingham1984; Newton and Porter Reference Newton and Porter1988). As Newton and Porter state, ‘Both singly and collectively, the institutions which make up this nexus have, in the legitimate pursuit of their own interests, committed the state to a liberal economic orthodoxy which often conflicted with the best interests of British producers’ (1988, p. xiii). What has proved somewhat elusive is the linking of specific policies to the working of this nexus. Though the City/Bank/Treasury Nexus was a two-way relationship, it was most frequently used to stress the ability of those in the City to influence the Governor and officials of the Bank of England. In turn they were able to influence the Chancellor of the Exchequer and the Treasury officials and so determine the monetary, financial and even economic policy followed by government, irrespective of the political party in power. Big Bang would be an obvious example of the City's ability to determine policy and was viewed as such at the time (Hamilton Reference Hamilton1986, p. 133). Subsequently, that was the conclusion of many, especially as Big Bang coincided with the Conservative Party being in office, as they were believed to be more inclined to respond positively to City pressure (Budd and Whimster Reference Budd and Whimster1992, p. 15; Francis Reference Francis1993, p. 180; Morgan and Sturdy Reference Morgan and Sturdy2000, p. 50; Talani Reference Talani2012, pp. 18–19, 60–2).

However, Ferguson's study of Warburg has cast doubt on the close relationship between City figures and the Conservative Party. Siegmund Warburg emerged as the most powerful financier in the City from the 1950s onwards through combining the practices of Wall Street investment banks and the City's long-established international connections. In doing so he had to surmount opposition from within both government and the City, which suggests that the core institutional nexus was deeply fractured. Warburg also had a far closer relationship with the Labour leader Harold Wilson, even before he became Prime Minister, than with either of the Conservative leaders, Edward Heath or Margaret Thatcher. This was despite the fact that one of his own staff, John Nott, had strong links with the Conservative Party, eventually becoming an MP and cabinet minister. There is also no evidence that Warburg tried to use his political connections to further the interests of his bank or protect it from the advances being made by foreign rivals. As it was, Warburg increasingly left the management of the investment bank, Warburgs, to his fellow German-Jewish refugee, Henry Grunfeld, from the mid 1960s onwards. This left Warburg free to pursue wider political matters, such as promoting European integration, and developing an overall strategy for the business that bore his name. Neither of these was particularly successful despite Warburg's status and connections. The business strategy became increasingly fraught, for example, during the course of the 1970s and 1980s as Warburgs faced growing competition from European and US banks in the business it had pioneered, notably the issue of Eurobonds (Ferguson Reference Ferguson2010, pp. 217–19, 225–8, 276–83, 306, 364–5, 371, 376–8, 413–16). What the example of Siegmund Warburg reveals is the complex and multilayered nature of the relationship between those in the City and their counterparts in government.

There is also an alternative view that questions whether the City of London possessed the power required to alter government policy even if it tried (Moran Reference Moran1981, Reference Moran and King1983, Reference Moran1988; Michie Reference Michie, Michie and Williamson2004, pp. 31–55; Michie Reference Michie, Battilossi and Reis2010b, pp. 79–96). To support such a view there is evidence of a climate of distrust and even dislike between government and, particularly, the Stock Exchange, whether among Conservative or Labour politicians or civil servants. In 1949 Robert Hall, the economic adviser to Labour and the Conservative governments between 1947 and 1961, expressed his opinion that ‘The Stock Exchange is mad anyway and I don't think we should take any notice of them’ (Cairncross Reference Cairncross1989, p. 96).Footnote ⁷ Similarly, Christopher Tugendhat, the Conservative MP for the City of London and Westminster, told the Council of the London Stock Exchange in 1971, when the Conservatives were in power, that ‘neither (Nicholas) Ridley (President, Board of Trade) nor the Civil Service are very familiar with Stock Exchange procedures, or particularly inclined in your favour’.Footnote ⁸ Later in 1983, after discussions with both Labour and Conservative politicians, the Council of the London Stock Exchange concluded that ‘Politicians tended to be uncertain people.’Footnote ⁹ Finally, it can be questioned whether the Bank of England or the Treasury were pawns of their City or political masters. George Peden's research has revealed that the Treasury had an agenda of its own (Peden Reference Peden2000; Daunton Reference Daunton2002, p. 362). Newton noted that the Bank of England took an independent line over monetary policy whatever political party was in power or what City interests preferred (Reference Newton2009, p. 86), while Collins and Baker (Reference Collins, Baker, Holtfrerich, Reis and Toniolo1999) Goodhart (Reference Goodhart, Friedman and Goodhart2003) have pointed to its operational independence.Footnote ¹⁰ Tomlinson (Reference Tomlinson2007) has stressed the continuity of economic policy, despite the different ideological stances of successive governments, because of the constraints imposed by spending commitments. What a study of Big Bang provides is a way of evaluating the working of the Treasury/Bank/City Nexus as a mechanism through which the City of London was able to influence government policy.

III

What Big Bang involved, when it took place in October 1986, was a series of technical changes to the structure and organisation of the London Stock Exchange as well as the transformation of the physical market it provided. Membership was extended to any who wished to join, including banks and foreign brokers who had previously been excluded. Members were no longer required to operate either as a broker, acting on the instructions received from non-members, or a dealer (known as a jobber) who traded securities exclusively with members, generating an income from the difference between the buying and selling prices that they quoted. Brokers did not have to charge non-members for the service they provided according to a mandatory scale of minimum commission rates. The buying and selling of securities was no longer confined to the trading floor located in the London Stock Exchange but could take place through office-to-office telephone links based on current prices displayed on computer screens. Finally, the Securities and Investment Board (SIB) was established as the statutory regulator for the entire securities industry, replacing the informal responsibility exercised by the London Stock Exchange, creating the opportunity for multiple stock exchanges to exist.

For the London Stock Exchange the results of Big Bang were revolutionary as it lost its control over the UK securities market.Footnote ¹¹

This comprehensive reform of the London Stock Exchange did not come ready formed in 1986 but can be traced directly back to the decision taken by the government to end exchange controls in October 1979. That decision was crucial for the Stock Exchange as it exposed its members to external competition for the business of the large institutional investors. This decision needs to be analysed with reference to whether the government intended to expose the Stock Exchange to competition knowing what the consequences would be. Following this, a court case involving the Stock Exchange will become the focus. Under the previous Labour government, the Office of Fair Trading (OFT) had referred the Stock Exchange rulebook to the Restrictive Trade Practices (RTP) Court in order to investigate the existence of fixed minimum commissions and restrictions on membership. In 1979, the incoming Conservative government had to decide whether to allow the case to run its course or exempt the Stock Exchange and reach an alternative settlement. They chose to refuse an exemption. That decision was reversed in 1983, in return for the Stock Exchange agreeing to abandon minimum commission rates, which was the substance of the Goodison–Parkinson agreement. The government's approach to the court case will be analysed to see if they intended to use it as a lever to force a reform of the Stock Exchange, and understood what the implications would be for the City of London as an international financial centre. Finally, the London Stock Exchange was not a passive participant in all that was taking place. The agreement made in 1983 was between the London Stock Exchange and the Department of Trade and Industry and reflected their mutual interests at that time. This approach requires the use of contemporary evidence from all the participants rather than the general comments of those involved (Kandiah Reference Kandiah1999). Without that it is impossible to separate intention from outcome, as was the case with those writing without access to the full documentation recording the actions and motivations of those involved (Reid Reference Reid1988, pp. 11, 23). That is now possible through access to the contemporary records of the Treasury, Bank of England and Department of Trade. These records contain research memoranda, notes of meetings, and correspondence between departments and other institutions.Footnote ¹²

IV

Both the decision to abolish exchange controls and the refusal to exempt the Stock Exchange from the RTP Court were taken on the same day, 23 October 1979. Exchange controls had been a central tenet of British financial and economic management since the Exchange Control Act of 1947. Their abolition gave British institutional investors unrestricted access to foreign exchange, so removing any impediment to international investment. In less than a year, the percentage of UK institutional investors' assets held overseas more than doubled, from 7.8 per cent to 16.4 per cent, and continued to rise. The annual flow of investment abroad increased from £1 billion in 1979 to £18 billion in 1985 and overseas brokers handled roughly 90 per cent of this business. London Stock Exchange members now had to compete with overseas brokers on foreign markets for a growing share of the business generated by British investors, and were losing out as a result (Reid Reference Reid1988, p. 11; Roberts Reference Roberts2000, p. 133). This put pressure on the London Stock Exchange to introduce reforms (Kandiah Reference Kandiah1999, p. 104). However, that leaves open the question of whether the government intended the abolition of exchange controls to force the Stock Exchange to become more competitive and so accelerate change in the City. In his budget speech of March 1986, the Chancellor of the Exchequer, Nigel Lawson, hinted that they did:

Coakley and Harris have argued that the government had ‘strong driving interests’ in the ‘abolition of exchange controls’ and that they sought to ‘promote the international competitiveness of the City’ (Reference Coakley, Harris and Michie1992, pp. 40, 38). In contrast, Roberts argues that the decision lacked ‘careful strategic or structural consideration of its impact on the City’ (2000, p. 137). In studying the decision to abolish exchange controls, the relationship between civil servants and politicians must be understood, and the motivations of one must not be confused with the motivations of the other. As Nigel Lawson, the Financial Secretary, commented, civil servants only have importance in policy decisions when ministers are unsure of which path to pursue.Footnote ¹⁴ This is confirmed in the correspondence between two Treasury officials, Robin Butt and David Hancock. Butt lamented that Hancock was suffering from ‘the strains of trying to give a comprehensive and even-handed presentation of the arguments when the conclusion has been pre-determined by the views of a potential Conservative Chancellor’.Footnote ¹⁵ What emerges from the available evidence is that political necessity, due to an ideological commitment made in opposition, was the chief motivating factor in the government's decision to abolish exchange controls.Footnote ¹⁶ The ending of exchange controls was a policy driven not by any belief that it would have major benefits for the City of London. There were even concerns that it might damage Britain's financial institutions because of greater foreign competition that they were not prepared for. Instead, it was seen as the removal of a restraint on competition for the economy generally and that would have the effect of forcing British business, such as manufacturers, to respond. The sense of ideological commitment is evident when the Conservatives came into government. The Chancellor wrote to Thatcher detailing his ‘determination to implement the policies to which we are committed’ and to ‘further our aim of freeing the market economy’.Footnote ¹⁷

However, ‘freeing the market economy’ was a very broad aim. When the Conservatives came to power in 1979 they did embrace a belief that encouraging competition by removing restrictive practices was a means to reverse Britain's economic decline, as is evident from the budget speech made by Geoffrey Howe, as Chancellor of the Exchequer, on 12 June. ‘It is our belief that many of these failures are themselves the result of actions and interventions by the Government themselves – laws that stand in the way of change and stifle enterprise.’Footnote ¹⁸However, that does not mean that they had a plan of how to achieve the ends they desired with respect to the City. Whilst in opposition the Conservatives had been lobbied by the London Stock Exchange over the problems created by exchange control for investors. In February 1978, Nicholas Goodison, the Chairman of the Stock Exchange, wrote to Thatcher urging ‘we need action on exchange control since the effect of this on our relative strength as a capital market in a competitive world . . . has been disastrous’.Footnote ¹⁹ At that stage the London Stock Exchange saw exchange controls as an obstacle because of the restrictions they placed on competing for international business. Thatcher's lack of a response suggests that these comments gained little traction in the Conservative Party. In no correspondence between Conservative politicians was the issue raised. In power there was a similar indifference to any opportunity or competitive threat faced by the London Stock Exchange, resulting from the abolition of exchange controls. This was bolstered by the expert opinion they received from the Bank of England. An internal research note by Sir Kenneth Couzens, that was passed from Lawson to Howe in September 1979 with strong endorsement, suggested that with the decline of the dollar, ‘the highly sophisticated’ nature of British financial institutions, and a ‘wider range of marketable assets than Frankfurt and Tokyo’, UK investors would continue to favour ‘sterling asset’.Footnote ²⁰ There is no sense that the government intended to expose the Stock Exchange to international competition and thus hasten the need for reform. Conversely, the government was quietly confident over the international competitiveness of the securities industry if exchange controls were abandoned.

Therefore, contrary to the claim made by Plender and Wallace that the decision to abandon exchange controls was ‘taken with virtually no consideration about its potential effect on the structure of the City’ (1985, p. 20), the government believed it was aware of the consequences. Officials at the Bank of England, which was responsible for exchange control, had briefed the government on the possible international consequences of abolition, but these did not relate to the Stock Exchange or the City but to the wider economy.Footnote ²¹ Of major concern to the Bank of England was that the abolition of exchange controls would allow British investors to place more funds abroad and so damage the ability of British companies to raise capital.Footnote ²² Estimates for the level of such an outflow were consistently updated right through October 1979 with a rough consensus around the £1.5–2 billion a year mark.Footnote ²³ In contrast, the impact on the securities market was considered to be minimal, as in a note produced by the Bank of England and passed to the Treasury. David Walker, the author and executive director responsible for City markets at the Bank, explained that he ‘got some firsthand reactions from major institutional investors to the hypothetical proposition that exchange control was altogether abandoned’. He concluded that ‘none consulted expects to see any significant stock adjustment in the short-term’ and that the institutional investors showed an appetite for overseas stocks that was ‘a good deal less than I, and possibly others, had expected’.Footnote ²⁴ As a result of Walker's note a meeting was held with the Chancellor, Financial Secretary and Governor of the Bank of England. Those present concluded that there would be no great shift towards the NYSE amongst investors as ‘it had been less attractive than the UK market for the past six years’.Footnote ²⁵ The government's prediction for the level of switching by institutions into international investments turned out to be a serious underestimate as it was around £4 billion per year by 1981, or roughly double the Treasury estimate.Footnote ²⁶ Whilst this miscalculation undoubtedly increased the magnitude of the impact on the Stock Exchange, the real error lay in the government's lack of consideration of how this outflow would occur. The assumption was that it would take place via members of the Stock Exchange, but this proved not to be the case (Hamilton Reference Hamilton1986, p. 130; Thomas Reference Thomas1989, p. 34). Once this was recognised, officials used the London Stock Exchange's own argument that removal of exchange controls created ‘a tremendous opportunity for London to recover its importance as an international capital market’.Footnote ²⁷ Though the abolition of exchange controls was warmly greeted in the City as an opportunity to consolidate its position as a leading international financial centre, this was not the government's intention.Footnote ²⁸ Similarly, no evidence can be uncovered that the decision was designed to improve the competitive position of the London Stock Exchange, though that is widely believed to be the case (Overbeek Reference Overbeek1990, p. 196).

V

In 1976, the Restrictive Trading Practices Act (RTP) was extended to cover services as well as manufacturing. The Stock Exchange did not apply for exemption as they regarded themselves as providing a regulated market while it was their members that provided a service. Thus it was a shock to them when they were told that their rulebook was to be investigated as fixed commissions and restrictions on membership were suspected of inhibiting competition and raising the charges for customers of the Exchange (Poser Reference Poser1991, p. 26; Reid Reference Reid1988, p. 26).Footnote ²⁹ In February 1979, the whole of the Stock Exchange rulebook was then referred to the RTP Court by the Office for Fair Trading (OFT) for inspection.Footnote ³⁰ The impending court case against the London Stock Exchange was an immediate issue for the incoming Conservative government to deal with.Footnote ³¹ In May 1979, the Chancellor of the Exchequer, Geoffrey Howe, wrote to John Nott, the Secretary of State for Trade, stating that he would ‘like to discuss this with [Nott] as soon as possible after the Budget’ and consider ‘the possibilities of review by some more appropriate body’.Footnote ³² Howe was in support of exempting the Stock Exchange from the court proceedings.Footnote ³³ The other relevant Treasury minister, Nigel Lawson, broadly agreed with Howe's stance.Footnote ³⁴ At this stage Richardson, the Governor of the Bank of England, did try to bring wider City issues to Howe's attention. He wrote to Howe suggesting that ‘I would like to discuss with you the extent to which the specific question relating to competition . . . might fall into the ambit of a wider review.’Footnote ³⁵ The Bank of England was beginning to articulate a view that reform was necessary if the securities market was to be made more competitive. Footnote ³⁶ This was in line with the Bank of England's consistent support for the City of London as an international financial centre. This support, however, was never unconditional but was tempered by the Bank's own self-interest and the constraints imposed by government financial and monetary policies. As a consequence the Bank of England did not promote the City of London directly, either collectively or particular parts of it, but indirectly by maintaining a flexible regulatory framework, encouraging competition and minimising the impact of high taxation and exchange controls. These policies clashed, at times, with the interests of individual components including the major banks and the Stock Exchange (Capie Reference Capie2010, pp. 137, 183–7, 425, 442–3, 780–3, 783). At this stage discussions at the Bank focused on the necessity of amalgamations to create financial conglomerates that would be better capitalised and so able to compete internationally for institutional business.Footnote ³⁷ There was no initial response from Howe, which may reflect the ‘deterioration of relations between the two institutions’ as soon as the Conservative government came into power (Lawson Reference Lawson1992, p. 84).

The decision of whether to exempt the Exchange was solely in Nott's hands. Nott shared the desire of Howe and Lawson to strengthen competition policy and was concerned that granting the Stock Exchange an exemption would be seen as hypocritical in the press. Nott handwrote comments on a draft note stating ‘there have already been comments in the press to the effect that if we were to exempt the Stock Exchange at this junction our whole stance on prices and competition policy would be undermined’.Footnote ³⁸ According to Goodison, Nott ‘seemed entirely absorbed by the political aspects of what he had decided and seemed largely unconcerned by regulation in the securities market’.Footnote ³⁹ However, Nott's refusal to exempt the Stock Exchange was also a personal one, which led him to disregard the advice he was given.Footnote ⁴⁰ His own officials at the Department of Trade stated that their ‘advice . . . had been opposed to the line Nott was now taking’.Footnote ⁴¹ Nott's hostility towards the City, evident in his memoirs, was fostered by his time spent at the bank, S. G. Warburg. His view was that ‘the City is living in a cloistered world all of its own with no real contact with ordinary people and their concerns’ and his refusal ‘was in large part inspired by the vigorous, unsentimental, meritocratic example of Warburg’ (Nott Reference Nott2002, pp. 99, 123, 182–3).Footnote ⁴² In contrast to Nott's personal determination to press ahead with the case, Howe took a more technical view. Howe's concern, having listened to his Treasury officials and City opinion, was that the court proceedings were likely to be cumbersome and unpredictable and during them ‘the Stock Exchange will be inhibited from desirable innovations’. If the case went against the Stock Exchange the result would be ‘turbulence in the market’ and ‘long-term structural damage’. Howe had a vague preference for a Monopolies & Mergers Commission investigation but once it became clear that Nott would not exempt the Exchange, he lobbied for the addition of a clause to the Competition Bill which allowed a ‘stay of execution’ so that any court decision would not be implemented for six months. This would give the Stock Exchange time to react.Footnote ⁴³ That was the decision reached and it was enshrined in the Competition Act of 1980.Footnote ⁴⁴ As yet there was no clear plan to engineer a revolution in the City through Stock Exchange reform, as has been suggested (Johnson Reference Johnson1991, p. 197).

VI

In the wake of the decision not to exempt the Stock Exchange from the RTP Act preparations were made on both sides to argue the case in court. Frustration with the process of the court proceedings was evident amongst officials. Sir Douglas Wass, Permanent Secretary at the Treasury, in a letter to the Deputy Governor of the Bank, Kit McMahon, said the Treasury felt the RTP procedure was ‘cumbersome and long’ with a conclusion not expected to be reached until 1985.Footnote ⁴⁵ At the Bank of England David Walker complained in an internal note that it is ‘impossible for the SEC [Stock Exchange Council] to discuss ideas and possibilities for evaluation of the market’.Footnote ⁴⁶ Geoffrey Howe proposed negotiations with the Governor of the Bank, Gordon Richardson, and Lord Cockfield, the Secretary of State for Trade, to discuss the possibility of an out-of-court settlement.Footnote ⁴⁷ According to Walker, ‘For reasons that are not yet clear to us . . . Lord Cockfield is interested in finding a way of taking the case out of the Court. This is the sense in which the iron is hot.’Footnote ⁴⁸ Cockfield confirmed this by agreeing to a proposal for the Stock Exchange to consider in May 1983 with the intention of ‘bringing the restrictive practices court case to an end’.Footnote ⁴⁹ The dilemma facing the government was how to exempt the Stock Exchange from the court case in such a way as not to contradict their rhetoric on competition policy.Footnote ⁵⁰

There was no evident change in attitude after the election in June 1983. Cecil Parkinson, the new occupant of the expanded role of Secretary of State for Trade and Industry, wrote to Nigel Lawson, the new Chancellor, and stated that ‘I should be disposed to accept the advice outlined in the paper’ based on the agreement reached by Cockfield and Howe in May.Footnote ⁵¹ In a letter to Margaret Thatcher, Parkinson sought to convince her to support the exemption of the Stock Exchange. He claimed that the agreement ‘will be welcomed not only by the Stock Exchange, but by the City generally’.Footnote ⁵² In his memoirs Cecil Parkinson insisted that, in pushing for an agreement, he ‘was concerned that our Stock Exchange would become a peripheral institution on the world financial scene and that it would be difficult for London to maintain its position as a world financial centre with a second rate securities market at its heart’ (Parkinson Reference Parkinson1992, p. 244). There is no trace of this sentiment in Parkinson's interactions with either the Chancellor or the Prime Minister. At the Bank of England David Walker pressed the case for reform, stressing that ‘if the London market is to avoid relegation to the 2nd or 3rd division of the world league, the Stock Exchange in London needs to be flexible and responsive’.Footnote ⁵³ There is little to suggest that the government shared this concern or saw a connection between competition policy and the transformation of the City. In his memoirs, Lawson did state that the Stock Exchange had ‘one fatal practical defect’ in its old system. This was that ‘it was woefully undercapitalized’ but the agreement made in 1983 was focused on improving competition by ending fixed commission rates not on addressing that issue directly (Lawson Reference Lawson1992, p. 399). As Lawson attested in an interview, it had become obvious that the Stock Exchange was going to lose the court case and the government's concern was the disruption to the market this would cause.Footnote ⁵⁴ By exempting the Stock Exchange from the restrictive practices legislation, in return for the dismantling of ‘all the rules which at present prescribe minimum scales of commission, completing this by 31st December 1986’, the government avoided any possible market disruption and achieved a symbolic victory for its competition policy. More radical changes were not considered.Footnote ⁵⁵ On 11 October 1983, the members of the Stock Exchange accepted this deal at an Extraordinary General Meeting.Footnote ⁵⁶ This formed the basis of the legislation that was later accepted by parliament.

The government's focus was not on sparking a process to propel the Stock Exchange, and as a consequence the City of London, to a position of global influence. However, this does not necessarily mean that the government had no idea of the potential consequences of the reform package, though that has been argued (Fishman Reference Fishman1993, p. 35). Quite quickly a number of those in government noted the implications of what had been agreed. Alex Fletcher, Minister for Corporate and Consumer Affairs, thought that the City was about to experience ‘pretty fast change’ (Plender and Wallace Reference Plender and Wallace1985, p. 104). Nigel Lawson believed ‘further changes are probably inevitable’ and wanted to ensure that the process through which minimum commissions were gradually dismantled ‘should be such as to give us full advance warning of developments likely to precipitate further rule changes’.Footnote ⁵⁷ However, what is important in assessing the government's motivation in reaching the Goodison–Parkinson agreement was whether they were aware at the time of these wider implications both for the securities market and the City.

VII

One of the key changes that resulted from the Goodison–Parkinson agreement was the introduction of dual capacity. This meant that members of the London Stock Exchange would be permitted to act as both brokers and dealers, opening up the possibility that Wall Street-style investment banks could be formed in London. However, the government explicitly stated in their negotiations before the Goodison–Parkinson agreement in 1983 that single capacity was to be preserved.Footnote ⁵⁸ This was despite the fact that they had been warned by both the Stock Exchange and the Bank of England as early as 1979 that the ending of minimum commissions would lead to the demise of single capacity.Footnote ⁵⁹ In a meeting in May 1983, between the Treasury, Department of Trade and the Bank of England, Peter Middleton, from the Treasury, announced that ‘there was a strong possibility that the competitive pressures so unleashed [by the end of minimum commissions] would lead to the collapse of single capacity’.Footnote ⁶⁰ However, they were not aware of the far-reaching implications for the London Stock Exchange that would come from the introduction of dual capacity. Instead, the focus was on the contribution that the separation between broker and jobber made to investor protection. As the broker had to transact all business through an intermediary, the jobber, the investor was guaranteed that it accurately reflected prevailing prices (Cobbett Reference Cobbett1986, pp. 125–7). The problem the government faced was that the Gower Report on financial services regulation was expected to recommend the continuation of single capacity because of the role it played in investor protection.Footnote ⁶¹ This influential report formed the basis for a new Financial Services Act. All that the Department of Trade and Industry could suggest in September 1983 was that the Stock Exchange would be expected to put an alternative system of investor protection in place ‘if and when the present system of single capacity disappears’. This was endorsed by Cecil Parkinson.Footnote ⁶²

The next two developments resulting from the Goodison–Parkinson agreement were the need to improve the capitalisation of member firms and the opening up to international membership. The two were closely related as allowing greater outside ownership of member firms was intended to resolve the capitalisation issue. Though the Bank of England had long been aware of the issue of undercapitalisation (Vogel Reference Vogel1996, p. 37, 104),Footnote ⁶³ the government only seems to have recognised their concerns in August 1983. The Governor of the Bank of England, Robin Leigh-Pemberton, wrote to Nigel Lawson that the ‘improved competitiveness of the British securities market and firms in world securities trading activity will depend in part on a substantial strengthening in the capital base of Stock Exchange member firms’. The foreign takeover of member firms was raised as a possibility.Footnote ⁶⁴ Lawson's response was that ‘the question of significant foreign ownership of member firms . . . will need careful consideration’.Footnote ⁶⁵ Responding to the Bank of England's initiative, the question of foreign ownership became a dialogue within government, involving the Department of Trade and Industry and the Treasury.Footnote ⁶⁶ It was not until December 1983 that the threat to Stock Exchange members from the ending of the minimum commission rules was finally recognised within government.Footnote ⁶⁷ The reaction was a defensive one rather than seeing it as contributing to making the London Stock Exchange and its members more competitive, let alone the City as a whole. In December 1983 the Secretary of State for Trade and Industry, at a meeting with the Bank and the Treasury, looked for advice on how the competition from abroad could be managed ‘to the advantage of British houses’.Footnote ⁶⁸ The government had formulated no method of doing so and were reluctant about embracing an international City. Even with hindsight, Lawson admitted that he did not anticipate the American interest in member firms once the restraints imposed by the minimum commission rules and single capacity had been removed.Footnote ⁶⁹

VIII

As the London Stock Exchange recognised that a link existed between minimum commission rates and single capacity, the question arises as to why they accepted the proposals inherent in the Goodison–Parkinson agreement. The reason is that they did not believe in 1983 that the consequences would be as great as they turned out to be. Despite the ending of fixed minimum commission rates in New York, the NYSE remained the dominant securities market in the USA, with its structure and organisation intact.Footnote ⁷⁰ It was only in the months that followed the agreement reached on 20 July 1983 that the implications of the ending of minimum commission rates become apparent on the Stock Exchange. It was then that they began to recognise the link between fixed commissions, single capacity and the microstructure of the securities market that the London Stock Exchange provided. Fixed minimum commission rates were introduced by the London Stock Exchange only in 1912, over a century after the institution had been established. They were designed to meet a specific threat to the division that existed between brokers and jobbers. Brokers bought and sold shares on behalf of non-members, charging them commission for doing so. Jobbers were dealers who made a market in securities by quoting prices at which they would buy or sell, making a living from the difference between the two. All this took place on the floor of the Stock Exchange to which non-members were denied access. It was the existence of these jobbers that made the London Stock Exchange such an attractive securities market. Jobbers were always ready to buy what a broker wanted to sell and sell what a broker wanted to buy at a price that was close to the current one. This was essential for those who wanted to trade large volumes quickly and close to current prices, as was the case when such activity was done on the basis of borrowed funds or involved international arbitrage.Footnote ⁷¹ Both these activities were central to the London Stock Exchange before World War I, when it was the largest and most liquid securities market in the world and at the centre of the global trading of stocks and bonds. No other stock exchange had the same market structure, including the NYSE.Footnote ⁷²

However, by the early twentieth century the growing use being made of the telephone provided a means of trading that by-passed the floor of the Stock Exchange. Brokers were able to make their own market in securities through contacting large investors such as banks and trading between them. For this purpose they used the bid and sell quotes available from jobbers on the floor of the Stock Exchange. Conversely, jobbers were doing business directly with non-members, especially large institutional investors, and so cutting out the brokers. Thus, the root cause of the rule banning ‘dual capacity’ was a desire to preserve the advantages possessed by members as only they were permitted access to the Stock Exchange's own trading floor and current market prices. What this represented was the perpetual dilemma of how to pay for an organised market. In return for their annual fees, members of stock exchanges received exclusive access to the trading facilities provided on the floor of the Stock Exchange and knowledge of the current prices at which securities were being bought and sold. This gave them a competitive advantage over non-members to compensate for the cost of the fees they paid to become a member of a stock exchange. These fees were essential as they met the costs of maintaining, staffing and supervising the market. Different stock exchanges achieved this in different ways.Footnote ⁷³

In order to bolster this division between brokers and dealers, so as to preserve the benefits it brought to the market as whole, in 1909 members of the London Stock Exchange were formally prohibited from operating in ‘dual capacity’. That meant that no broker was allowed to make a market in securities, while no jobber was allowed to transact any business with a non-member. That measure was ineffective. It proved easy for jobbers to find brokers willing to pass the business through their accounts for a small fee, while brokers could pass off deals with foreign banks and finance houses as transactions undertaken on the initiative of clients. The response was the introduction of compulsory minimum commissions three years later, in 1912, which forced members to charge for every transaction they handled, apart from the business done by jobbers with their fellow members. Recognising that banks would head the list of those complaining about the introduction of a mandatory scale of charges, because they were used to operating through specific brokers at negotiated rates, it was agreed that a broker could offer them a rebate of 50 per cent of the fee charged. Thus a bank could charge their customers the published commission rate when they passed the order on to a broker and then receive half the fee back for themselves. In this way the members of the London Stock Exchange ensured the loyalty of the banks, by giving them a privileged position within the charging structure.

Though this was the reason why the minimum commission rule was introduced, its continuance was increasingly justified as an investor protection measure, as all trading went through an independent intermediary. By the time the London Stock Exchange emerged from World War II it occupied a position as the unofficial regulator of the British securities market. This boosted its ability to enforce its rules and regulations on the entire membership. The merger of all British and Irish stock exchanges in 1973 left London without a rival in its home market. Exchange controls made it difficult for those outside the UK to compete for business in £ sterling-denominated securities or attract the custom of British investors. That position did not change until 1979 when the newly elected Conservative government abandoned exchange controls. The effect of that was to expose the London Stock Exchange to external competition, especially the NYSE given the presence of so many US brokers in London. This did take place, with the growth of a market in New York for the ADRs (American Depository Receipts) of the largest British companies. However, for most members of the London Stock Exchange, this was only a minor loss of business. The London Stock Exchange was the deepest and broadest market for the shares issued by British companies, and so its prices provided the reference point against which all sales and purchases were measured. By restricting entry to its trading floor to members only, and delaying the dissemination of current prices, the London Stock Exchange retained a competitive advantage over all rivals.Footnote ⁷⁴ Consequently, even after 1979 most members of the London Stock Exchange saw no reason to abandon fixed commission rates, which generated a guaranteed income, in response to competitive pressures.

Reluctant as members were to abandon fixed commission rates in 1983, it did appear to be a small concession as no other changes were required, such as the end of dual capacity and the admission of banks to the trading floor. Further change could then take place gradually as was already the case.Footnote ⁷⁵ The problem was that without minimum commission rules the whole structure of the securities market provided by the London Stock Exchange became unstable. Copying the practices and organisation of the NYSE was no solution. The US securities market was dominated by the investment banks that had long enjoyed access to the trading floor and were immune from competition from the retail banks because of the Glass–Steagall Act and the restrictions placed on nationwide branch banking. That was not the situation in the UK, where there was no prohibition on combining investment and retail banking or on branch banking. It was also quickly recognised that though Wall Street investment banks were prospering, the NYSE was slowly losing business to NASDAQ and would continue to do so unless it changed, especially the commitment to a physical trading floor. Rapid technological change in both communications and data processing was undermining the dominance of the trading floor. Those buying and selling stocks and bonds could operate efficiently from the well-equipped dealing rooms located in the large investment banks that were connected to each other by telephones and computer screens.Footnote ⁷⁶ By following this path the London Stock Exchange could gain a competitive advantage not only over those stock exchanges that retained minimum commission rules but also over the NYSE.

This did happen as a result of Big Bang. One estimate suggested that commissions had fallen by around 50 per cent by February 1987, while many transactions were done directly with dealers and so involved no payment. By 1989 turnover in foreign stocks in London had reached £40bn per annum.Footnote ⁷⁷ Though London was not able to retain all this new business, as other stock exchanges were forced to respond, the long-term result was to make the City of London into a global hub for the cross-border trading of securities. In November 2006 the London Stock Exchange was responsible for 41 per cent of total cross-border turnover in foreign equities.Footnote ⁷⁸ However, this success of the London Stock Exchange can be contrasted with the failure of Britain's own financial community to meet the post-Big Bang challenges, despite the expectation that a number UK global investment banks would emerge. Among those expected to benefit most from Big Bang was Warburg's. Warburg's took the opportunity provided by Big Bang to buy two major brokers and a leading jobber with the aim of converting itself into a serious rival to the Wall Street investment banks. It failed to do so, tried to merge with one US investment bank, Morgan Stanley, in 1994 and was then acquired by the Swiss Bank Corporation in 1995, while its asset-management subsidiary was bought by another US investment bank, Merrill Lynch, in 1997. What Big Bang had done was to expose the City of London's brokers, dealers and investment bankers to external competition and, even when combined, they lacked the scale, culture and management required to survive. Prior to its collapse in 2009 the US investment bank Lehman Brothers was the largest dealer on the London Stock Exchange (Ferguson Reference Ferguson2010, pp. 364–5, 371, 376–8, 413–16).

IX

In conclusion, what an examination of the process leading up to Big Bang in 1986 reveals is the complexity of political decision-making as it involved both individuals and institutions on the one hand and the need to balance short and long-term interests across a wide spectrum on the other. There was no path dependency between the election of a Conservative government in 1979 and Big Bang in 1986. The agreement reached between the British government and the London Stock Exchange in 1983 produced a response that none predicted. In December 1985 the Economist magazine observed that ‘Since July 1983 the City has changed far more quickly than most people expected.’Footnote ⁷⁹ Moreover, though the prism of the Treasury/Bank/City nexus does provide a useful analytical tool, it emerges as too narrow and simplistic. Beyond the Treasury on one side were the politicians who were in power and the personal and party motivations that drove them. On the other side the City was not a single unity but composed of different factions simultaneously competing and co-operating in the furtherance of their own business agenda. In between were the Treasury and the Bank of England, both controlled by and answerable to government in this period but also aware that, while politicians and financiers came and went, career civil servants went on and on forever.

The answer to the question of whether the Big Bang in the City was an intentional revolution or an accident depends on the level of detail required. When the Conservative government of Mrs Thatcher came to power in 1979 its intention was to reverse the decline of the British economy and the means chosen was to remove obstacles to competition. In that light Big Bang can be seen as an intentional revolution. However, there is an absence of evidence to connect the sequence of events that led to Big Bang, and even less to its consequences, with any conscious decision by the Conservative government whether through the actions of its politicians or officials. Nor was Big Bang the product of City influence with the deliberate intention of making London into a global financial centre. Again, no evidence can be found to support that view. When it comes down to detail Big Bang was an accident that had major consequences few of which were expected when the Goodison–Parkinson agreement was made in 1983. Here there are many similarities between what happened to the London Stock Exchange and the wider reform of the British financial system, including banking. There is no evidence that the Conservative government under Mrs Thatcher intended to transform British banks into the dynamic sector of the British economy they had become prior to the Global Financial Crisis of 2007/8. Neither the Conservative government that won the election of 1979 nor, in all probability, the Labour government that emerged from the landslide victory in 1997 had a detailed plan of how to transform the UK financial system into a globally competitive sector that would replace manufacturing as the engine of the British economy. At the same time neither envisaged that their actions would leave British banking vulnerable to a global shock as happened in 2007/8. In claiming the former they would both have to accept the latter. Financial systems are complex organisms that are continually evolving. Intervention by politicians can have both positive and negative consequences. What happened with Big Bang in 1986 can be seen as positive for the London securities market, as it made it globally competitive. In contrast, the implications of those changes that affected banks, building societies, the discount houses and financial regulation at the same time were less recognised but were to have important negative consequences 21 years later as they made the British financial system more vulnerable in a crisis.