The Finance Curse. Nicholas Shaxson
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for it was a reflection of the age-old clash between finance and other parts of the economy. The Bretton Woods restrictions on speculative financial flows across borders and the remarkable set of New Deal regulations inherited from the 1930s brought this clash into sharp relief.
An old and profitable set of relationships between Wall Street and London had been decisively interrupted. The City, looking with envy at the giant, fragmented, yet fast-growing global marketplace that the Bretton Woods controls had now mostly placed out of its reach, was bottled up inside Britain’s war-shattered domestic economy, plus a few remaining British territories and outposts that still used the pound sterling. Heavily constrained and highly taxed, the City was suffused with lethargy. Oliver Franks, the chairman of Lloyds Bank, lamented that his daily job was “like dragging a sleeping elephant to its feet with your own two hands.” For the next couple of decades Britain and the countries participating in the Bretton Woods system would collectively enjoy the strongest, most broad-based, and most crisis-free economic expansion in history, with growth running at nearly 4 percent in the advanced economies and 3 percent in developing nations, more than twice the rate that had been attained in a thousand years of history.4
British elites, still basking in old imperial and financial glories, dreamed of remaking their system with the City of London at its heart. As Britain’s future prime minister Harold Macmillan put it in 1952, “This is the choice—the slide into a shoddy and slushy Socialism … or the march to the third British Empire.”5
Yet these elites were due for another set of shocks. The British Empire was crumbling. India became independent in 1947. Then, in 1956, everything changed. Egypt’s feisty president, Gamal Abdel Nasser, took over the Suez Canal. Britain and France joined Israel in an invasion of the canal zone, but the United States, which had lost patience with European imperialism and fretted that the escapade would inflame pro-Soviet passions in the Arab world, forced the invaders to withdraw. The colonies realized how weak Britain now was and that it was possible at last to break free. Ghana gained its independence in 1957, followed by Nigeria in 1960, then Uganda, Kenya, Northern and Southern Rhodesia, Bechuanaland (now Botswana), Nyasaland (now Malawi, where I was born), Basutoland (now Lesotho), and a host of others.6 Those last streams of easy profit from the colonies, backed by British gunboats, were now permanently out of reach—or so the newly independent countries thought.
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Nobody could guess it then, but in 1956, the year of Britain’s greatest imperial humiliation, a new financial market was born in London that would nurture itself on the City’s old religion of freedom, and also reinvent the City as a global financial center. This market would grow so spectacularly that it would come to replace and even surpass the empire as a source of wealth and prestige for the City establishment. And this market in London would also create a new offshore playground that would in the decades to come play a central role in Wall Street’s quest to reassert its own dominance over the US government and establishment and the rise of an all-American finance curse.
A few months before the Suez Crisis, some officials at the Bank of England noticed that the Midland Bank (now part of HSBC) was taking US dollar deposits unrelated to any commercial or trade deals. Under Bretton Woods this was classified as speculative cross-border activity, breaches between the separate national safety compartments of the global oil tanker, and this wasn’t allowed. The City of London in those days was an old boys’ network of elaborate rituals and agreement by gentleman’s handshake. Financial regulation was achieved, often quite effectively, by the Bank of England governor inviting people in for tea and using raised eyebrows and other discreetly English signals to let them know if they were out of line. Midland’s chief foreign manager was called in, and whether throats were politely cleared in his direction, a subsequent Bank of England memo noted that Midland “appreciates that a warning light has been shown.” Yet Midland’s new cross-border business was unusually profitable, so it pressed quietly on.7
Any central bank trying to implement the Bretton Woods system needed enough foreign exchange or gold reserves on hand to defend its currency at the fixed level against the US dollar. The Bank of England was constantly anxious about those reserves running out and making it hard for Britain to source essential foreign goods if things came to a crunch. Midland’s dodgy activities were generating healthy dollar fees, bolstering Britain’s dollar reserves, so the Bank of England decided to look the other way. Slowly, as more dollar profits tumbled in, this temporary indulgence solidified into a permanent tolerance. In effect, Britain had decided to host, but not regulate, a new market for dollars in London. Yet this new business wasn’t regulated or taxed by the United States either. So who was regulating it? The answer was: nobody.
Ironically, some of the first users of this über-capitalist market were Soviet and Communist Chinese banks, delighted that their transactions weren’t being regulated or overseen by Western governments during the Cold War. But soon their funds were swamped by far bigger tides, as American banks realized they could come to London and do things they weren’t allowed to do at home, bypassing tight New Deal financial regulations in the States.8 In short, these bankers could take their business elsewhere to escape the rules they didn’t like at home. Amid high anxiety about the loss of empire, the City establishment had quietly turned Britain into an offshore tax and financial haven.
As word got out, more and more banks, especially American ones, got in on the action. The Americans gave this business an appropriate name, the Eurodollar markets, or the Euromarkets. This didn’t have anything to do with today’s euro currency; a Eurodollar was simply a dollar that had escaped Bretton Woods controls and was being traded in these new libertarian markets, mostly located in Europe. Eurodollars were a new form of stateless money and, as a London banker put it, “completely isolated from the monetary mass” of the rest of the UK. Bankers in London would simply keep two sets of books: one for offshore Eurodollar deals in foreign currencies, where (mostly) dollars got borrowed and re-lent around the world, and a second book for deals in sterling hooked into the British economy.
So Eurodollars were in one sense dollars like any other, but in another sense they were different because they had escaped into a market outside government control, where they could behave freely. It’s a bit like helping someone escape from their conservative family home environment in the suburbs and taking them to Las Vegas, then offering them whiskey and cocaine. They are the same person but also different—more fun but also more irresponsible. This is a good way to understand not only Eurodollars but also offshore tax havens.
As London created this profitable offshore market, other preexisting tax havens in the neighborhood—notably Switzerland and Luxembourg—also joined the Eurodollar party.
Switzerland was the granddaddy of the world’s tax havens, having harbored the wealth of European elites in secret for centuries. This dark history is directly connected to the country’s famous political neutrality and also to its snow-capped Alpine geography. After becoming a unified country in 1848, Switzerland was always riven by internal divisions, as hardy and self-reliant Alpine valley communities, often speaking different languages and practicing different religions, were separated from one another by forbidding snow-covered mountain ranges. A German-speaking part around Zurich in the north, center, and east, bordering Germany and Austria, sits next to a very different French-speaking zone in the west, dominated by Geneva and up against the French border, and an Italian-speaking area in the smaller southern segment, above Italy. So if a European war were to break out between France and Germany, for instance, this could pitch Switzerland’s French- and German-speaking zones into conflict with each other. To counter this threat, the Swiss had to adopt political neutrality in all foreign wars. But they also created a remarkable constitutional machinery to minimize internal conflicts, including a major decentralization of power to the cantons and regions, plus a system of government based on rule by consensus between the main parties, called Concordance. These two mechanisms—neutrality and this unique political machinery to curb latent internal linguistic, religious, and cultural antagonisms—have been so successful that they have made Switzerland into one of Europe’s most stable countries. And on this bedrock, a great tax haven has been built.
When Catholic French kings took large loans from heretical Protestants, it was Swiss bankers who acted as the intermediaries,