Sovereign debt management and the globalization of finance: Recasting the City of London’s ‘Big Bang’

Introduction

An important strand of political economy literature has emerged examining the issue of sovereign debt management. This previously under-investigated area has invigorated the debate about the role of the state in financial markets. Rather than question whether states have been the passive victims of rapidly expanding financial markets or have been agents facilitating their growth, focussing on sovereign debt management instead looks directly at the state–market nexus and how state and non-state institutions combine in the task of policymaking. This article contributes to this nascent literature by revisiting the iconic 1986 ‘Big Bang’ deregulation of the City of London. By drawing upon historical material about the drivers and impact of the Big Bang, it proposes that domestic concerns over sovereign debt management and its impact on broader monetary policy were central to its design. In doing so, it captures the direct interest the state had in pursuing regulatory change.

This counters the common depiction about the Big Bang in both popular and academic literature. The reforms are often presented as an iconic moment in the globalization of financial markets, marked by anniversary newspaper commemorations (e.g. Economist, 1996; Guthrie, 2013). Reflecting both the political commentary of the time, and the broader significance of the 1980s as a reformist decade, many political economy writers present the Big Bang as a local product of global competition (Baker, 1999). Driven by competitive pressure from New York in particular, critical writers like Green (2016) and Helleiner (1995) show how the state led the changes, pursuing a ‘liberalization’ of restrictive rules that had governed the securities market, and instilling a competitive order instead. Institutionalist literature on the case, meanwhile, illustrates how liberalization was part of the broader transformation of the British state that was becoming more ‘pro-competition’ and prepared to adapt its regulatory structure to instil and stabilize that new competitive order (Moran, 1990; Vogel, 1996). These accounts note the role of the state in the Big Bang, yet they do not capture its direct interest and direct stake in the reforms. At most the state is acting to support the City.

I instead argue that domestic state interests were central to the Big Bang reforms. The London Stock Exchange (hereafter ‘the Exchange’) is the principal place where the state secured long-term finance, and in the two decades leading up to the reforms, policymakers were becoming increasingly frustrated by the inability of the small and lightly capitalized firms on the Exchange to underwrite the state’s increasingly large debt issues. It left the Bank of England (hereafter ‘the Bank’) having to absorb its own issues, creating excessive liquidity in the financial system. The result of which meant that the operation of debt management was too often contradicting the aims of monetary policy which at the time was dedicated to squeezing credit creation. By changing the rules on membership and trading in Exchange, the Big Bang worked to greatly expand the size and liquidity of the market for British sovereign debt, the gilt-edged market. At the time of the reforms gilt sales accounted for a significant proportion of all deals traded on the Exchange, making up 20% of its revenue (Reid, 1988: 26), and the reforms allowed international financial conglomerates to underwrite far bigger gilt issues than was the case under the old system (Bank of England, 1989).

By recasting the Big Bang in terms of the management of sovereign debt, I offer a way to bring the state’s interest into the centre of the account. This not only offers a new perspective on financial globalization but also speaks to the growing interest in financial statecraft and the impact of sovereign debt in the contemporary global political economy (Di Muzio, 2016; Dyson, 2014; Hager, 2016; Livne and Streeck, 2014; Trampusch, 2015; Yonay, 2016). Often this literature risks casting the state as a passive recipient of creditor agendas when it raises public finance, but as I show through the example of the British state and the Big Bang, global financial markets also present opportunities for states to shape and improve the terms by which they obtain finance. This necessitates an examination of the place of sovereign debt securities in the financial system and the mechanisms through which domestic policy decisions come to affect the workings of global financial markets. In doing so, I demonstrate the importance of the internal factors driving the British state’s pursuit of regulatory change in London’s securities market and offer a perspective on the politics of public debt by showing how sovereign debt management links to broader questions of economic governance and the continued capacity of the state to shape economic life at a time of globalized financial markets.

The paper is divided into four sections. I begin by analysing how existing accounts of the Big Bang stress the importance of global competition in driving the reforms while underplaying the impact on debt management. This is followed by an examination of the place of sovereign debt securities in the financial system to show how deeply embroiled state debt is in the operation of broader economic governance. I then explore the place of the gilt market in British capitalism and the struggle the monetary authorities had maintaining gilt liquidity through the 1960s and 1970s. This section shows how constant attempts at intervention by the Bank eventually ran up against the mechanism for selling gilts itself, which resulted in the demand for reform of the Exchange. Finally, I asses how the Big Bang reconfigured the gilt market to enhance the government’s capacity to raise finance and use monetary policy to intervene in the economy.

Saving the City or saving the state?

The debate over the globalization of financial markets has focussed on two main questions. First, the extent to which competitive pressure forced the state to deregulate financial markets, and second, the extent to which political and social institutions can still play a role shaping global financial market relations. The Big Bang reform of the City’s securities market in 1986 is widely recognized in academic (Baker, 1999; Cerny, 1991; Hall, 2009) and popular (Economist, 1996; Guthrie, 2013) literature as a key episode in the globalization of financial markets. At the time the governing Conservative party, led by Margaret Thatcher, explained the changes as necessary to uphold the City’s place as a financial centre and was keen to present the reforms as ‘a showpiece for Government policy on deregulation and increased competition’ (PREM19/1718 f81, TNA) (Griffiths and Willets, 1986). This account focussed on the external drivers of change, arguing that London faced new competition from all over the world which meant that without significant reform the City would become a financial backwater. It seemed to fit the broader historical moment where global financial markets were apparently overwhelming domestic autonomy, and many commentators – both at the time and since – depict the Big Bang in these terms. Philip Augar (2000), for example, suggests that the Big Bang was driven by the worry that British financial houses would not be capable of competing with international investment banks in the market for corporate equities, and in an increasingly footloose, global capital market, investors would simply take their business to where terms were most favourable. This external pressure was facilitated by another important change in the character of financial markets that came through the growth of institutional investors. Where once the sellers of securities could dictate terms, large institutional investors now gave market power to the buyer (Laurence, 1996; Sobel, 1994). Charles Goodhart (1987: 7), the Bank economist who would later serve on its Monetary Policy Committee, summarizes this perspective on the Big Bang with his argument that ‘all UK financial operations were subject to international competition, so change was necessary’.

Yet as Andrew Sobel points out such outside-in explanations that stress American competition as necessitating reform are misleading. He argues overseas demand did not increase dramatically after the changes (Sobel, 1994: 96). Moreover, the actual fact of the matter was that the City was thriving in the lead up to the Big Bang and had been since the mid-1970s (Plender, 1986: 42). The presence of the Euromarkets in London meant the City hosted international financial houses in an incredibly modern market (Green, 2016). Though the Euromarkets were not within the Exchange itself, they were in the City and by 1983 had deposits in the region of $1050 billion (Burn, 2006: 16). By the 1980s, they were also developing into a potent source of corporate finance (Eurobond issues reached $150 billion in 1985; Plender, 1986: 43) and were populated by banks from across the developed world (Cassis and Battilossi, 2002). Even popular commentators at the time recognized that the development of the Euromarkets was a ‘Bigger Bang’ than the 1986 reforms (Congdon, 1986). While the Exchange may have shrunk in the face of new international competition, there was never a question of the City more broadly becoming a financial backwater (Plender, 1986). As even Thatcherite commentator Tim Congdon (1986) put it on the eve of the reforms: ‘Today [the City] is the hub of a new and vast capital market without rival anywhere. It is surely preposterous to describe the City as “uncompetitive”.’

Another important challenge to the ‘competitive market pressure’ account is that the instigator for reform was not a pro-market ideologue like Thatcher, nor newly dominant domestic market players like the institutional investors as Laurence (1996) and Sobel (1994) suggest. Rather, it was the previous Labour government (Webb, 1987). It made the initial move when it launched an Office of Fair Trading (hereafter ‘OFT’) case in an effort to clamp down on City corruption. The OFT referred the Exchange to the Restrictive Practices court in 1978 and the case was only dropped when Thatcher came to office and her government pushed for alternative reforms in financial services, all of which were designed more by government bodies – the Treasury, the Department for Trade and Industry, and the Bank – than by private sector players (Vogel, 1996).

These factors demand a reassessment of the dominant claim that regulatory change can be understood simply in terms of the necessity to save the City that was facing external competition. Clearly there was more at stake. It is on this ground that critical political economy literature has found an opening. A key purpose of political economy literature is to correct the end-of-history triumphalism of commentators who saw in financial globalization an inevitable subjugation of political and social institutions to market forces.

In the case of the Big Bang, this literature has been crucial in demonstrating the ways in which the creation of liberalized securities market depended on the decisions of particular policymakers, and illustrating how the success and stability of the liberalized market relied on political and regulatory institutions. Phillip Cerny, for example, argues that drive to ‘impose market oriented rules’ on the City was necessarily accompanied by a plethora of regulation through the subsequent Financial Services Act of 1986 that was ‘far more complex [than] the previous cosy self-regulatory regime’ (Cerny, 1991: 177).

Moran (1990, 2003, 2006) explains how the Big Bang was part of the transformation of the British regulatory state led by Thatcher to better prime Britain’s economic institutions for the new pressure of international competition. As he argued, the Big Bang revolutionized the old self-regulated system, putting in place a more codified, formal arrangement. Previously members of the Exchange were protected from competition between each other (through fixed commissions) and from outside (through membership rules) but these were undone by the reforms and London’s financial houses were forced to compete with firms from abroad.

What is useful about both Cerny and Moran’s accounts, and also that of Steven Vogel (1996), who examined the new regulatory ‘rules’ that accompanied ‘freer markets’, is that their attempt to bring the institutions back in to the story of financial globalization necessitated a recasting of key assumptions. For example, they stress that the reforms were initially resisted by the City’s financial houses (Vogel, 1996: 107). These small, specialist firms knew they would never survive the exposure to global rivals and in that sense, financial globalization could never be cast in too straightforward a way as a triumph of ‘financial interests’ as some Marx-inflected scholars describe (e.g. Duménil and Lévy, 2004).

Yet throughout this work there remains an ambiguity over how to conceptualize the interest of the state in the reforms. Symptomatic of some of the broader political economy literature on the role of the state in financial deregulation, state actors are presented as constructing liberal financial regimes because they were persuaded by ‘power of financial ideas’ that had blossomed in the wake of the 1970s crises. By this account the belief that liberal markets were the optimum form of managing macroeconomic governance prompted the US and Britain to lead the way in liberalizing their markets, including both countries’ stock exchanges (Blyth, 2003: 241). Yet such accounts depict state agency in curiously stunted terms. State actors are crucial in facilitating deregulation and creating market rule (Helleiner, 1995) but make little difference to how global financial markets work once established.

It is here where literature investigating how states mobilize markets for particular policy aims is so crucial. Konings (2007, 2009), for example, examines how state and non-state institutions have combined to give the US government an ‘infrastructural power’ within a private financial ‘empire’ made in its own image. He point out how, even in moments of crisis, US financial assets are still seen by global investors as safe-haven securities, granting the state a flexibility not afforded to others. Similarly, there is an established literature on financial statecraft that looks at how states use financial and monetary policies, like reserve accumulation or regional currency promotion, for foreign policy aims and to shape the broader, structural economic conditions in which they operate (Armijo and Katada, 2015). This work focuses on the way states shape their external economic environment. For examining how state and non-state institutions combine in the pursuit of domestic macroeconomic governance, the literature on sovereign debt management provides fertile ground. As Fastenrath et al. (2017: 274) describe this implies examining not just the actual level of debt but instead exploring ‘how and from whom governments borrow money’ and ‘the manipulation of its structural composition’.

Given that one of the state’s most crucial tasks of economic management is securing the public finances, sovereign debt management is a crucial area of inquiry. Within this, Daniella Gabor’s (2016) work has shown the deep material interdependence between private financial institutions and sovereign states in the working of global finance. In managing the public finances, the British state draws on an assemblage of public and private institutions, of which the Exchange is one of the most important. It is the primary place where the state secures long-term finance, intimately tying the operation of the Exchange to government interests. For this reason, sovereign debt management is not a cold, technocratic issue. It has implications for economic governance as a whole and is embroiled with issues of monetary policy and macroeconomic stability.

In my account, it is clear that state action takes place through an amalgamation of institutions, both public and private. In that sense, I do not subscribe to a ‘unitary vision of the state’ (Copley, 2017: 697), the state is neither wholly autonomous nor entirely functional to other forces. Rather, my focus on state capacity comes from a recognition of the difficulty state actors have in turning policy into practice. The gap, which is filled by a network of public and private institutions, means that whatever intentions policymakers may have, translating these into the desired outcomes is never straightforward. Indeed, one of the reasons for examining the expansion of financial markets through the lens of sovereign debt management is precisely that it necessitates breaking with the vision of the state as a static entity.

It is my contention that to capture the importance of the state’s role in the reforms, and the direct stake it had in the changes, we must shift the gaze away from the pressure of external competitive forces and instead look at the domestic drivers, specifically by examining the effects the Big Bang had on the mechanisms and terms by which the government manages sovereign debt. As I have mentioned, the structure of the Exchange had been a matter of debate for years before the reforms were finally announced. Not only was there the OFT case but more broadly, following the economic instabilities of the 1970s, there was debate over what impacts raising public sector debt had on the broader economy. Put simply, the effort to squeeze credit creation in the private sector and the inflation it was thought to bring, contradicted with the effort to secure long-term sovereign debt on favourable terms. It is only from a historical vantage point, that places the operation of debt management at the centre of the story of post-war macroeconomic policy, that it becomes possible to grasp the domestic drivers of the 1986 Big Bang. As such, in what follows, I track the role of sovereign debt in Britain’s post-war political economy and the growing contradiction between the state’s monetary policy objectives on the one hand, and the operation of debt management on the other by the time of the Big Bang. In doing so, I substantiate my claim that if political economy literature is to capture the role the state plays in imposing and upholding global financial relations, it must make sovereign debt management a central part of its analysis.

The problem of sovereign debt in the post-war financial system

Debt management has become a major problem of policy – Radcliffe report (1959)

In Britain, the management of sovereign debt has been an important part of economic governance since the 17th-century Financial Revolution and the establishment of the Bank of England (Brewer, 1990). Though more sophisticated techniques to issue debt and use debt securities to guide economic activity began to develop in the 19th century, as the Bank of England secured a monopoly on banknote issuance (Knafo, 2013), it was in the 20th century that the management of sovereign debt became integral to the functioning of British capitalism. The two world wars, and the Keynesian period that followed, grew the national debt substantially and changed its role in broader macroeconomic policymaking. In brute quantitative terms, the First World War pushed the national debt to £7.41 billion, the Second World War to £21.4 billion, and over the post-war years, the national debt increased even further, standing at £95.3 billion by 1980 (Nield, 2012). ¹ Qualitatively, through Keynesian techniques of macroeconomic management allied to the wartime apparatus of planned national economic industries, sovereign debt was integral to government policy. For that reason, debt management was a significant concern for Britain’s monetary authorities throughout the post-war period (Allen, 2014). Indeed, one of Clement Attlee’s first moves as peacetime prime minister in 1945 was to establish a National Debt Enquiry Commission to examine how government could ensure its financing remained stable and what this would imply for monetary policy (Tily, 2010).

As indicated above, the reason why debt management is of such concern to policymakers is because of the way public financial securities connect to the broader banking system affecting both fiscal and monetary policy objectives (Gabor, 2016; Preunkert, 2017). After the war, the responsibility of managing the state’s finances – including the control of the way a substantial proportion of sovereign debt was raised – was given to the newly nationalized Bank of England. This was in part a recognition of how deeply intertwined state authority had become with the central bank and it is telling that both the 1959 Radcliffe Committee and 1980 Wilson Committee reports into Britain’s financial sector used the term ‘monetary authorities’ when describing the regulatory apparatus in British finance. The state and nationalized central bank had shared responsibility in managing British finance until the first moves towards Bank independence emerged with Britain’s ignominious exit from the European Exchange Rate Mechanism in 1992 (Cukierman, 2008: 726).

The majority of sovereign debt was raised in two ways. First, the Bank could issue long-term securities, called ‘gilts’. Gilts were sold at tender but underwritten by the Issue Department at the Bank, which as a result was the main buyer at tender. It would then sell the majority of the gilts to external dealers on the secondary market on ‘tap’ at a set price (Allen, 2014). These secondary market transactions were crucial and took place exclusively through the Exchange at the behest of the Bank and through the Government Broker, Mullens, who had held the role for over a century (Thomas, 1986). The Bank was prevented from dealing directly on the Exchange because that was a privilege only open to members of which it was not. For that reason, the Exchange was the main site upon which sovereign debt securities were sold to non-state investors. The second way in which the state raised debt was by the Treasury issuing short-term securities, called Treasury Bills, directly to the banking system (Allen, 2014). The part of the debt raised by selling gilts, bought by investors, was often called the ‘funded’ part of the national debt, while the debt financed through Treasury Bills, issued directly to the banking system, was referred to as the unfunded, or ‘floating’ debt (Wadsworth, 2013: 60). Crudely, gilts could be considered like the state’s mortgage debt, while Treasury Bills could be considered its overdraft.

The difference mattered because Treasury Bills were accepted as a reserve asset in private banks, which meant that the greater the number of Treasury Bills in circulation, the greater the stock of loanable funds which the banks had available to advance as credit to private borrowers (Allen, 2016). For this reason, banks were always happy to take on Treasury Bills, often at yields lower than longer term gilts (Allen, 2016). This was to become very important because when the British state attempted to curtail bank lending, it would try to fund its debt more through gilts than Treasury Bills. This was because issuing Treasury Bills, a reserve asset, added to stock of loanable funds in the banking sector, while issuing gilts, on the other hand, removed liquidity from the banking system, because investors (be they banks, institutional investors or companies) would buy them with cash (Allen, 2014).

The complicating factor, however, was that after the war, it was Bank practice to intervene in the gilt market by buying and selling its own issues in order to maintain price stability in gilts, which it felt was crucial to the stable financing of sovereign debt. Buying its own gilts from the banking system, however, meant releasing liquidity into the economy, because in effect it swapped private banks’ holdings of a long-term debt security (gilts) for cash. As a result, there was often a tension between the objectives of debt management and those of monetary policy. As Conservative chancellor Rab Butler found in the 1950s, and Edward Heath found again in the 1970s, the ability of the state to govern the economy through active monetary policy often contradicted with concerns over how to fund the national debt (Allen, 2012). This conflict came to a head in the 1980s when both the Conservative government and especially the Bank felt that the only way stability could be ensured was by fundamentally changing the way gilts were sold (Bank of England, 1984b). By then the general problem of ensuring stability in the gilt market ran up against the architecture of the market itself.

Put simply, the firms involved in underwriting and selling gilts on the secondary market in the Exchange were too small and too limited in their base of customers (Wilson Committee, 1980). It meant that in comparison with competitor countries, the British gilt market was tiny. While the US Treasury bill and bond market turned over $24 trillion in 1986, and Japan $21 trillion in government securities, there was just $630 billion worth of deals in British gilts (Reid, 1988: 106). This was in large part because until 1986 the jobbing role was dominated by two firms, Wedd Durlarcher and Akroyd & Smithers. Between them they held an estimated 80% of the dealing market (Kerr, 1986), and they sold predominantly to British institutional investors with whom they already enjoyed long-standing relationships. The limitations of this arrangement frustrated the Bank especially, because without a large private underwriting market, the Bank itself had to be the main ‘market maker of last resort’ in its own securities (Allen, 2016: 49), which both affected the ability to enact tighter monetary policy (for the reasons outlined above) but also curtailed the size of the gilt market. They wanted private jobbing firms to absorb much larger issues on their books (Bank of England, 1984b) in the hope of creating a market ‘more robust’ and that ‘the changes would also bring the market more into line with similar structures overseas’ (Bank of England, 1984a: 112). Yet this was impossible for the domestic, small-scale specialist British houses that simply lacked the capacity to take on big gilt issues (Plender, 1986). To be more like the Federal Reserve there would need to be a major overhaul of the dealing mechanism with a much larger capital base and a willingness to take large inventory positions (Thomas, 1986: 68). The Big Bang reforms did precisely this, and in doing so trebled the size of the market for gilts (Reid, 1988: 108). As William Allen, who worked at the Bank from 1972 to 2003 argued, the reforms helped move debt management from the centre of monetary policymaking to the margins. ‘New issuing techniques and new capital markets since the 1980s’, he wrote, ‘have all helped to reduce concerns about how the quantity of debt impinges on monetary control, to the point where the two issues could now be seen as almost distinct’ (Allen, 2012: 16).

In what follows, I substantiate this claim by delving into the history of the gilt market with the intention that a historical perspective on the development of financial policymaking in Britain in the lead up to 1986 will shed light on both the Big Bang itself and the politics of financial reform more broadly. By revisiting historical sources – such as Bank of England reports and commentary from the time – that are frequently neglected in contemporary debates about financial globalization and the state, I realign our understanding of the Big Bang with established facts. When these are taken into account, the reforms and their broader attachment to our conception of financial globalization are profoundly changed.

Instability and intervention in the gilt market: 1960–1986

The path to the Big Bang reforms looks very different when posed from the perspective of sovereign debt management and its relation to broader macroeconomic policymaking. Rather than doubtful claims about the necessity of upholding the City’s place as a centre of global finance, the reforms mattered because they transformed the operation of debt management and monetary policy and the interaction between the two. As I show, the Big Bang provided a longed-for solution to the problem of combining attempts at monetary control with stable debt management. These were issues that grew in importance in the two decades preceding the Big Bang.

After the Big Bang

The history of how the state public finance needs and monetary policy objectives ran up against the previous mechanism for managing the sale of sovereign debt on the unreformed Exchange puts the Big Bang into a different perspective. It becomes clear that it is insufficient to assert that the reforms were about the state ‘establishing the City as a financial centre’ or ‘forcing capital to be free’ in the pursuit of neoliberal financial globalization. Rather, the state’s own interest becomes clear throughout. It needed to find ways to better manage the national debt so as to make possible an alternative monetary policy, and the Exchange was a key site where it could exercise its agency. By remaking the rules on the Exchange, the Big Bang made the operation of the gilt market substantially different and in that way empowered the British state. Previously, two jobbers dominated nearly 80% of the market (Kerr, 1986). After the reforms there were 27 (Bank of England, 2013). Whereas previously British companies ruled, now American banks joined too. The effect was to deepen capitalization in the market and widen the network of possible buyers of gilts (Bank of England, 1989), which together extended their marketability beyond recognition.

One crucial change was replacing the single-capacity system with new integrated financial houses. Previously, the brokering role for gilts was separated from the jobbing role with different firms managing each. The Big Bang worked to unite these two aspects as newly formed Gilt Edged Market Makers (hereafter ‘GEMMs’). These are firms that purchase gilts directly from the Bank and sell them directly onto their own clients. In this way the trading and sales of gilts worked in a single operation (Bank of England, 1989). For the newly registered GEMMs – which now included the likes of Goldman Sachs, JP Morgan and Salomon Brothers – this meant the Bank would originate and tender a variety of different gilts and the GEMMs would fix their price by buying them at a certain rate of their choosing before selling them on (Bank of England, 1989). The direct access these GEMMs had to the Bank meant that after 200 years there was no longer intermediation provided through the Government Broker.

Moreover, now the whole set of GEMMs were granted the technical and fiscal privileges enjoyed only by a very limited number of gilt-edged jobbers previously (Thomas, 1986: 76). Before the reforms the two big gilt jobbers had the unspoken privilege of borrowing from the Bank. In the restructured gilt market this lending facility was codified and made available to all 27 GEMMs. These GEMMs, as I mentioned, were not narrow banks specializing in gilt trading either. They were high street names and international investment houses (Bank of England, 1989). It meant that a large group of big financial houses had direct backing from the Bank. This was money that could be borrowed on a secured basis and was available at the initiative of the GEMMs themselves when their routine sources of financing were not available. Though they rarely needed it, the implicit promise of support meant that the GEMMs were able to raise cash from other sources on better terms (Thomas, 1986: 76). It is precisely why when the plans for the reforms were announced and the Bank sent out a call for applications to become GEMMs over 50 firms initially expressed an interest. Though in the end 27 were taken on they all agreed that they would be prepared to take on larger amounts of gilts than ever before. As the Bank wrote three years later, when evaluating the ‘gilt-edged market since the Big Bang’, ‘the new structure [was] successful in providing a continual and liquid market for investors and official operations’ (Bank of England, 1989: 49).

The result was a massive increase in capitalization in the market. Whereas previously the capital of the gilt-edged jobbers was estimated at around £100 million, the capital of the 27 GEMMs amounted to £595 million, and by 1989 stood at £610 million (Bank of England, 1989: 51). This large capital base is what allowed the GEMMs to absorb much larger issues of gilts, and their international client base meant finding customers proved not to be a problem. Even on other measures of liquidity the new market structure proved more sophisticated. Turnover of gilts increased from around £1 billion a day before the Big Bang to around £4 billion a day by 1989 (Bank of England, 1989: 51). This was in large part because the bigger pool of GEMMs traded with each other but there was also a big increase in customer turnover. Investors, of course, gained through the end of fixed commissions, with a reduction in wholesale costs of almost 60% (Bank of England, 1989: 51). These lower costs for investors meant they were more willing to take on gilts at lower margins, cutting the spreads in half, this despite the number of deals increasing (Bank of England, 1989: 51).

These may sound like arcane intricacies when set against grand conceptual themes about the role of the state in financial globalization, but in such empirical detail theoretical clarity lies. The great expansion in liquidity of government securities and the great swell in the size of the gilt market meant that the monetary authorities were able to construct monetary policy differently. As I outlined in the previous section, managing liquidity through variations in interest rate was ineffective previously, because debt financing through Treasury Bills only served to increase the broad money supply. After the reforms, if the Bank wanted to reduce liquidity in the financial system, it was able to sell gilts much more broadly to non-banks, and in this way ‘exert some control on broad money growth by absorbing from the non-bank private sector liquidity created by bank credit’ (Allen, 2012: 25). The problem of having to ‘lean into the wind’ and manage the pace of gilt sales – which was impossible in the old system where brokers and jobbers could not underwrite government issues of gilts – was resolved by the new dealing mechanism that Bank insiders had longed for in the 1970s.

Conclusion

The Big Bang reforms of the City were an important part of the globalization of financial markets. As this article has suggested, examining how public and private institutions are mobilized in the task of sovereign debt management provides a strong foundation for investigating how states act in financial markets. The Big Bang was not simply a case of financial market competition overwhelming state institutions and demanding regulatory reform, nor was it simply driven by the British state’s desire to maintain London as an international financial centre and constructing a regulatory infrastructure to meet that aim. Rather, its lasting impact was to improve the mechanism by which the British state managed its debt. By limiting the examination of state agency to the question of regulatory apparatus, scholars neglected the way in which financial reform affected a crucial avenue for state action in the economy: the way sovereign debt securities interact with the private banking system and shape monetary and fiscal policy decisions.

The Big Bang reforms opened up membership and removing fixed commissions in the Exchange, and in doing so transformed the way the state sold government debt securities. It brought highly capitalized, international financial houses to the Exchange, the outcome of which was to increase the turnover in the gilt market threefold (Reid, 1988: 26). At a time when the national debt, which had long been a permanent part of British capitalism, was growing and inflation and unemployment was still high, this was a crucial change. It gave the state greater capacity to raise finance more easily and, in doing so, allowed it to pursue monetary policy in a way that was impossible before. By deepening the market for government debt securities, the Bank no longer had to intervene directly in the gilt market.

The broader arguments and evidence presented in this article should prompt IPE scholars to examine the continued ways in which sovereign debt affects global financial markets, and in that light how what may appear on the surface as financial liberalization, can also affect and enhance the state’s capacity to act in financial markets and govern the economy more broadly. In the years since the Big Bang reforms the size and liquidity of the market for British government debt has only grown, with the recent Quantitative Easing programme demonstrating the continued ways in which the Bank acts as a dealer in its own securities. That the state has the ability to do this is precisely because of changes made to the mechanism of raising and managing sovereign debt and should be a key line of inquiry for scholarship aimed at understanding the role of the state in globalized financial markets.