In the nineteenth century Britain's imperial power meant that much of world trade was conducted in sterling, and the government had a huge range of overseas assets which brought vast amounts of money into the country. It is with this legacy that the City of London has become powerful.

World trade is now conducted in dollars, as the USA is by far the world's biggest economic and political power. But London is still the biggest financial centre in the world. It has hung on to its significance, in part by relaxing controls on cashflows further and faster than the rest of the world, so much so that more dollars are now exchanged in the City than in New York. London has Greenwich Mean Time on its side, allowing its working day to intersect at either end with Tokyo and New York. London also speaks English, still the major language of finance.

London faces competition as a financial centre from mainland Europe, mainly Frankfurt. At some point though, Europe's exchanges will probably merge, in a bid to take on the Far East and the US.

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The financial dealing that goes on in the City plays a role that far exceeds Britain's economic and geographical boundaries. Indeed, 40% of City workers have a foreign employer. UK investors can put their money into Japanese and American companies just as easily as into those based in the UK. They can buy the shares during the day in London, or sell them over the phone or the internet in Tokyo or New York during the night.

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As jailed ex-trader Nick Leeson recounts in his biography, (see further reading) "I would walk up the stairs (at the head office) and see all these family portraits staring serenely into space above my head. They had the faraway look of men who had seen the world, bought what they wished of it, and were content to rule their far-flung empires from a calm distance. They needn't muddy their hands anymore. They had people like me, Nick Leeson, 22 years old and up from Watford, to do it for them."

Peter Baring, chairman of Barings Bank, once commented at a meeting at the Bank of England in 1993 that "the recovery in profitability has been amazing following the reorganisation, leaving Barings to conclude that it was not actually terribly difficult to make money in the securities business". Leeson responds, "As I stood in the box and grabbed phones, signalled to George or Fat Boy, bought and sold, watched the market lurch about - I imagined Peter Baring's quiet voice in some splendid, lofty office in the Bank of England as he sat back on a leather sofa and stirred his Earl Grey tea and admired his brightly polished toe caps."

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Government Bonds
Government borrows money through the sale of government bonds to pay for projects.

Like companies, the State needs money for projects, be it hospitals or warheads. The shortfall between expenditure and tax income is met by borrowing. The State raises finance in the City, mainly by selling government bonds, known as 'gilts' or 'bills', which work in the same way as an IOU.

Government bonds are generally considered safe investments, as governments rarely default on loans. But in the '80s Mexico hugely increased foreign borrowing. Its Stock Market shot up, but only 10% of the incoming money went into creating goods to make money to repay it all. The rest went to debt repayments, and the pockets of Mexico's elite. In 1994, the bubble burst, and Mexican markets crashed. The peso was devalued and the poor were hit hard. American investors holding Mexican bonds received a $50bn bailout from taxpayers. Nothing went to poor Mexicans.

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This is the oldest form of investment. When a community gets thrown off its land for a new supermarket, set of luxury flats, or business park, it's because the investors are demanding higher profits than their rents can provide.n pr. Members of the General Council of the British Property Federation (which keeps trying to abolish the planning system) include Norwich Union, Prudential and Scottish Widows.

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Companies which have 'Ltd' after their name are owned by an individual, family or group, and people can only buy shares by invitation. They are mostly relatively small, with a few exceptions (eg. Cargill, Virgin).

When there isn't enough private money to finance more growth, the company raises more by allowing anyone to buy its shares: it 'floats' on the Stock Exchange and gets 'plc' (public limited company) after its name.

The 'limited' refers to limited liability: if the company goes bust, directors and shareholders are only liable for a limited amount of the company's outstanding debts. Thus workers, suppliers (and sometimes taxpayers) take the risk for the directors and shareholders. But if the risk pays off, it's the shareholders who get the dividends. Limited liability encourages directors to take bigger risks - and rake in bigger profits.

While a company is owned by its shareholders, day-to-day decisions are made by its directors. They can be fired by the shareholders if they don't make enough profit. This happened at BP in 1992, when chairman and chief executive Bob Horton was sacked. His replacement, David Simon, turned the company round over the next 5 years, reducing its workforce from 117,000 to 56,000 and making it the darling of the City. In 1997 he moved to the House of Lords as Lord Simon, Minister for Competitiveness in Europe.

DIY Research You can find out the home addresses of company directors from Companies House, at 21 Bloomsbury St, London WC1, or in Birmingham, Glasgow, Leeds, Manchester, Cardiff or Edinburgh. (Telephone 01222 380 801). Details of all the directors of a company costs £1

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To do anything with upfront costs - like drilling an oilwell, building a factory or researching a new genetically modified organism - a company needs finance. High Street banks (see High Sreet Banks) will make short term loans usually for a maximum 2-3 years in the UK. But if a company gets into trouble, the bank will demand its money back - the cause of most bankruptcies.

So for longer-term finance, a company will issue shares or raise project finance. Companies sell shares when they first start up, or when they float on a Stock Exchange. When a company is already listed on the Stock Exchange, it can make a rights issue if it needs more capital to expand. This means that existing shareholders are offered new shares at a discount.

For project finance, a company goes to its bank(s) to raise money. Take Premier Oil, a major player in Burma, Indonesia, China and Tunisia, with a long list of environmental and human rights abuses to its name. When they want to finance another rainforest-razing pipeline, they turn to their bankers - Chase Manhattan, Barclays and J. Henry Schroder Wagg & Co - to come up with the finance. In return the banks get a stake in the project (ie. the pipeline is jointly owned by Premier and the banks).

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Shares are initially sold by a company to raise finance. An investor gives the company money, and gets a share certificate which entitles them to dividends (a share in company profits) and voting rights on a few management issues. This share can then be sold on to someone else. Much of the trading that takes place in the City is the buying and selling of these 'secondhand' shares. This is what share prices (like the FTSE 100) are about.

If a company has a profitable year, dividends will be high and the share price will rise. If it performs badly, it will only give small dividends, so investors won't want the shares, and the price will fall. Optimism and pessimism are contagious if start to buy a share others will want it and the price will rise, if people start to sell everyone will rush to sell, driving the price down. The market is often in a state of either euphoria or panic and expectations are self-fulfilling. Sometimes even the smallest tremor can trigger a landslide. Expectations are influenced by a host of factors. Prices could be pushed up by, say, news of an oilstrike, or merger rumours. Or they can be pushed down by, say, the failure of a new drug to be licensed for public use, a poor harvest or internal company strife.

On the day NATO started bombing Serbia in March 1999, shares in British Aerospace rose faster than any other company on the index. Three weeks into the war, GKN, BAe and other British arms companies were still rising. The FT commented "there may be a 'war dividend' if countries reassess their military needs in light of the conflict".

The market is also told what to expect of a company by analysts and ratings agencies (p.15) With computer-based trading, investors can now know in an instant how share prices are changing. Increasingly share-dealing is tied more to the profit that can be extracted now than to providing money to invest for the long-term.

DIY Case study A recent sustained campaign that all but destroyed a company was that waged against the arch-vivisectionists Huntingdon Life Sciences. When TV documentary "It's a dog's life" expose was televised, Huntingdon's shares dropped by 33%. The company ran a successful PR campaign in the City to pick prices up, and survived, quite possibly because no campaigners went in to deliver the counter-arguments.

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Mergers and acquisitions are very popular at the moment. Three of the ten biggest companies on the London Stock Exchange were involved in mergers in the first few months of 1999: the BP-Amoco deal, creating the third largest oil company in the world, with the subsequent takeover of Arco (announced in April '99) triggering yet further job cuts; Vodafone's take-over of the US company AirTouch; and the purchase by Zeneca of Astra Pharmaceuticals. Also in 1998, the two insurance giants Commercial Union and General Accident merged to form CGU, concentrating their control over financial markets (see Who Owns The Companies). Globally, the ten biggest mergers in history all happened in 1998, mostly involving American companies.

What this means is more corporate power - more political power and more control over markets. BP Amoco's turnover is now greater than Colombia's GDP. There are few that can compete with this kind of financial muscle, and it allows a company to make both bigger, riskier and therefore often more destructive investments. Also, governments bend over backwards to attract their jobs and money, by offering incentives (bribes) like lax regulations and tax breaks.

Takeovers are often dressed up as mergers to avoid negative press for the larger company.

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Corporate short-termism and profiteering are re-inforced by the fear of being taken over. If a company is taken over, the managers will lose their jobs. This fear acts as a great spur to keep dividends and share prices high.

Otherwise the company could be bought out (have some other company buy over 50% of its shares). This could either be another company in the same business which wants to expand, or a 'corporate raider', whose only business is buying companies and selling them off for a profit.

Michael Armstrong, smiling CEO of AT&T;, and John Malone, CEO of TCI, at 'merger celebrations' in 1998

If a company's share price is below the amount that could be made by selling off its assets - its factories, machinery, computer networks, brands etc - (its "break-up value"), "predators" will buy the company, restructure it, and then sell it for a profit.

This could well happen if the company is looking to the long term - it is profit, now, in the short-term, which makes the dividend, and hence share price, high. This means there is no choice but a race to the bottom when it comes to ethics, workers rights and environmental sustainability. Trying to persuade corporate management to reform ethically is a non-starter. If a corporation paid too much heed to people and the environment, its management / directors would be sacked, or it would be raided, asset-stripped and sold.

A hostile takeover is one that the smaller company's directors don't want. The larger company offers all the shareholders more money for their shares than their stock market value. If a majority of the shareholders vote in favour, the takeover goes ahead.

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