By Mark Griffith
Occasionally the Economist remarks that city states like Singapore have a big advantage over larger countries, without really saying why. Economic geographer Jane Jacobs, who died not long ago, had a fuller explanation.
Jacobs claimed that cities, not countries, are the fundamental units of economics. Hardly a surprising idea for workers in London's square mile. In contrast entities like Britain, the US, or euroland commit the primary Jacobs sin of forcing two or more big cities to share one city's currency …therefore economic cycle …slowly choking most centres in favour of the dominant city. Just as oil-synchronised sterling handicapped British manufacturers, City-finance-synchronised sterling handicaps non-financial British firms too.
The solution - cut the square mile loose. But how?
No-one outside the City need even notice.
The government allows certain institutional 3 or 6-month deposit accounts lower taxes - with one catch. Those accounts get denominated in a new, made-up currency free to move incrementally against sterling in a pegged weekly Bank-of-England fix. Call it the "red pound". Just as in the 1980s, when some City traders got mortgages denominated in ecus without ever seeing an ecu, the red pound need only exist in financial-sector accounts, doing useful work nonetheless. The red-pound account cools down and slows down hot forex money. Instead of international cash sloshing in and out of today's sterling every second, a growing fund of slower-moving red sterling increasingly reflects just the City's economy in its exchange value.
Meanwhile vanilla sterling - call it the "green pound" - starts decoupling from the square mile, better mirroring the physical economy of the rest of Britain. The exchange rate between green and red only appears inside the City, shifting gradually on that weekly peg. As more money flows into red-pound accounts, red appreciates against green, funding the tax break. Without knowing why, British manufacturers find their green-denominated export and import prices growing stabler. Mainly red sterling appreciates when London's banks prosper. Red pounds depreciate when financiers mess up. Red sterling against euro becomes as important as green sterling against euro.
Like city-states Singapore or Hong Kong, the City of London would acquire a low-key currency increasingly aligned with its own cycle. The rest of Britain would breathe a slow sigh of relief as green sterling gradually uncoupled from square-mile invisibles, instead synchronising more and more closely with Birmingham, Manchester, Newcastle visible trade.
This is an excerpt from a longer article
Tags: pound city banks
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