London is a major force in the UK economy, accounting for between a quarter and a third of UK output, depending on how the boundaries are drawn. And London is, by a multiple of over seven, the UK’s most populous city.

Yet the familiar story of London as the powerhouse of the British economy is relatively new. Within living memory London was a city in decline. Its population peaked in the late 1930s before going into a long decline. London’s population shrank by over a fifth between 1941 and 1992, losing two million people at a time of rapid growth in the UK’s wider population. Its economy also underperformed. The economic historian, Professor Nicholas Crafts, estimates that the premium of London GDP per head over the UK average shrunk from a peak of 65% in 1911 to 23% by 1971.

Poor housing, pollution and the decline of established industries weighed heavily on London during this period. Before the second world war the government was making plans for the demolition of vast tracts of slum housing. Bombing during the war did some of the planners’ work and, from 1945, further demolitions and the construction of new towns such as Stevenage, Hemel Hempstead and Bracknell, led to an exodus of people to the outer London boroughs and beyond. The population of Tower Hamlets, one of the city’s most populous boroughs, shrank from over 600,000 in 1901 to less than a quarter of this by 1981.

Sectors, particularly manufacturing and the docks, which were once significant sources of employment, declined in the second half of the twentieth century. Anxious to push development to the rest of the country the government crimped London’s growth by restricting the development of new factories and office space.

For those that stayed air pollution and ‘pea-souper’ fogs, long a feature of London life, became ever more dangerous. They culminated in the Great Smog of December 1952, which killed an estimated 4,000 people in less than four weeks, with thousands more dying in the ensuing months. It was the worst air pollution event in Britain’s history and powerfully illustrated the disadvantages of life in London.

While London’s population shrank many more people commuted in from the suburbs or the Home Counties. The average commuting distance rose from 7 km to 21 km in the twentieth century. The number who walked to work, which in the period 1890-1919 accounted for well over a quarter of the London workforce, had collapsed to low single digits by the 1990s.

London’s fortunes started to revive at the end of the 1970s. A new wave of globalisation and economic integration played to London’s historical role as a financial centre. Under Mrs Thatcher pro-market policies and the ‘big bang’ reform of financial markets ushered in a period of explosive growth in finance.

Longstanding features of London’s economy – language, law, a favourable time zone, scale, institutions and infrastructure – enabled London to prosper in a new era of globalisation.

By 2013, London had surpassed its previous peak population and in recent decades, London’s economy has grown about one percentage point faster than the economy of the UK as a whole.

It has not been plain sailing. The global financial crisis of 2007–09 hit London hard. Financial services, London’s most important sector, entered a deep recession, with output declining by 13% and 20,000 lost jobs.

The truth, however, is that financial services were never the only show in town. At its peak, financial services accounted for 20% of London’s output; today it makes up 15% of the total. In recent decades job growth has been far stronger in IT, communications and consulting. The proportion of London’s workforce in financial services has shrunk from 8.4% to 6.5% in the last 30 years. Put another way, 14 out of every 15 people who work in London do not work in financial services.

Despite its manifest success in recent decades London faces great challenges. Concern about air pollution and housing loom large, much as they did in the 1940s and 1950s. Official data suggest that measured happiness in London is the lowest in the UK.

The fortunes of cities, regions and countries shift over time. In the twentieth century London first boomed, then declined and finally recovered. For cities, as for countries, economic success is never assured.