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This book was written to mark the bicentenary of Pictet & Cie, Geneva's large private bank. Among other events, the partners wanted to commemorate this anniversary by publishing an academic work that would contribute to banking and financial history. This desire to support a scholarly project reflects a broadness of outlook, characteristic of the Genevan humanist tradition, which is probably not unconnected with their bank's extraordinary longevity. I suggested to them that I write a history of the main international financial centres over the last two centuries, an important topic that had interested me for a long time and that I had broached in some of my publications, but that, oddly enough, had not yet been the subject of a comprehensive historical study. I would like to thank the Banque Pictet's partners, especially Ivan Pictet and Claude Demole, for giving me the opportunity to write such a book and, hopefully, to help fill this gap.
The interest aroused by the book called for a paperback edition. However, the financial meltdown which engulfed all financial centres from the summer of 2007 called for some updating: the most severe financial crisis since the 1930s could not simply be ignored. Accordingly, a new section has been added to the last chapter, providing a necessarily provisional account of what actually took place and attempting to make some sense of the events. In the same way, the final part of the conclusion dealing with possible future developments of international financial centres had to be rewritten: I had not foreseen a massive crisis as a likely scenario – very few had in late 2004. Its effect on the leading international financial centres will briefly be discussed.
On 4 August 1914, the day that Britain declared war on Germany, Gaspard Farrer, one of Baring Brothers' partners, noted in a letter: ‘It is mortifying in the extreme to find how instantaneously the credit edifice which we have built for generations could tumble to pieces in a night.’ At the time, this view was widely shared in the major international financial centres. Nevertheless, few imagined that it would soon be known as the Great War. In this respect, Farrer's remark was fairly typical of bankers' short-sighted yet premonitory views. While being preoccupied above all by the serious crisis suddenly facing the City's accepting houses, at the same time he had a foreboding of a phenomenon on an altogether different scale – that of the end of an era, or of the transition from one economic order to another.
The period described by the historian Eric Hobsbawm as ‘the age of catastrophe’ had profound repercussions on life in the international financial centres. Two world wars and the most severe economic crisis of the twentieth century indeed brought about major changes in the world economic and political order, the most important of which was the transfer of world leadership from Britain to the United States. This inevitably had an impact on the power struggle between Wall Street and the City.
Towards 1840 the City of London was the leading financial centre in the world, ahead of Paris, itself followed by a group of important but secondary centres, including Amsterdam, Brussels, Frankfurt and Geneva. In all of these centres the most prominent merchants and bankers ran their international businesses like private firms and within the framework of highly personal and family contacts. And the House of Rothschild held sway over the world of international finance thanks to its immense resources and to its key position in issuing loans on behalf of foreign governments. Things were not fundamentally different around 1875; the City of London still ranked top in the world, followed by Paris, private bankers retained control over large international financial transactions, and the House of Rothschild was still the largest bank in Europe. This did not mean that inaction was the dominant feature of these thirty-five years, far from it. Two major changes occurred during the second third of the nineteenth century. The first was the increased concentration of capital; the second was the strong growth in capital exports.
The concentration of capital was a fundamental shift, whose effects profoundly transformed the life of the financial centres. They were already noticeable in the 1830s even though, on the face of it, the old order barely seemed to have changed. The first big businesses of the industrial era were the railway companies and the joint-stock banks.
The thirty years that followed the Second World War were Europe's ‘Golden Age’; commonly known in France as ‘les Trentes Glorieuses’. At that time, the countries of Western Europe were experiencing the fastest growth rates in their history. Between 1950 and 1973, their GDP per capita grew at an average rate of 3.8% per year, compared with 1% between 1913 and 1950 and less than 2% throughout the twentieth century. Expansion was pronounced in Germany (5%), somewhat less so in France (4%) and considerably less so in the United Kingdom (2.5%) – where, however, the level of income was higher than in the major countries of continental Europe at the start of the period. In one generation, Europe managed, if not to catch up with, then at least to draw closer to the United States, where growth, admittedly strong (2.2%), was bound to be slower. A European's average income, which barely exceeded half an American's in 1950, was getting on for three-quarters in 1973. Europe had definitely entered the age of plenty and mass consumption. Economic development was even more spectacular in Japan which, thanks to average growth of 8% per year, became the second world economic power by 1973. By then its GDP was one and a half times higher than Germany's, despite having been only in sixth place, behind Italy, in 1950.
What should this outstanding post-war expansion be attributed to?
Globalised economy or age of empires? To ask the question is to highlight, from the very outset, the ambiguous nature of the globalisation of the world economy during the three or four decades before the First World War. Opening up the world – with the revolution in transport and communications, population shifts and the free circulation of capital – went hand in hand with establishing colonial empires and with the imperialist powers extending direct or indirect domination over most of the world on an unprecedented scale. In 1914 the British Empire stretched over 30 million square km and included 450 million inhabitants, while the French colonial empire stretched over ten million square km with 50 million inhabitants. On top of this, they informally held sway over regions as vast as China, the Ottoman Empire and Latin America. These two phenomena are only partly linked, yet they are not completely unconnected either – as revealed by arguments among contemporaries, as well as among generations of historians, about the primacy of politics or of economics in spreading imperialism at the end of the nineteenth century. But in either case, the international financial centres were more involved in opening up the world than in colonial imperialism.
Whatever one's viewpoint, the political and economic environment prior to 1914 was particularly conducive to the rapid development of international financial centres. In many respects, it was truly a golden age for them and one that they would not encounter again before the late twentieth century.
International financial centres have come to represent a major economic stake. Yet no historical study has been devoted to them. Professor Cassis, a leading financial historian, attempts to fill this gap by providing a comparative history of the most important centres that constitute the capitals of capital - New York, London, Frankfurt, Paris, Zurich, Amsterdam, Tokyo, Hong Kong, Singapore - from the beginning of the industrial age up to the present. The book has been conceived as a reflection on the dynamics of the rise and decline of international financial centres, setting them in their economic, political, social, and cultural context. While rooted in a strong and lively historical narrative, it draws on the concepts of financial economics in its analysis of events. It should widely appeal to business and finance professionals as well as to scholars and students in financial and economic history.
For Walter Boyd, an ambitious young Scottish businessman determined in the early 1780s to cut a figure on a larger stage, London, Paris and Amsterdam were at that time the three great international financial centres upon which Europe's trade depended. Where to seek one's fortune? Boyd opted for Paris. He settled there in 1785 and in the space of a few years became one of the capital's most influential bankers, but had to flee to London in 1792. After brilliant initial successes in issuing loans for the British government, he went through some difficult years, eventually recovering his fortune only after Waterloo.
Walter Boyd's route illustrates fairly well the changes that occurred within the leading international financial centres during the French wars, as well as the new international hierarchy which formed at the beginning of the nineteenth century: the pre-eminence of London; the resurgence of Paris, which emerged as the second major market; and the eclipse of Amsterdam, relegated to the rank of a lesser centre, along with cities like Brussels, Frankfurt, Hamburg and Geneva, in a hierarchical order that was not easy to determine. This hierarchy was obviously not of a permanent nature. It nevertheless left its mark on the whole of the nineteenth century, despite the coming of Berlin, which to some extent replaced Frankfurt after 1870, and then the emergence of New York at the turn of the twentieth century.
The temptation to compare the last twenty-five years with the situation prevailing a century ago is a strong one, and many commentators have given in to it. Owing to its open economy, the turn of the twenty-first century is surprisingly like that of the twentieth. Measured by the freedom and intensity of capital flows, the degree of globalisation reached on the eve of the First World War was not surpassed before the nineties. For us, the main difference is of course our inability to anticipate how the current process will evolve in the future. Instead of trying, in vain, to use history for predictive purposes, we are better served by placing the changes of the last quarter of a century in a historical perspective. For while there is some continuity with the previous period, globalisation having started in the 1960s, there was unquestionably a break around 1980. Rather than a single event, it was a series of changes, both quantitative (volume of transactions) and qualitative (the kind of financial instruments), that launched this new phase that still endured twenty-five years later. For all that, the specificities of the late twentieth century characterised in particular by the end of the cold war and the arrival of the post-industrial society, should not be overlooked.
The new world economy
On an economic and financial level, three major characteristics, closely linked to each other, define this new era: globalisation, deregulation and innovation. The first has been hotly debated since the early 1990s.
How can the rise and decline of the international financial centres be explained? Contemporary economic and financial literature has identified conditions that are necessary, if not sufficient, for their development. The most important and most frequently debated of these include: stability of political institutions; strength of the currency; sufficient savings that can readily be invested abroad; powerful financial institutions; firm, but not intrusive, state supervision; a light tax burden; a highly skilled workforce; efficient means of communication; and plentiful, reliable and widely accessible information. This list may not be exhaustive, yet it is hard to refute it. We have seen that these various elements, or most of them, can be found in the centres that, at one time or another in history, have held a dominant position in the international hierarchy. Conversely, those centres that have seen their international influence fade lack one or several of these elements.
Another analytical grid, or at the very least a different departure point, nevertheless seems more apt for understanding the changes in fortune of the capitals of capital over more than two centuries. In the final analysis, the elements of explanation most commonly put forward appear to be short- and medium-term consequences rather than the underlying causes of the relative success or failure of the main international financial centres.
Staying power and change
A first conclusion prompted by long-term historical analysis is that the rise of a major centre is closely linked to the economic power of the country that hosts it.
International financial centres have come to represent a major economic stake. Indeed, the advantages that they bring, especially in terms of jobs, incomes and wealth concentration, to the countries and cities that host them seem highly desirable – even though they come at a price, the most visible to date being the strengthening of inequalities. Such benefits apply above all to the most important centres: New York and London, or even Frankfurt, Paris, Zurich, Tokyo, Hong Kong and Singapore, to name but the leading ones. However, there are far from insignificant benefits for the numerous secondary centres in developed countries confronted with the competition and challenges of the post-industrial era, or for those in emerging economies to which they offer further prospects of enrichment and development.
The extent to which defending and promoting these centres has reached today reflects the importance of these stakes, which are far from solely the concern of pressure groups from the financial sector. Politicians also enter the fray whenever national interests are concerned. Has the British chancellor of the Exchequer, Gordon Brown, not provided the best example of this by making the preservation of the City's international competitiveness one of the five conditions for the pound sterling's entry into the European Monetary Union?
These stakes are also mirrored in the increasing number of publications devoted to this subject over the last twenty years or so.