Wednesday, June 6th, 2012
[ I don’t normally do historical surveys, but I came across this very interesting piece on the development of European financial centers. The author, Dr. Beate Reszat, an economist from Hamburg, was kind enough to give me permission to repost it. This is part of a larger paper, so please click through the links below to check out the rest. You can see more of her writings online at reszatonline – Aaron. ]
* This is the first part of a shortened and revised version of a paper published as Centres of Finance, Centres of Imagination: On Collective Memory and Cultural Identity in European Financial Market Places, in: GaWC Research Bulletin 92, 20th August 2002. Part II will be on Collective Memory and Cultural Identity, Part III on Financial Agglomeration in Europe as Cultural Phenomenon, and Part IV will provide a list of links and references.
In an interesting post, Robert J. Shiller recently drew the attention to the importance of common cultural values and symbols for European political and economic stability. In his view, a common currency can play an important role in generating a narrative which allows the members of a monetary union to develop a sense of shared identity. This knowledge, for example, could allow to contain the damages in case of a eurozone breakup.
Common cultural values, narratives and symbols are also important determinants of the rise and success of international financial centres. As I will argue, they help explain why, for example, a financial transacion tax in Europe – with or without UK participation – although weakening the competitiveness of financial institutions located there, would hardly alter London’s regional and international dominance.
Beside their real function as providers of intermediation and financial services cities such as London, Paris and Frankfurt always have a symbolic dimension, a power to focus the imagination of market actors which strongly influences their choice of location. They are imaginary places – “Lieux de Mémoire” (Pierre Nora) – with their symbolic content shaped according to people’s memories and beliefs of a past and present which is socially constructed and determined in a permanent active process of cultural creation and destruction.
There is a subjective experience of financial places shared by actors in the markets determining what broadly may be called “market culture”. From sociology we know that individual memory creating cultural identity depends on the social environment (Berger 1963). It is deeply rooted in collective phenomena. Collective memory of a financial centre in this sense takes many forms. It relies on a variety of rites, myths, symbols and media and is influenced by patterns which in turn are determined by spatial context. Taken as a whole these factors add to the attractiveness of places. Many of them are rooted in history.
European Financial Centres in History
The concentration of trading and financial activities in centres is an old phenomenon. First gatherings of merchants which according to some views already resembled a rudimentary version of an exchange can be traced back to the big trading places of antiquity in Babylonia, Egypt and Phoenicia. First exchange-traded bills emerged on fairs in Italy – in Lucca, Genoa, Venice and Florence – in the 12th century. The first government bonds were issued in Venice. Italian cities in the Middle Ages were “awash with bills and coins from foreign countries” (Edwards 1998).
Initially, trading took place in streets or in public places like in Italy or, for example, at Jonathan’s Coffee House in London. In the beginnings, it was wholly informal by nature. There was no institutional frame and trading had to be done step by step because partners did not know each other. Only much later did it move to closed rooms where entry was restricted to a limited number of traders with proven solvency.
Early financial activities stretching beyond the boundaries of the local town or village were rooted in long-distance trade. Trade and financial activities among European merchants were largely facilitated by the rise of organised fairs such as the Champagne fairs in the European heartland in the 13th century. Located in north-eastern France, the fairs lay midway between the two poles of economic activity in Europe at that time: the Italian cities and the industrially developing textile region of Flanders. Trading in money and foreign exchange became their true specialty.
With the decline of overall Italian economic supremacy the centre of financial activities shifted to the Low Countries, first to Bruges, and later to Antwerp and Amsterdam.
The beginnings of Bruges’ rise date back to the year 957 when the first trading fair there was established. But, the true breakthrough came with what economists tend to call (making historians groan) “historic accident”: In 1134, a big storm raged over the North Sea and changed the coast line. As a consequence, for the first time commercial ships could navigate this part of Europe. In what follows, Bruges became the main trading port at the North Sea coast. In 1252 it established relations with the Hanseatic League. In 1277 the first trading ships from Genoa arrived and in the 14th century, there was even a daily courier service to Venice overland.
Between the 13th and 15th centuries, Bruges became one of the richest cities in the world famous not only for its trade but also for its fine cloth manufactories as well as its banking services. The end of the its predominance was marked by another natural event: In the late 14th century, the Zwin, the river on which the city is built, began to silt up, discouraging the passage of commercial shipping. Economic crises and political unrest worsened the situation and in 1488 Maximilian of Austria, ruler of the Spanish Netherlands, ordered foreign merchants to shift their offices to Antwerp (Benevolo 1993).
Between 1480 and the 1560s, Antwerp rose to the main centre of north European trade and to the leading financial place in Europe. The town was the first to grant almost total liberties to both domestic and foreign merchants. One reason for the existence of fairs in the Middle Ages had been the temporary exemption from trade restrictions. Now, under almost total permanent liberalization uninterrupted market trade became possible and Antwerp changed from a place for fairs and markets to one in which exchange trading became the rule. In 1518, the Antwerp Exchange was founded which was open to merchants from all nations. Only the English merchants kept their own commodity exchange.
In the 1570s, the Spanish-Dutch conflict, the closure of the river Scheldt and the isolation of the town by Spanish troops put an end to Antwerp’s supremacy. Its successor became Amsterdam whose advantages were among others its port, its outstanding superiority in shipbuilding and its geographic position, but also a liberal government compared to the rather conservative Spanish rule. The Amsterdam Bourse became Europe’s leading securities market. One of its achievments was that it helped stock trading to get accepted and that forward transactions as a specific form became a common tool of exchange trading.
At that time, European merchants often concentrated their transactions in one or more specified towns known as staples and Amsterdam was the biggest staple in the western world (Fischer 1998). There, merchants coming from East India or America met those from eastern Europe, and since cargoes from both directions could not be transported any further before the winter set in they were stored in Amsterdam. As late as 1728, Daniel Defoe described the Dutch as “the Carryers of the World, the middle Persons in Trade, the Factors and Brokers of Europe: … they buy to sell again, take in to send out: and the Greatest Part of their vast Commerce consists in being supply’d from all Parts of the World, that they may supply all the World again.” (Cited from Fischer 1998: 29.)
One hundred years later, the same was said of London. The exact time when London took over from Amsterdam is not known. It emerged as a centre of international merchant banking in the 17th and 18th centuries. The decisive years appear to be between 1660 and 1700 when the Navigation Act took effect and England brought a large part of the transatlantic trade under its flag (Inwood 1998: 318 f.). Among the 28 colonies established in the western hemisphere in the 17th century, 12 were English, but only three Dutch and eight French. Around 1700, there were 350,000 to 400,000 British subjects on the other side of the Atlantic, but only 70,000 French. The final stroke to Amsterdam came during the French Wars of 1793-1815. When in 1795 the French occupied the town much of its financial business migrated to London which was one of the few major towns in Europe which had not fallen under Napoleon’s control (Einzig 1970, Inwood 1998). When peace returned many of the Dutch commercial and banking families remained and London benefitted from their money as well as from their experience and worldwide contacts. For a long time, Dutch became the leading business language in London. Many financial regulations, norms and behaviour patterns such as the rules and techniques of stockbroking followed those prevailing in Amsterdam.
The Dutch were not the only aliens dominating trade and finance in London, and they were not the first ones: The first foreign financiers there had been Jews who had settled in London after 1066 where they were the main source of loans until the middle of the 13th century. Next came Italian and Hanseatic merchants as well as many others. The most important group up to the late 15th century were Italians who not only handled about a quarter of England’s overseas trade but also dominated its banking system in using financial techniques and capital not available to native merchants.
War was not the only reason for Amsterdam’s decline. During the 1760s and the 1770s there had been a series of financial crises. In 1763 it was speculation in unsecured war loans which ruined several Amsterdam financiers. In 1772-3 a succession of bankruptcies among Dutch financiers from speculations in East India Company stock brought business to a standstill. In both cases, the Bank of England acted to restore confidence which left the overall impression among the European business community that the financial system in London was safer than the decentralised and uncontrolled system in Amsterdam.
All this does not mean that in the 18th century England as a whole already had an efficient banking system or a well-functioning capital market. On the contrary, before the 1880s, there were almost two separate financial sectors: the ‘City’ with its highly sophisticated system of mainly foreign banks and financiers as well as its insurance, shipping and commodity markets which reflected Britain’s dominant position in the global economy, and a rather backward country banking sector (Cottrell 1992).
During those years, London’s position as a financial centre underwent radical changes. Traditionally, credit had been granted by those with surplus cash, above all, goldsmiths, courtiers and merchants. Some of them became part-time bankers. However, for example, most of the 44 goldsmith-bankers known to have existed in London in 1677 did not survive the next turbulent fifty years (Inwood 1998).
The first true English banking houses were founded only around 1700. In addition, the capital market at that time was poorly organised compared to the continent and its development was largely following domestic needs. On the other hand, the system had already considerable comparative advantages. The Bank of England was the only central bank in the world producing a paper currency with a fixed and guaranteed gold value. There was a whole range of sophisticated financial instruments and methods to shed risk or deliberately take it. Government debt as well as industrial expansion brought a constant flow of financial demand. Since the late 17th century it became possible to buy insurance against all kinds of calamities from individual brokers or underwriters.
In the 19th century London’s international role strengthened. It became common for European merchant banks to open offices there. American banks followed. Those were the years when the Barings and the Rothschilds became the most powerful financiers in the City. In 1914, twelve of the twenty-one leading London merchants banks were Anglo-German, three American and one French. London became the focal point of overseas lending – mostly government and railway issues, but also mining, industry and public works, in America, India, Australia, Canada and New Zealand – with a large proportion of the money originating overseas and much of the businesses handled by the London offices of American and German finance houses. The City’s reputation was high: Foreign merchants used its accepting and discounting services even when their trade was not with England.
Internationalisation was fostered by new technology. The electric telegraph enabled trades between London and other financial centres to be done in minutes rather than days or weeks. The first submarine cable linking London to Paris was established in 1851, to New York in 1866 and to Melbourne in 1872 (Headrick 1990). However, perhaps the most important single advantage was the openness of the financial system which was largely free from government interference and official rules and regulations.
During these years other towns in Europe emerged as financial centres as well. London’s nearest rival at that time was Paris. Between 1850 and 1870, Paris was said to be the first place in Europe for foreign exchange (Kindleberger 2007, 2011). Historians emphasize Paris’s dealings with Russia and Italy at that time. However, various data show a different picture. For example, published deposits in London banks in 1873 amounted to £120 million, compared to £40 million in New York, but only £13 million in Paris (Inwood 1998: 483).
Like in Britain, in France there was a discrepancy between the domestic banking sector and the international one. But the French system was by far much less developed than the British and those of other comparable countries. Between the 1880s and the 1930s French commercial banks proved largely incapable to provide the channels for financial savings. For example, end of 1937, there were 12,000 francs’ worth of deposits per inhabitants in the United States, 10,000 francs in England, but only 1,200 francs in France. Hoarding reflected the still essential rural nature of the country (Gueslin in Cassis 2002).
The influence of the French state was overwhelming. This does not only refer to the vast public channels for deposit collection provided by public and postal savings banks, but also to the numerous restrictions French banks were subject to before World War II (and to the Bourse de Paris which, in contrast to the London Stock Exchange, was a state monopoly).
Paris’s international position was not to last. It became severely weakened by the Franco-Prussian war when the Bank of France abandoned the gold standard for long eight years.
In Germany, up to the second half of the 19th century, Frankfurt was the most important financial centre (Wandel 1998). Its success owed a great deal to names such as Bethman and Rothschild. It was Meyer Amschel Rothschild (1744-1812) who established the famous dynasty there. The earliest source mentioning the Frankfurt stock exchange dates from 1605. But, the place lost its vigour in the Thirty Years’ War from which it recovered only in the 18th century when bond issuing operations, together with commodity trade, formed the basis for exchange trading on a larger scale. One feature of the bond issuing process in Frankfurt was the strong cooperation between banks and the exchange – a characteristic marking the relation between the two up to these days which strongly influenced the rise and decline of Frankfurt as a financial centre in the course of history:
In general, German exchanges were rooted in two different developments. On the one hand, in the general market activities of the big trade fairs in towns like Nuremberg and Augsburg, on the other, in the guilds and merchant cooperatives which were found in Frankfurt, but also in Cologne, Hamburg and Berlin.
Those differences had important implications for the competitiveness of German financial centres in the 19th and 20th centuries: At the beginning of the 19th century, modern exchanges in Europe like those in London, Paris, the Netherlands and – to a certain extent – Vienna were tightly organised and regulated, either by the state or by private initiative in reaction to earlier speculative excesses and breakdowns. Access was restricted to professional traders with a specialisation and separation according to functions aimed at, among other things, investors’ protection. For example, in London there were brokers taking orders from outside the exchange and so-called dealers or jobbers executing those orders in trading on their own accounts. Another characteristic of those exchanges was a high sophistication and a strongly growing funds, and in particular forward, business.
In contrast to these exchanges, in principle, the major trading places in Germany in the 19th century were successors of the autonomous merchant gatherings and guilds and cooperatives of the late Middle Ages and early modern history. Their most important characteristic was free access. Funds and forward dealings were comparably underdeveloped. There was no excessive speculation and therefore no need for respective regulation. The exchanges served above all as information exchanges which offered an opportunity to deal in commodities, foreign currencies and assets besides.
The first speculative boom in Germany was in railway stocks in the middle of the 19th century. This was accompanied by a change in hierarchy among the German exchanges. While in the 1940s, Frankfurt’s supremacy in a bond-dominated market was still unchallenged, with the boom in railway stocks and the crisis of 1848 the Berlin exchange took the lead. In the following years, Frankfurt, confirmed by the events, maintained its hesitant attitude towards industrial shares concentrating on the bond business which, after a while, brought it into the reputation of backwardness. When the Prussian government decided to make Berlin the new capital, the town soon became the centre of economic and financial activity in Germany, a situation which prevailed until the end of World War II.
After 1945, Germany was split up into occupied zones and the financial system was rebuilt in a largely uncoordinated way along the lines of its former decentralised regional nature. Berlin lost its dominance, above all, because of its geographic position in the Soviet zone. Frankfurt once again took the lead – this time, at first, together with Düsseldorf. However, Frankfurt’s future role was decided when the American and British occupation authorities chose the head office of the Bank deutscher Länder, the predecessor of the German Bundesbank, to be located there.
Internationally, London’s role as a financial centre was in steady decline since 1914. The main reason was its shrinking influence in the global economy and the economic and political rise of the United States which already began at the end of the 19th century. However, despite the shift in economic leadership, London’s dominant position as a financial centre remained undisputed for about at least another twenty years. New York banks continued to depend on the City of London for their international business, the rules and regulations prevailing there stayed the same as overseas and by the end of the century the British gold standard was adopted almost worldwide.
One explanation given for London’s ongoing predominance during those years was the role played by the British Empire. Another important factor was the willingness of the biggest economy at that time, the United States, to go on considering London as its central financial place. More than one hundred years after becoming independent, the US obviously felt no need to change old habits that appeared well-established, comfortable, inexpensive and reliable. A third argument is that Britain managed to maintain its competitiveness in at least two areas which were of special importance for its functioning as a world banker: On the one hand, it showed an increase in a whole range of services from shipping over insurance to finance even at a time when its industrial performance was in decline. On the other hand, its surpluses from overseas investments were still growing with remarkable regularity.
The First World War brought two significant changes. One concerned Britain’s international financial position which was considerably weakened by the need of war financing and by foreign assets lost or confiscated. The other, even more dramatic, was a widening trade deficit which not only reflected the effects of the war but also long-term structural changes. As a result, New York took the lead, and it maintained this position up to the stock market crash of 1929 and the following worldwide economic crisis when London – although temporarily – regained its supremacy. World War II brought another setback for London, and New York became again the most important international financial centre, a position it held until the US introduced the Interest Equalization Tax in 1963. The resulting emergence first of the eurodollar market, and later on the euromarkets for other currencies, meant the last turning point so far in the history of international financial centres (Hamilton 1986). Since then, London was, and is, the Number One, not only in Europe but worldwide.
Despite, or perhaps because of, its competitive advantages, during the 1960s and 1970s, the City of London remained a remarkably conservative financial place slowly reacting to new challenges. This changed with the arrival of highly competitive American and Japanese banks in the 1980s and with the deregulation of the London Stock Exchange, the so-called Big Bang. One result was an often complained change in the nature of the City itself, its main actors, habits and rules:
Before 1914, there had been thirty foreign banks in London. In the 1970s, there were already 183. Between 1914 and the first half of the 1980s their number grew fourteen-fold up to 434 in 1985 (Hall 1999). Another result was the concomitant spatial extension of the City economy. There was a huge increase in the demand for, as well as supply of, office space which in parts triggered a kind of self-reinforcing process. In the end, the pressure to build seemed to become a herding phenomenon (Fainstein 2001). One of the most disputed outcomes was the transformation of the Docklands in order to create new office space. The City, which over centuries had been the “square mile”, a region with more or less unchanged boundaries, was losing shape. Between 1985 and 1989 alone, 2.6 million square feet of office space were completed in the Docklands, another 16.5 million square feet in the City itself.
The introduction of a common currency in Europe brought new challenges for the City. Competition among financial centres has clearly stiffened and the discussion of advantages and disadvantages of places is no longer restricted to economic arguments. These days, cities compete by building infrastructure and enhancing the amenities of their Central Business District (CBD) as well as by promoting lavish cultural programs. The way in which people in financial institutions are conceiving a place is considered more and more important. No longer do locational decisions for or against one or the other financial centre depend solely on cost and return considerations. The symbolic dimension, and the common cultural values, narratives and symbols Robert Shiller referred to in a different context, play a growing role here, too. The theoretical foundations for studying these influences will be explored in the next part.
This post originally appeared in rezatonline on March 26, 2012.