Capitals of Capital

Capitals of Capital Cambridge University Press
978–0–521–84535–9 - Capitals of Capital - by Youssef Cassis
Frontmatter/Prelims

Capitals of Capital

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 financial professionals as well as to scholars and students in financial and economic history.

YOUSSEF CASSIS Professor of Economic and Social History at the University of Geneva. His previous publications include City Bankers, 1890–1914 (1994) and Big Business: The European Experience in the Twentieth Century (1997).

---

Capitals of Capital

A History of International Financial Centres, 1780–2005

---

Youssef Cassis

Translated by Jacqueline Collier

---

CAMBRIDGE UNIVERSITY PRESS
Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, São Paulo

Cambridge University Press
The Edinburgh Building, Cambridge CB2 2RU, UK

Published in the United States of America by Cambridge University Press,
New York

www.cambridge.org
Information on this title: www.cambridge.org/9780521845359

© Youssef Cassis 2006

This publication is in copyright. Subject to statutory exception
and to the provisions of relevant collective licensing agreements,
no reproduction of any part may take place without
the written permission of Cambridge University Press.

First published 2006

Printed in the United Kingdom at the University Press, Cambridge

A catalogue record for this publication is available from the British Library.

ISBN-13 978–0–521–84535–9 hardback

ISBN-10 0–521–84535–l hardback

Cambridge University Press has no responsibility for the persistence or accuracy of URLs for external or third-party internet websites referred to in this publication, and does not guarantee that any content on such websites is, or will remain, accurate or appropriate.

---

Contents

---

List of tables			vii
Foreword			ix
Preface			xiii
	Introduction		1
1	The age of private bankers, 1780–1840		7
		The grandeur and decline of Amsterdam	9
		The rise of the City of London	15
		The revival of Paris	24
		The lesser centres	31
		Interactions and networks of relationships	37
2	The concentration of capital, 1840–1875		41
		The banking revolution	42
		The railway adventure	54
		Rivalry between London and Paris	60
		The rise and fall of the lesser centres	68
3	A globalised world, 1875–1914		74
		The globalisation of the world economy	75
		World financial capital: the City of London	83
		A brilliant second: Paris	101
		The rise of Berlin	108
		The rising star: New York	114
		Niches and specialisations	124
		Competition and cooperation	131
		The Belle Epoque of the bankers	135
4	Wars and depression, 1914–1945		143
		The Great War	144
		The roaring twenties	152
		The years of crisis	180
		The Second World War	193
5	Growth and regulation, 1945–1980		200
		The difficult return to convertibility	204
		The birth and development of the Euromarkets	219
		The dawn of globalisation	235
6	Globalisation and financial innovations, 1980–2005		242
		The new world economy	242
		The leading financial centres at the Dawn of the twenty-first Century	261
	Conclusion		279
Glossary			288
Notes			297
Bibliography			348
Index			368

---

Tables

---

3.1	Stock of foreign investment, 1913	78
3.2	Distribution of the major powers’ foreign assets, 1913	79
3.3	The 20 largest commercial banks, 1913	92
5.1	International issues in the main financial centres, 1955–62	207
5.2	The main commercial banks in the leading financial centres	208
5.3	The growth of the Euromarkets, 1958–73	221
6.1	Stock of foreign investment, 2000	245
6.2	International financial operations, 1982–2004	256
6.3	The 20 largest commercial banks, 2001	267
6.4	The top 10 investment banks, 2001	269

---

Foreword

---

Past performance is no guarantee of future returns …  this well-known warning – printed regularly on all investment prospectuses, and rightly so – demonstrates quite simply how much financiers tend to focus on the future and on what tomorrow might bring rather than dwelling on the past. But looking ahead does not mean ignoring yesterday’s lessons. Although no two financial shocks are ever the same, they often display strikingly similar patterns: when speculative bubbles – whether in tulips in 1637, railways in 1845 or the Internet in 2000 – burst, it is always sudden, investors change their minds without warning and, with the crisis at its height, markets simply grind to a standstill. The risks facing investors are legion, but no matter how much they remember these past mishaps, there is no way of predicting the exact timing or repercussions of tomorrow’s shocks. In this respect, knowledge of the past is useful, but by no means vital.

There is, however, another part of the financial universe that evolves less erratically, tracking a more predictable course: the business of settling transactions, transferring deposits and assets, trading securities, organising the structure and legal status of the main intermediaries – a complex set of functions encompassing most back-office banking operations and the hidden cogs of the financial sector’s machinery. Highly intensive in physical and human capital, structures of this sort are always slow to change. Moreover, in the financial arena, the infrastructure is so vast and so expensive to construct that individual players have naturally sought to keep costs down by grouping many related activities in one location, more often than not close to a stock exchange’s trading floor. This drive towards greater concentration was so strong all around the developed world that it finally gave birth to the so-called ‘financial centres’. Whilst most such places confined their business to their immediate horizons, either local or national, a select few extended their activities way beyond their original and natural territory to turn themselves into international financial centres – the true world’s capitals of capital. These capitals soon laid down the operating standards for finance, imposing their skill and technical innovations – some would even go so far as to say their fashions and whims – on the rest of the sector operating in more remote and less prestigious areas. Every decision-maker in finance should thus have some notion of how these centres have evolved, as details of their history are necessary background knowledge for anyone trying to reshape, either partially or totally, any kind of financial activity. Will these capitals of capital continue to dominate world finance, pushing for even more concentration centred around them and marginalising weaker or smaller centres even further? Or will they fade in importance or even very slowly vanish into oblivion, dissolving into a plethora of dislocated and increasingly fuzzy trading networks, as physical trading floors disappear one by one, cheap information is disseminated instantaneously worldwide and business procedures everywhere are standardised? Two questions, countless opinions, but the various answers could have a major bearing on many strategic investments and (re)location decisions, some of them vital for the future of specific cities, regions or even entire countries.

As a 200-year-old private bank that has weathered many a crisis, recession and war, Pictet & Cie of Geneva has garnered a wealth of experience and tradition. Interestingly, a number of key elements in the Bank’s history have closely mirrored developments in the world’s leading international financial centres even though Geneva, our birthplace and home still today, has always tended to rank among the second tier of financial market-places worldwide. At its inception in 1805, our establishment was a merchant bank, ready to undertake all sorts of banking business and trading operations. Often working closely with other private bankers in Geneva, it gradually evolved over time into an investment bank, placing its capital in various ventures, such as shipping, before setting up an investment trust in US and Mexican shares in the early years of the twentieth century. Finally, from 1910 on, Pictet & Cie turned to specialise in private banking and, later in the century, branched into institutional asset management to become eventually what it is today: a small international banking group dedicated to wealth management. Although, through the decades, Pictet & Cie has retained its structure as a private bank and not been transmuted into a limited liability company or a universal bank, many of Pictet’s partners in the nineteenth century served as directors on the boards of the deposit banks set up at the time to smooth settlement procedures and interbank clearing. Understandably, much of Pictet & Cie’s knowledge concerns Geneva and private banking. Nevertheless,

© Cambridge University Press