Published by EH.NET (October 2007)

Youssef Cassis, Capitals of Capital: A History of International Financial Centres, 1780-2005. Cambridge: Cambridge University Press, 2007. xiv + 385 pp. $40 (cloth), ISBN: 978-0-521-84535-9.

Reviewed for EH.NET by Catherine R. Schenk, Department of Economic and Social History, University of Glasgow.

Given the recent international transmission of the U.S. sub-prime loan crisis, it is a particularly appropriate moment to consider the long-term development of financial markets and the growth of international capital. Pictet & Cie, itself a venerable private bank, commissioned Youssef Cassis, Professor of Economic and Social History at the University of Geneva, to write a history of international financial centers (IFCs) to mark its bicentennial, and they have certainly generated a fine monument to commemorate their anniversary. This is a truly scholarly work of synthesis drawing on an impressively comprehensive bibliography and with a helpful glossary included.

Beginning with the rise of private banks in the eighteenth century and concluding with the financial conglomerates and hedge funds of the early twenty-first century, Cassis has produced a comprehensive overview of the developments of the main centers of capital: London and New York, Amsterdam, Paris, Brussels, Zurich, Frankfurt and Tokyo. His account shows how these centers were buffeted by political crisis and military conflict but proved resilient through innovation and specialization. The structure is strictly chronological, although themes of rivalry and competition, regulation and innovation emerge. Changes in the financial architecture are traced throughout as private banks gave way to joint stock banks, and stock markets matured and became international. The concentration of capital at the end of the nineteenth century, described in the first part of the book, is echoed near the end of the book by the mergers and acquisition wave of the 1980s and 1990s, which saw a return to the scale and breadth of global financial activity that had occurred a century earlier. Nevertheless, Cassis is skeptical of the comparison of the ‘new’ globalization of the 1980s with the first era of globalization given the technological and scale differences between the two periods, and he seeks merely to position the integration and growth of financial markets that has occurred in the last 25 years in its historical context.

The most detailed descriptions are devoted to the three chapters that draw out the decline of Amsterdam and the rivalry between London and Paris from the early nineteenth century to 1914. The years of crisis from the beginning of the First World War to the end of the Second World War are treated together in a single chapter. Along with the description of the changing fortunes of European centers, this period sees the rise of New York as a major player with very different characteristics than its European rivals. One chapter covers the recovery of markets from the war and the subsequent financial innovation (in the form of the Eurodollar market) that transformed the nature of business done by IFCs in the 1970s. The final substantive chapter takes the story from 1980 to 2005. In common with all histories that seek to cover such a broad time period there is a sense that later decades get rather short-changed, but that is the nature of this kind of project.

The final chapter draws conclusions from the long historical perspective on why IFCs emerge and prosper. There is a range of features that seem to promote the establishment of IFCs, including political security and a strong currency, but Cassis admits that his account of the historical record shows that no combination is either necessary or sufficient. He moves between centers that were important mainly because of large domestic markets that make for large banks and transaction volumes (New York and Tokyo) and those that operated more as financial services entrepots (Zurich and post-1950 London) but concludes that his research has shown that being a world economic leader is (usually) an important underlying cause of the rise of IFCs. Will all large economies eventually generate an IFC, and if so what does this suggest about Shanghai, for example? Other long-term factors include wars (which dent but do not necessarily end IFCs) and openness to migrant skilled workers. He concludes that state intervention “rarely determines the destinies of IFCs in a lasting or fundamental way” and controversially argues that regulation is more a consequence of how an IFC develops than a cause. He concludes that most regulatory interventions did not profoundly change the outcome of the hierarchy of IFCs. Supporters of Shanghai as an IFC of the future will take comfort from this argument that size of the domestic economy rather than regulation or strength of the national currency are the most important long-term drivers of IFCs.

Cassis has not quite escaped the challenges of identifying, classifying and ranking IFCs, although one of the themes of the book is shifting rivalries. He dodges the tricky question of how to rank IFCs by using various measures at various times; including size of national banks, employment, and value of foreign issues. Each of these measures reflects different attributes of international financial activity but none allows a comprehensive comparative approach given the different ranges of activity in each center. Moreover, these measures become less useful with globalization once a product may involve activity in several centers, and as innovation changes the labor requirements and some operations are outsourced. Nevertheless, the breadth, scope and detail of the study must recommend it to scholars and students seeking an overview of the development of international financial and banking markets over the past two hundred years.

Catherine Schenk is Professor of International Economic History at the University of Glasgow. She is the author of Hong Kong as an International Financial Centre; Emergence and Development (Routledge, 2001). Her most recent project examines the exchange rate regime choices of a range of developing economies in the early 1970s.