How single cities grow to dominate global finance
Seán Keyes looks at how the world's financial capitals develop, and how power can shift from one place to the next with remarkable ease.
Some of the greatest cities in history have also served as the great global financial capitals: Florence, Amsterdam, London, New York.
But how does a single city - or a handful of them - get to be at the heart of the financial system? And how do they lose this grip?
The simple answer is that financial capitals evolve in a similar way, and to meet similar needs, as money itself does.
In the same way that it makes sense for two people to swap different goods with one another via a common form of exchange (money), it makes sense for a Bradford bank and a Newcastle bank to clear payments to each other via a common centre.
That's the basic logic of financial capitals. Financial transactions need trust. Trust is easier to maintain when the industry is concentrated, than when it is dispersed.
As a result, money and talent move to specific centres of finance, creating a gravity that in turn attracts more money and more talent. Local banks clear through regional financial centres. Regional financial centres clear through national financial centres. And these in turn clear through the international financial centre.
And throughout history, finance's concentration has helped build the great cities.
But the forces that make finance concentrate in one place aren't strong enough to hold it there forever. Money's geographical centre of gravity is determined by the pull of those economic forces, and also by the push of history - of "events, dear boy, events".
Florence: the global financial centre of the Middle Ages
The great merchant banks of the Middle Ages were based in Florence. The Florentine banking empire was built on remittances to the church. The contributions were then re-lent to export businesses at a profit.
Monasteries were some of Florence's most important clients - they sent a lot of money abroad, and they exported a lot of wool. Wool was the hot commodity of the era, and England was the Saudi Arabia of medieval wool. (Since the 14th century, the speaker of the House of Lords has sat on the Woolsack - a remnant of England's woollen glory days).
Sending gold and silver across thousands of miles of lawless continent was not a simple task. The Florentine banks solved this problem. They were the Western Union of their day, moving funds from monasteries in Kent and Eindhoven to the papal coffers in Avignon and later Rome. The Medici bank mastered this trade in the 1400s, using their huge international reach and close ties to the papacy. Money from finance made Florence rich and grand, enabling it to support great artists such as Leonardo Da Vinci, Michelangelo and Botticelli.
But Florence couldn't dominate international finance forever.
Over centuries, trade and exploration opened up new worlds and new economies, and Florence didn't keep pace. Genoese merchant bankers wormed their way into the Spanish court and when Spain found gold and silver in the Americas, the Genoese were there to profit.
Spain was at war with the Netherlands; the Genoese paid the Spanish troops stationed in the Low Countries and took gold from Spain in receipt. That war was fought on an international web of credit, centred on the merchant banks of Genoa.
The global financial centre moves north
Over the centuries the shape of the European economy changed. Northern Europe got wealthier and finance's centre of gravity shifted towards it. First Antwerp, then Amsterdam emerged as dominant international banking cities.
Innovation characterised the northern capitals of money. Antwerp created the first dedicated exchange or bourse' for merchants to deal in money. It created the legal framework to support these dealings, which in turn led to the first derivatives markets. Commodities such as wool could for the first time be traded for delivery in the future as well as on the spot.
Antwerp also developed the first short-term loan market, which linked international money from Germany, Italy and Spain with governments and kings.
All this innovation in finance led to more complexity, which in turn led to even more concentration in one place. As the range of services that finance offered grew, so did the importance of expertise, and local information.
Military defeat and bankruptcy displaced Antwerp as the Europe's financial capital. The Fuggers were a powerful German banking dynasty, who were intimately tied to the Antwerp financial markets. They were undone by a string of royal bankruptcies at the collapse of the Habsburg empire. A similar fate had undone the Medicis, centuries before.
Spanish troops occupied the city of Antwerp and the Dutch navy blockaded the Flemish coast in 1585. At roughly that time, Amsterdam took centre stage, the next link in the evolutionary chain of financial centres.
Amsterdam's rise was driven by equity trading and the new Dutch overseas empire. Trade with East Asia and Latin America was risky, costly - and profitable. Capital was typically tied up for about two years, with an average of 20% of the investments lost due to piracy or other misfortune. These big risks and big profit opportunities led to the creation of the joint-stock company in Amsterdam. Secondary trading in the equities of these companies fuelled Amsterdam finance's growth in the 17th century, and made the city the earliest capital of corporate finance.
London rose alongside Amsterdam, and like Amsterdam, London's power was derived from its empire. London was the hub of the biggest and richest empire the world had ever seen. The busiest port in the world, it became "the world's clearing house".
Paper issued by London merchant banks became a quasi-global currency, lubricating trade all over the world. At the centre of it all was the Bank of England, which was trusted to handle Britain's sovereign debt. It cleaned up the mess left by the South Sea bubble in 1720. Trust in the Bank of England's paper created a liquid market for paper which sustained the City.
Wall Street rose along with the American Empire, like London and Amsterdam before it. And New York, along with London, is one of the two money capitals of the world today.
But London's strength has persisted. The advantages it built up over two centuries at the top of the tree have remained - the people, supporting firms, institutions, and trust. London is still a brutally efficient machine for sorting money and talent.
What could replace it? The banking capitals' grip on their industry is so strong that they typically dominate for periods of centuries. The discovery of the new world, the beginning of global trade, the British and then American empires... it took a century-defining change to displace financial capitals past.
Asia's rise is epochal. And political change in Europe threatens to make the City less globally competitive, while increased regulation in the US has already blunted New York's attractions. It may take some time, but it seems likely that the next great global financial centre will arise in the east.