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LIBRARY

OF THE
MASSACHUSETTS INSTITUTE
OF TECHNOLOGY

Digitized by the Internet Archive

in 2011 with funding from
Boston Library Consortium Member Libraries

http://www.archive.org/details/formationoffinanOOkind

MASS. INST.

S^ft 12 1973
QEWEY LIBRARY

orking paper

department

of economics

THE FORMATION OF FINANCIAL CENTERS:

A STUDY

IN COMPARATIVE ECONOMIC HISTORY

C. P. Kindleberger

Number 114

August 1973

massachusetts
institute of

technology

50 memorial drive

Cambridge, mass. 02139

THE FORMATION OF FINANCIAL CENTERS:

A STUDY

IN COMPARATIVE ECONOMIC HISTORY

C. P. Kindleberger

Number 114

August 1973

Draft.

Comments, corrections, criticism welcome.

1.

i

I. Introduction

It is a curious fact that the formation of financial centers is not

studied today in economics.

Partly it falls between two stools.

Urban

and regional economics which concern themselves with cities discuss the

location of commerce, industry and housing but rarely that of finance.

(An exception should perhaps be made for Canada [Kerr, 1965, 1967] and for

France [Labasse].)

A recent United States survey of urban economics men-

tioned finance only once in the text, and referred to no book on the subject

in a bibliography of 438 items [Goldstein and Moses].

At the same time, a

vigorous new literature on money and capital markets and their role in eco-

nomic development takes no interest in geographical location or the relation-

ships among financial centers [Goldsmith, McKinnon, Sametz, Shaw].

Apart

from a sentence or two, one would think that the money and capital market

was spread evenly throughout a given country.

Such general analytical

literature as I have found goes back to World War I.

In a 1912 study,

Marco Fanno has a chapter on the centralization process in banking and

money markets, including the geographic centralization.

A 1915 volume on

The Evolution of the Money Market presents an elaborate account of the

processes by which congeries of isolated banks were formed into a financial

hierarchy centered on London, with liberal use of physiological analogies,

including “natural selection” and “survival of the fittest.”

In his general

work on economic history, Gras describes the development of metropolitan

economy from town economy and village economy, and specifies that the metrop-

olis adds the function of finance [Gras, chaps v, vi].

His work demonstrates

an interest in the functions of and relations among financial centers which

is rare in current research.

2.

The problem is of considerable historical interest, and not without

relevance to contemporary issues.

Historically, for example, explanation

is needed why money and capital markets were centered at the capital in

Great Britain, France and Germany, but not in Italy, Switzerland, Canada,

the United States, Australia, etc.

Or one can formulate an aspect of the

issue as a riddle:

what do the Midlands Bank, the Credit Lyonnais, the

Dresdner Bank, the Banca Tiberina, the Bank of Nova Scotia and the First

of Boston Corporation have in common?

The answer is that their executive

offices are located in a different place than that implied by their name –

the Midlands Bank in London, the Credit Lyonnais in Paris, the Dresdner

Bank in Berlin from 1892 to 1945, the Banca Tiberina (after 1879) in Turin,

not along the Tiber, the Bank of Nova Scotia in Toronto, and the First of

Boston Corporation in New York.

The two historical curiosities can be com-

bined:

a year after the Midlands Bank transferred its headquarters from

Birmingham to London (in 1891) , there was a simultaneous movement of the

A. Schaffhausen’scher Bankverein from Cologne to Berlin, i.e. from provincial

city to the capital, and of the Eidgenttssiche Bank from Berne, the capital,

to Zurich.

The affinity of finance and locations is underlined by the fact

that so many banks have places, rather than functions (Merchants, Farmers,

etc.) in their names.

(For private banks where confidence is all-important

banks are named for people.)

Contemporary relevance is provided partly by the tasks of building

money and capital markets in developing countries, which McKinnon and Shaw

regard as vital to economic development and more important than foreign aid

or export expansion.

Of interest to the writer is the question of predicting

which center, if any, will emerge as the leading money and capital market

of the European Economic Community if its monetary integration is achieved.

For the purposes of such prediction it is necessary to have a model of the

formation of financial centers.

In the pages that follow a comparative analysis is presented in

literary rather than statistical or econometric form.

It is perhaps unneces-

sary to defend the comparative method after having shown that the adminis-

trative capital sometimes serves as the financial center, and sometimes does not,

I go further, however, and suggest that the study of single cases, valuable

as It is, frequently tempts the economic historian to rely

too heavily on

single analytical models, and that the comparative method, for limited prob-

lems at least, is of value in showing what in historic process is general

and what special.

The qualification that the comparative method is most

effective with limited problems – as a rule of a partial-equilibrium sort –

reflects scepticism that general-equilibrium issues like business cycles,

stages of growth, and backwardness embody too many degrees of freedom as

one moves from one to another country, society, polity and economy to enable

the analyst to generalize with confidence.

As an aside, let me note the conviction that the comparative method

is best pursued by dealing with broadly similar countries rather than those

of widely differing cultures, traditions and stages of development and put-

ting the several cases through one head.

Useful work is done by assembling

different experts on different countries and asking them to follow a single

outline.

The two volumes edited by Cameron on the role of banking in the

early stages of industrialization show this method at its best, with the

editor seeking to generalize on the basis of separate studies [Cameron,

1967, 1972].

With multiple authorship, it is possible, of course, to go