Discussion Paper No. 121

Competition and Complementarity of International
Financial Centres from A Historical Perspective

Ayumu Sugawara

October 2015

TOHOKU MANAGEMENT & ACCOUNTING RESEARCH GROUPGRADUATE SCHOOL OF ECONOMICS AND

MANAGEMENT TOHOKU UNIVERSITY
KAWAUCHI, AOBA-KU, SENDAI

980-8576 JAPANCompetition and Complementarity of International Financial Centres
from A Historical Perspective 1
Ayumu Sugawara 2 (Tohoku University)
1. Introduction
An article, on 19 December 2013 NIKKEI Asian Review newspaper, showed an aspect of
the relationships between international financial centres, which is competition of them,or more precisely how the relationships of the centres is perceived by people 3. Then,interestingly, just within half a year after the news telling they lost the competition in
the foreign exchange business to Singapore, Japanese policy makers have gone to be ahelter-skelter and suddenly said they would try to strengthen the Tokyo financial
centre 4. Japanese policy makers tend to show such a behavior sometimes and, as I will
mention later, a similar thing happened in 1996.
This Japan's case could be an extreme one. But, of course, competition itself is very
important not only for the financial world but also for the economic world as a whole.
Therefore, the concept of competition among international financial centres is accepted
as a natural view point.
On the other hand, another view point to economic things and also in basic micro
economics, that is complementarity, have been paid less attention. Of course, experts onfinancial history have not overlooked it. They carefully have dealt with both competitionand complemetarity between the centres. However the latter have attracted lessattention so far. But, I think, in depth of the history of international financial centres,
we can find an important role of complemenarity of them as a sound base for financial
activities such as international banking operations.
Of course, competition is one of the most basic and important concepts in theThis is a revised version of a paper presented by the author in the World Economic
History Congress (WEHC) 2015 Kyoto (4 August 2015 at Kyoto, Japan) in the session
titled “Competition and Complementarity of International Financial Centres:International Banking and Historical Perspective”. This paper is a result of theresearch by the author supported by a grant-in-aid from Zengin Foundation for Studies
on Economics and Finance. The author thanks the Zengin Foundation for the financial
support.
2 An Associate Professor at the Graduate School of Economics and Management,
Tohoku University.
3 "Sun sets on Japan's status as Asia's financial centre", Nikkei Asian Review, 19 Dec.
2013.
4 “Governor wants Tokyo to be a global financial hub”, Nikkei Asian Review, 30 May.
2014.
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history of economics, but complementarity is a much for it. For example,
complemetarity can be said, in other words, the division of labour, and that is also one of
the main idea in Adam Smith’s Wealth of Nations. Therefore, I would like to deal withcomplementarity with equal importance compared to competition among international
financial centres at least.
2. Definitions of International Financial Centre
As the beginning of the details in a paper which is interested in the relationshipbetween international financial centres, it is reasonable to begin with searching for thedefinition of international financial centre. In 1992, Geoffrey Jones said, in his very
sophisticated paper about the history of financial centres in Asia-Pacific and the Middle
East, “financial centres are much discussed but rarely defined.” 5 However, Youssef
Cassis’ definitions in his grand work on the topic can be a good starting point. He
defined a financial centre in two ways; firstly, “a financial centre can thus be considered
the grouping together, in a given urban space, of a certain number of financial services”
and secondly, “or in a more functional way, it can be defined as the place whereintermediaries coordinate financial transactions and arrange for payments to besettled.” 6
However above mentioned definitions can be applied to all financial centres both
domestic and international. Therefore, Cassis carefully continued to distinguish thelevels of financial centre based on geographical scope; “this concentration (of financial
industry) can be found at national, regional…and world levels, depending on the extent
of the geographical area served by on financial centre." 7After focusing on international financial centres, there is a lot of approaches togroup them into some types. Among them, we follow Jone’s typology. He divided
international financial centres into three categories; sub-regional, regional, and global
centres. 8 We chose the typology firstly because it is clear and avoids unnecessary
complexity and secondly because, though its simple appearance, it is thoroughgoing
prepared to explain the rises and falls of international financial centres.

Jones (1992), p.405.
Cassis (2010), p.2.
7 Cassis (2010), p.2.
8 Jones (1992), pp.405-406. There, it is said that a sub-regional financial centre focuseson serving to bilateral trades of the host country and other economies. However, rather
we prefer the definition that a sub-regional international financial centre has
relationship with a global financial centre bilaterally.
5
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3. Peking Orders of International Financial Centres: A Current Example
Grouping of international financial centre based on its geographical scope leads to put
the centres on a pecking order. From such a view point, there is a lot of rankings ofinternational financial centres about each period, not only current but also historical.
Firstly, we take “the Global Financial Centre Index” as an example of current rankingsof international financial centres in the table 1. However, the Index does not divide thecentres like sub-regional, regional, and global. It just gives scores to each centres.
As a result of the scoring, the Index put the international financial centres in anorder in the table 1. In the table 1, London and New York occupied 1st and 2nd places
through the years. More interestingly, Hong Kong and Singapore, two Asian centres,
established their 3rd and 4th places in the global financial world. Among Asian centres,
Tokyo has fallen behind Hong Kong and Singapore though until the 1990s it was said
that Tokyo was one of the three global financial centres with London and New York.9
As Jones and Cassis mentioned financial centres provide a wide variety of financial
services,10 therefore researchers are interested in the volumes of each type of trade inorder to put centres in an order based on an quantitative criteria. Because I cannot deal
with the data of the wide variety of services, I pick up an example of international
financial services, foreign exchange turnover in the figure 1 and 2. The figure 1 shows
foreign exchange turnovers of five largest trading countries, the United Kingdom, theUnited States, Japan, Singapore, and Hong Kong, in the service. Although the former
three countries are not just the centers in them, London, New York, and Tokyo, we deal
with country names as proxies of each centre due to the data’s limitation.
In the figure 1, here also London and New York are the largest centres being worthyof their name as a global financial centre. And recent further concentration on the UK(London) is also eye catching. On the other hand, in the figure 1, three Asian economies
looks very small, although they are third, fourth, and fifth largest foreign exchange
trading places in the world. Switzerland follows them as the sixth largest trading
country and she has 3.2 per cent share.
Due to the difficult looking of three Asian economies in the figure 1, we put justthree Asian economies’ shares in the figure 2. The figure 2 shows that Japan, Singapore,and Hong Kong are equally matching in the field. However, when we make ourperspective pretty wider, it is impressive that Japan has declined in the field since 1989,
when the BIS provided the first survey on the global foreign exchange turnover. At that
910

Jao (1997), p.101.
Jones (1992), p.405; Cassis (2010), p.2.
3

time, Japan dealt with US$ 111 billion foreign exchanges per day compared to the UK’s
184 billion, the US’s 115 billion, Switzerland’s 56 billion Singapore’s 55 billion, andHong Kong’s 49 billion. In the figure of 1989, Japan was catching up with the UnitedStates and having the double size turn over to Singapore and Hong Kong. Thus, thedistribution of foreign exchange business in Asia has changed dramatically. 11
4. Peking Orders of International Financial Centres: A Historical Example
In the academics on financial history, Howard Reed(1981) compiled long term rankingsof international financial centres. He decided the rankings based on quantitative data.
Under the limitation of data availability for 80 years, He forged the term, international"banking" centre, because the available data are just included the number of theheadquarters of domestic banks in a centre, the number of "direct links" of domestic
banks 12, and the number of the offices of foreign banks in the centre. 13 The results ofReed’s research on the international “banking” centres is shown in the table 2. Like thetable 1 on current rankings, in the table 2, London and New York had dominated their
1st and 2nd status. Through the years, Paris, Hong Kong, German centres (Berlin,
Hamburg, or Frankfurt), and Japan’s centres (Yokohama and Tokyo) had appeared inthe 3rd through 5th status.
In the table 2, for example, the ranks of New York and Paris in 1900 probably
attract skeptical views most. It takes place because on 1900 Reed could just used two
types data, the number of private (merchant and investment) banks in a centre and thenumber of correspondences of domestic banks in the centre.14 Especially, the type ofprivate banks which Reed chose led a serious bias, because his selection excluded Paris“haute” banks. The same thing might happen about Berlin in 1900 because famous
Germany private banks like Bleichroeder.15
With the extended data availability, Reed compiled the ranking of international“financial” centres from 1955 to 1980 16 and the result is shown in the table 3. In orderto make the rankings in the table 3, Reed used foreign assets and liabilities of a centre’s
domestic banks or center’s host economies in the case of like Hong Kong or Singapore,"Sun sets on Japan's status as Asia's financial centre", Nikkei Asian Review, 19 Dec.
2013.
12 Reed (1981), p.10. However, the definition of "direct links" is unclear. It seems thenumber of correspondents.
13 Reed (1981), pp.17-25.
14 Reed (1981), p.17.
15 On Paris, see Cassis (2010), pp.57-58. On Germany, Cassis (2010), p.59.
16 Reed (1981), pp.25-31.
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the number of branches and agencies of domestic banks in a centre, and the number ofbranches of foreign banks in the centre 17, in addition to the data of the table 2. On theyears from 1955 to 1980, the results in the tables 2 and 3 are basically similar,
particularly the positions of London, New York, Paris and Tokyo. One prominent
character of the table 3 is the presence of San Francisco in 1955 and 1965. It probably
comes from the global presence of the Bank of America headquartered at the city at thattime.
In sum of these historical development, at least after the First World War, there
have been two global financial centres, London and New York, in the world, and Asia
has not had such type of centres. Instead, Asia has had three regional financial centres,Hong Kong, Tokyo, and Singapore after the Second World War, and before the War,Shanghai was added to them. 18 However, setting positions of Paris and Berlin before
World War II, and of Tokyo in the 1980s is still difficult because sometimes they looked
playing global roles respectively. In Europe, at least Zurich has been a prominent
regional financial centre.19
5. Competition of Centres: A Focus in the Development of Researches
With the historical development of relationships between international financial centres,
researches on it had also developed. Charles Kindleberger is regarded as the founder ofthe modern research on the topic, although his book in 1974 mainly focused on thehistorical formations of national financial centres. His main interests were whether
single or plural financial centres each country had, why so, and how the centers wereformed. Then in 1981, Howard Reed, as we have already seen, had done the firstorganized research on rankings of international financial centres in the long term.
After the beginning by Kindleberger, literature in the field has tended to focus oncompetition between international financial centres. One reason is that Kindleberger
emphasized a pressure to concentrate financial transactions in a single centre in acountry and suggested to apply the idea about a country to the global economy. He said"the same concentration that produces a single dominant financial center within acountry (with the possible exception of Canada) tends to result in the emergence of asingle worldwide center with the highly specialized functions of lending abroad andReed (1981), p.10. However, it is unclear the difference between an office of a foreignbank and a branch or an agency of the bank.
18 Jones (1992), p.407, Table 21.1.
19 Cassis (2010), passim. He also emphasizes the role of Geneva.
175

serving as a clearinghouse for payments among countries." 20 It can be taken as amessage that become a single centre, or fade away in the global finance by following
researchers and policy makers. In other word, some can regard the relationship ofinternational financial centre as a zero-sum game.
Such pessimists could have their theoretical foundation. It was provided by a Nobel
laureate Paul Krugman in his Geography and Trade in 1993. In the book, he presented"a model of geographic concentration" in order to explain the logic of making a single
manufacturing centre in a country. In the two-places model, while economic resources
distributed equally, each place has manufacturing capacity respectively, when thebalance of resources between the places is lost, the place with more resources becomes
the single manufacturing ‘centre’.21
Japan presented an example of such a competition-oriented and pessimistic view.
In 1996, Kazuo Ueda sounded an alarm bell of fear of disappearance of an international
financial centre. He modified two-paces model of Krugman in order to apply to thefinancial industry and use the modified model as the base of his argument. 22 In a realpolitical world in Japan, Ueda and his colleague's pessimistic view could pave a road to
Hashimoto government's Japanese version of financial "big bang" deregulation policy in
1996. Behind the case of Japan, had been the competition between Asia's threeinternational financial centre, Tokyo, Singapore, and Hong Kong and latter two's faster
growth.
6. Complementarity of Centres: Another Focus of the Researches
Although there has been the focus on competition of the centres in the development ofresearches and it has brought the fear of disappearance of a centre, in historical reality
no disappearance of an established international financial centre has not taken place
expect for fading away due to a war, a civil war, and a communist revolution. Reed andJones clarified some spectacular falls of international financial cenres respectably. The
table 2 based on Reed tells the fall of Berlin concurrently with the defeat of Germany inWorld War II and the partition of the city by four victorious nations. 23 In the article
dealing with Asia-Pacific and the Middle East, Jones gave clear-cut explanations to therises and falls of Shanghai and Beirut. Shanghai was forced out of the status as a

Kindleberger (1974), p.247.
Krugman (1993), pp.14-33.
22 Ueda (1996), pp.218-228.
23 See also Cassis (2010), pp.215-217.
20
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regional financial centre by the Communist Revolution in China in 1949. 24 Beirut
flourished as a regional financial centre during the late 1949s to the 1960s attracting
foreign banking operations from Europe and America even including the pro-type ofEuro-currency business. However, the outbreak of the Lebanese Civil War in 1975
ended the role of Beirut as a regional financial centre.25 Thus it were severe politicalevents that have destroyed international financial centres. On the other hand, justeconomic competition between centres have not led an international financial centre
disappeared.
In the long history, a lot of international financial centres has been co-existed
rather than has tried to ruin each other even though they have competed between
themselves. Therefore, it is reasonable to shift our focus on the other side of therelationship between international financial centres; the complementarity of them.
Actually, some leading scholars have already embarked on paying more attention to thecomplementarity; for example, Chaterine Schenk and Youssef Cassis, both in the
2000s. 26
Yet, long ago, as a forerunner, in 1931 Paul Einzig sometimes emphasized thecomplementarity of centers in his book although whose title was the Fight for Financial

Supremacy and actually his main interests were in challenges of New York and Paris to
London respectively after World War I. For example he said, "in the past, the two
Anglo-Saxon countries have found it easy to create a common basis for financial
co-operation..." 27 Further, "there is indeed wide scope for co-operation between thethree countries; none of them is at present strong enough to support any really large
international loan transaction without the assistance of the others" and "another field
in which co-operation should produce useful results is that of acceptance credits." 28Thus, in both long term capital and short term money markets, it is worthwhile
searching for mechanisms of complementarity of international financial centres.
More recently, Schenk pointed out the very significant idea about thecomplementarity of London and New York markets in the 1960s; “the financial
activities of Frankfurt and Paris were dwarfed, however, by the enhanced integration of
New York and London.”29 As mediators connecting the two centres, she attaches theimportance of the roles of American banks; “the regulatory environment…generated theJones (1992), p.410.
Jones (1992), pp.408-409, 412.
26 Recently, an IMF working paper also emphasizes the complementarity between
current Hong Kong and Singapore financial centres. Le Lesle et al (2014).
27 Einzig (1931), p.129.
28 Einzig (1931), pp.131-132.
29 Schenk (2002), p.97.
24
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multinational expansion of US banks and the intensification of their activities in
European financial centres, in particular London.” 30 Although still there is a room to be
filled like the meaning of “the integration of New York and London”, the idea is an
excellent jumping-off point for further researches about complementarity ofinternational financial centres.
Finally, Cassis’ grand work about the history of international financial centres also
have seriously and usefully dealt with the complementarity of centres. On theinternational financial centres particularly about capital markets before World War I,
he said, “cooperation among financial centres, or rather among the banking houses
operating in different centres, thus seemed to be the dominant characteristics…” 31
Here also, like Schenk, the role of banking operation is emphasized. Further, in detail ofcapital markets, he added “on the level of primary market, one of the clearest indicatorsof this integration was the simultaneous floating of an issue in several financial centres”
and “on the level of the secondary market, the financial centres grew closer throughinternational arbitrage operations.” 32
7. Points for Empirical Researches on the Complementarity of the Centres
With these developments of the history of the international financial centres andresearches on it, we can set our points for empirical researches on the relationshipbetween the centres. There are three point. Firstly, we pay special attention to banking
operations as mediators between the centres. As mentioned partly in the previous
section, both Schenk and Cassis emphasized the roles of banks to connect financial
centres, and even Einzig did the same about relationship between London and New
York in the 1920s. 33 Among banking operations, we deal with both money and capital
markets because financial centres contain wide variety of financial services asliterature mentioned.
Secondly, on long term capital markets, we pay attention to the roles of merchantand investment banks and also borrowers. In such a view point, simultaneous issues in
multiple international financial centres are particularly important as Einzig and Cassis
have already mentioned. 34
Schenk (2002), p.97.
Cassis (2010), p.133.
32 Cassis (2010), pp.131-132.
33 Einzig (1931), p.73. "The same cordial relationship that developed between themonetary authorities have also existed between banks in London and New York."
34 The case of Japanese government bond issues, see Suzuki (2015).
30
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Finally, on short term money and foreign exchange market, we focus on theoperations of commercial banks and exchange banks. Money and foreign exchange
markets provide places for accommodating banks’ liquidity, especially not only forputting their reserves in a wider sense and for putting their working capital, but also forborrowing funds temporarily.35 On the other hand, banks choose the places for theiraccommodation of liquid assets and for borrowing short term funds. 36
We present an example about the roles of money and foreign exchange markets,
because the roles of such short term markets have been mentioned less than the roles ofcapital markets in literature about the relationship between the international financial
centres. A case of a Japanese exchange bank, Yokohama Specie Bank in 1930, is pickedup.37 The situation of the balance sheets of Yokohama Specie Bank in the year broken
down by branches was clarified by a group of Japanese researchers. Here, we just deal
with the geographical distribution of the Yokohama Bank’s liquid assets at that time.
On bankers balances, 44 per cent was put in the Tokyo branch, 31 per cent in the New
York agency, and 14 per cent in the London branch respectively. Bonds were allocated in
the Yokohama headquarter with 93 per cent of them and in the New York agency with 6
per cent. Therefore, for the Yokohama Bank, in 1930 New York was more important
than London at least from the view point of the quantity of liquid assets. Being different
from these two items, gold and silver were mainly concentrated in China; the Shanghai
branch held 38 per cent of them and the Dalian branch had 9 per cent. Yet the
Yokohama headquarter also held 36 per cent of their assets in the form of precious
metals. In China, the precious metals particularly silver were the most liquid means forsettlement at that time. In order to scrutinize the centers such as London, New Yorkand Shanghai in the 1930s from the international banking view point, we cancompare Yokohama Specie Bank to the Chartered Bank of India, Australia and China
about their liquid asset distributions in the centres, for example. 38

On the concepts of bank's reserve and bank's running capital, see Hicks (1989), Chap.
8, pp.66-67.
36 Keynes (1923), pp.103-109. Keynes (1923) said "the difference between the spot andforward rates is...the measure of the preference of the money and exchange market forholding funds in one international centre rather than in another...". (p.103.)
37 Yamazaki (1988), pp.92-97. The balance sheets in Jan. 1930 are in pp.94-95.
38 On the Chartered Bank's Shanghai branch relationship with the London
headquarter and the New York agency, see Siu (2015).
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References
Y. Cassis (2010), Capitals of Capital, 2nd ed.
P. Einzig (1931), The Fight for Financial Supremacy
J. Hicks (1989), A Market Theory of Money
Y. Jao (1997), Hong Kong as an International Financial Centre: Evolution, Prospects

and Policies
G. Jones (1992), “International Financial Centres in Asia, the Middle East andAustralia: A Historical Perspective”, Y. Cassis ed., Finance and Financiers in

European History, 1880-1960
C. Kindleberger (1974), The Formation of Financial Centers
J. M. Keynes (1923), A Tract on Monetary Reform
P. Krugman (1993), Geography and Trade
V. Le Lesle, F. Ohnsorge, M. Kim, and S. Seshadri (2014), "Why Complementarity
Matters fir Stability: Hong Kong SAR and Singapore as Asian Financial Centers",

IMF Working Paper, WP/14/119
H. C. Reed (1981), The Preeminence of International Financial Centers,
C. R. Schenk (2002), “International Financial Centres, 1958-1971: Competitiveness andComplementarity”, Y. Cassis and S. Battilossi, eds., European Banks and theAmerican Challenge
M. Siu (2015), China and the International Financial Centers in the 1930s: the Foreign
Exchange Business of the Chartered Bank of India, Australia and China", a paper
presented in WEHC2015 at Kyoto.
T. Suzuki (2015), "The Development of Market Linkages in the Japanese Government
Foreign Loan Issues before and after the First World War (1870-1930)", a paper
presented in WEHC2015 at Kyoto.
K. Ueda (1996), “Nihon Kinyu Sijyo Kudoka to Nihon Keizai” (“Hollowing out ofJapanese Financial Market and Japanese Economy”), K. Ueda and M. Fukao, eds.,

Kinyu Kudoka no Keizai Bunseki (An Economic Analysis on the Hollowing out of
the Financial Industry)
H. Yamazaki (1988), “Kin Kaikin Ki no Yokohama Syokin Ginko” (“Yokohama Specie
Bank under the Reconstructed Gold Standard”), K. Yamaguchi and T. Kato, eds.,

Ryou Taisenkan Kino Yokohama Syokin Ginko (Yokohama Specie Bank in theInterwar Period)

10Table 1

Ranking of International Financial Centres:
A Current Example
Y2011
London
New York
Hong Kong
Singapore
ZurichSeoul

Y2012
London
New York
Hong Kong
Singapore
ZurichTokyo

Y2013
New York
LondonHong Kong
Singapore
ZurichTokyo

Y2014
New York
LondonHong Kong
Singapore
San Francisco

Tokyo

Source: The Global Financial Centres Index, 14-16, 2011-2014
4

Figure 1

Sizes of A Financial Service: Foreign
Exchange Turn Over (% of Global Trade)
50.0
40.0
30.0
20.0
10.0
0.0

Y1998

Y2001

Y2004

Y2007

United Kingdom United States
Japan
Singapore

Y2010

Hong Kong SAR

Source: BIS, Triennial Central Bank Survey, each year.

11

Y2013

5

Figure 2

Size of A Financial Service: Foreign
Exchange Turn Over (% of Global Trade)
10.0
8.0
6.0
4.0
2.0
...

Y1998

Y2001

Y2004

Hong Kong SAR

Y2007

Japan

Y2010

Y2013

Singapore

Source: BIS, Triennial Central Bank Survey, each year.

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Table 2

Ranking of International Financial Centres: A Historical
ExampleInternMtionMl ‘BMnking’ Centres by Reed, The Preeminence of

InPernMPionMl FinMnciMl CenPers, 1981

Y1900 Y1915 Y1930 Y1940 Y1947 Y1960 Y1975 Y1980
London New York London

LondonLondonLondonLondonLondon

New York London New York New York New York New York New York New YorkParis

HongKong

Paris

HongKong

Paris
Berlin

Paris

Paris

Tokyo

Paris

Yokohama

Tokyo

Paris

Frankfurt

BerlinHongKong

Tokyo

HongKong

Hamburg

Hamburg

Amsterdam

San Francisco

HongKong

Montreal

ZurichTokyo

San Francisco
712Table 3

Ranking of International Financial Centres:
A Historical Example
International ‘Financial’ Centres by Reed, TOe Preeminence of
InPernaPional Financial CenPers, 1981

Y1955

New York
LondonParis
HongKong
San Francisco
Osaka
Tokyo

Y1965

London
New York
Paris
Tokyo
San Francisco
HongKong
Frankfurt

Y1975

London
New York
Tokyo
Paris
Frankfurt

Y1980

London
New York
Paris
Tokyo
Frankfurt
ZurichAmsterdam

813