If You Build It, Will They Come?

When the towering Shanghai World Financial Center is completed next year, it will not only rank among the world's tallest skyscrapers but will also embody Shanghai's bid to become a major financial center. (Indeed, the smoke pouring from the building during a mid-August fire could have been read as a sign of China's overheating economy.) Despite its planned 1,600-foot-plus height, though, the tower is destined to fall short of Taipei 101. Owned by the Taipei Financial Center Corp., that already-finished skyscraper is a 101-story symbol of Taiwan's financial aspirations. Meanwhile, work has begun in lower Manhattan on the even taller 1,776-foot Freedom Tower, the centerpiece of the rebuilt World Trade Center complex. But withhold the superlatives, because Burj Dubai, expected to be completed in 2008, will reach more than 2,000 feet into the desert sky.

In a literal race to the top, cities in emerging economies are scrambling to stake their claim as the world's next great center of finance even as existing centers fight to maintain their status as capitals of capitalism. Some would argue that such efforts are wasted. Today, more than ever, distance seems to disappear as work can be accomplished remotely by broadband, cell phone, and video. If geography no longer matters, goes the theory, people should disperse to cheaper pastures. Why spend $1 billion on the newest tallest-ever when transactions can be conducted electronically and far-flung colleagues can convene online?

Distance has been declared dead before. After more than 25 million people emigrated from Europe to the United States between 1880 and 1910, people hailed the "annihilation of distance," according to Harvard University historian Niall Ferguson. In the 1970s, the philosopher Martin Heidegger wrote of "uniform distanceless," noting that, "All distances in time and space are shrinking." And in 1997, Frances Cairncross, formerly of The Economist (a sister publication of CFO), wrote The Death of Distance, a book arguing that cities as we know them may cease to exist.

But reports of their demise may be exaggerated. Although manufacturing towns have seen their populations thinned by cheaper transport and communications, people still flock to centers of finance and innovation.

Come Together
From earliest times, financial centers began by first following capital and then becoming magnets for more of it. Traders naturally congregated by ports or shipping routes, although now — as Dubai has shown — even the desert will do. The first financial center dates back to the 13^th century, when merchant-bankers in Florence, Italy, organized expeditions to purchase wool and collect papal contributions from England. Well positioned to deal with both northern Europe and the maritime economies developing in Genoa and Venice, Florence's banks prospered until the 1340s. Then England's Edward III failed to repay his debts and the Black Death of 1348 stifled people's willingness to spend.

Although the Medici family ultimately revitalized Florence's banking, Genoa became the country's credit capital in the 16^th century. The city held quarterly exchange fairs, where Spanish dealers sold silver for gold and delivered it as payment to Spanish troops fighting in Antwerp. Genoese merchant-bankers became experts at international currencies and credit flows as they traded precious metals from Europe to Asia. Their innovations for managing debt became known as early versions of swaps and securitization.

As transportation improved and new types of securities developed, other financial centers emerged. In a new study on the evolution of financial centers, Michelle Fratianni, of Indiana University's Kelley School of Business, marks the 1688 "Glorious Revolution" in England as the beginning of London's emergence as a financial center. A new Parliament made property rights a priority and the Bank of England was formed, selling government debt as securities. As the East India Company and the South Sea Company went public, shares became more "marketable and liquid." Good institutions, an ideal harbor, and a central location put London on pace to become the center of the financial world.

The handoff from London to New York began around 1815, explains Charles Kindleberger in his landmark book The Formation of Financial Centers: A Study in Comparative Economic History. When the War of 1812 ended, the British dumped their supplies in New York. Once they had left, merchants from around the United States flocked to New York to bid in auctions for the leftover goods. When one of the merchants started a liner service to ship goods to Liverpool, New York became a major hub for cotton traders. Financial institutions and corporations followed.

Face Time Matters
Abroad, Paris, Berlin, and Zurich all had their moments as Europe's financial capital. In 1842, Hong Kong began to emerge as an Asian financial center when China ceded control of the island to Britain under the Treaty of Nanking.

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