Finance, Geography of

The Geography of Finance and the Birth of Financial Geography

“Money makes the world go round!” This phrase neatly encapsulates the intricate link between money and space. Of the three functions of money—storing value, serving as a unit of account, and serving as a medium of exchange—the latter two impinge directly on geography. By providing a single standardized measure for the value of different goods and services, money facilitates the exchange between strangers, annihilating space and crossing cultural, social, and physical boundaries. As such, money is one of the great “space-shrinking” and “border-crossing” techniques of mankind. However, a geography of finance, in the sense of a systematic study of the spatial distribution of financial value production, only came into being when providing money, forwarding capital, intermediating exchange, and settling accounts became specialized economic functions. Banks, brokers, and exchanges owe their existence largely to the increasing division of labor that is the hallmark of modernization. However, these functions were not spread evenly over space but appeared to follow the development of the urban network and the hierarchy of marketplaces it implied. In other words, from the 17th century onward a complex network of local, national, and transnational financial centers came into being that has since become a self-standing object of investigation of what could be termed “financial geography.”

Initially, the study of financial centers and, more broadly, the spatial distribution of financial flows, markets, and products was not exclusively a geographical object of study, even though older geographical theories such as “central-place” theory were widely used to explain the multiscalar nature of financial center networks. During the 1950s, 1960s, and 1970s, the study of the geography of finance was very much a niche topic that was largely the preserve of isolated economists and some historians. Still a classic is Charles

Kindleberger's 1974 study of the “formation of financial centers,” which, tellingly, was presented by the author as a “study in comparative economic history,” as its subtitle read.

This changed from the 1970s onward, when deregulation, liberalization, and privatization as well as technological changes (the start of the rise of information and communication technologies) unleashed a torrent of liquidity and financial innovation. A financial and economic crisis as well as 6 years of war on a global scale had largely undone the border-crossing entanglements of the “first wave of globalization” that ended so brutally in the trenches of Flanders in World War I. During the first three decades after World War II, exchanges, banks, brokers, and insurers had mainly served a national clientele. Stepwise globalization, starting in production and consumption markets, facilitated a hesitant international deployment of financial functions by some of the largest financial players. The wish to grab these new market opportunities and effective policy lobbying, as well as the demise of the Keynesian underpinnings of the postwar regulatory regime, resulted in the gradual liberalization of national financial markets and the construction of the transnational financial system of today.

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