Capitalist economic crisis and finance capital
Talk presented to RSP Marxist Education conference January 2-5, 2010
By Doug Lorimer
In a December 1915 introduction to Bolshevik theorist Nikolai Bukharin’s book Imperialism and World Economy, Lenin wrote:
“There had been an epoch of a comparatively ‘peaceful capitalism’, when it had overcome feudalism in the advanced countries of Europe and was in a position to develop comparatively tranquilly and harmoniously, ‘peacefully’ spreading over tremendous areas of still unoccupied lands, and of countries not yet finally drawn into the capitalist vortex. Of course, even in that epoch, marked approximately by the years 1871 and 1914, ‘peaceful’ capitalism created conditions of life that were very far from being really peaceful both in the military and in a general class sense. For nine-tenths of the population of the advanced countries, for hundreds of millions of peoples in the colonies and in the backward countries this epoch was not one of ‘peace’ but of oppression, tortures, horrors that seemed the more terrifying since they appeared to be without end. This epoch has gone forever. It has been followed by a new epoch, comparatively more impetuous, full of abrupt changes, catastrophes, conflicts, an epoch that no longer appears to the toiling masses as horror without end but is an end full of horrors.
“It is highly important to have in mind that this change was caused by nothing but the direct development, growth, continuation of the deep-seated and fundamental tendencies of capitalism and production of commodities in general. The growth of commodity exchange, the growth of large-scale production are fundamental tendencies observable for centuries throughout the whole world. At a certain stage in the development of exchange, at a certain stage in the growth of large-scale production, namely, at the stage that was reached approximately at the end of the nineteenth and the beginning of the twentieth centuries, commodity exchange had created such an internationalisation of economic relations, and such an internationalisation of capital, accompanied by such a vast increase in large-scale production, that free competition began to be replaced by monopoly. The prevailing types were no longer enterprises freely competing inside the country and through intercourse between countries, but monopoly alliances of entrepreneurs, trusts. The typical ruler of the world became finance capital, a power that is peculiarly mobile and flexible, peculiarly intertwined at home and internationally, peculiarly devoid of individuality and divorced from the immediate processes of production, peculiarly easy to concentrate, a power that has already made peculiarly large strides on the road to concentration, so that literally several hundred billionaires and millionaires hold in their hands the fate of the whole world.”
In his 1916 work Imperialism: The Highest Stage of Capitalism. Lenin argued that.
“If it were necessary to give the briefest possible definition of imperialism we should have to say that imperialism is the monopoly stage of capitalism. Such a definition would include what is most important, for, on the one hand, finance capital is the bank capital of a few very big monopolist banks, merged with the capital of the monopolist associations of industrialists; and, on the other hand, the division of the world is the transition from a colonial policy which has extended without hindrance to territories unseized by any capitalist power, to a colonial policy of monopolist possession of the territory of the world, which has been completely divided up.”
Many Marxists, however, while endorsing Lenin’s analysis of imperialism as the stage of monopoly capitalism, fail to understand what he meant by finance capital. They falsely think he was arguing that finance capital is the domination of banking capital over industrial capital, the domination of banks and bankers over industrial corporations. Thus in his 1955 article “The Marxist Theory of Imperialism and its Critics” Ernest Mandel argued that “The control and domination of industrial capital by finance capital has proved to be a passing phenomenon in numerous countries (United States, Great Britain, Japan, Belgium, Netherlands, etc.).” In support of this view, Mandel claimed that “Thanks to the accumulation of enormous super profits, the trusts are expanding more and more by self-financing and are freeing themselves of bank tutelage.”
Similarly, in an article written in 2006 on the 40th anniversary of the publication By Monthly Review Press of Paul Baran and Paul Sweezy’s book Monopoly Capital, Monthly Review editor John Bellamy Foster claimed that in the mid-1960s “industrial capital was still firmly in control, financing its investment through its own internal funds, and it was common to see the basis of the system at the level of the giant firm as fairly stable. But the changes that emerged with the resurfacing of stagnation altered all of that. The golden age of the 1960s was succeeded by a leaden age that dragged on seemingly endlessly with no hope of full recovery. “A new stimulus was badly needed” under these conditions, Sweezy observed in [his 1994 article] “The Triumph of Financial Capital,” “and it emerged in a form which, while certainly unanticipated, was nevertheless a logical outcome of well established tendencies within the global capitalist system.” Unable to find profitable outlets for their investment-seeking surplus within the productive economy, corporations/capitalists, sought to augment their money capital by means of financial speculation, while the financial system in its turn responded to this increased demand for its “products” with a bewildering array of new financial instruments—including stock futures, options, derivatives, hedge funds, etc. The result was the rise by the 1980s of a financial superstructure that increasingly took on a life of its own.”
Contrary to such views, for Lenin, finance capital was not the domination of “industrialists” by the banks but a historical new form of capital, in which the separate existence of industrialists and bankers had been replaced by a “financial oligarchy” that owned both types of capitalist business. To illustrate just what Lenin meant by finance capital as “the bank capital of a few very big monopolist banks, merged with the capital of the monopolist associations of industrialists” let me cite two concrete examples.
The Morgan banking family, which made its initial fortune in early 19th C out of the slave trade, provided the financing in 1901 for the merger of a number of steel companies into the US Steel Corporation. The Morgan’s banking company JP Morgan & Co also took a controlling interest in US Steel, which immediately became and remains the biggest US steel maker. In 1892 the JP Morgan bank financed the merger of Edison General Electric and the Thompson-Houston Electric Company to form the General Electric Company in which the Morgan bank took a controlling interest. GE is the only one of the original 12 giant industrial businesses that was included in 1896 on the Dow Jones Industrial Average that is still included. In December 2009 Forbes magazine classified GE as the world’s biggest privately owned corporation. The Anglo-Dutch owned Royal-Dutch Shell oil company was ranked as the world’s second largest company, followed by ExxonMobil.
The second example is provided by the Rockefeller family. The bothers John D. and William Rockefeller built their initial fortune in the oil business in the 1870s. By the end of the 1890s their Standard Oil Trust, a conglomeration of state-based oil companies controlled by the Rockefeller’s Standard Oil Company of New Jersey, controlled 88% of US oil refining. Jersey Standard, known outside the US as Esso, was renamed Exxon in 1972. In 1999 Exxon merged with Mobil, founded by the Rockefellers in 1911 as the Standard Oil Company of NY.
In 1891 the Rockefellers took a controlling interest in the National City Bank of NY, which had been established in 1812. By 1894 National City Bank was the largest bank in the US. In 1955, National City Bank, then headed by James Stillman Rockefeller, merged with the Morgan-dominated First National Bank of New York to become the First National City Bank of NY, which in 1976 renamed itself Citibank then Citigroup. In March 2009 Citigroup was, by core capital, the largest US bank. The second largest US bank was JP MorganChase – the product of a merger in 2000 of JP Morgan & Co and the Rockefeller family’s Chase Manhattan Bank.
In the 19th century industrial capital and banking capital had distinctly different owners, reflecting the smaller scale of capitalist operations. The rise of joint-stock companies as the dominant form of capitalist businesses at the end of the 19th century brought about a merger of industrial and banking capital into finance capital. It thus utterly misleading to talk about the explosion of speculation on the money markets over the last two decades as the rise to “dominance” of finance capital. This is confuse finance capital with loan capital, with credit money.
Since the beginning of the 20th century, capitalist production and capital accumulation has been dominated by finance capital, by the superrich families like the Rockefellers that own both the big banks and the big industrial companies. These finance capitalists invest their money-capital in both the production of commodities and in speculation in the money markets. Speculation on the money markets has absorbed more and more of their investments because, since the exhaustion of the 1948-68 expansion of capitalist production of goods and services, continued reinvestment of the profits they derive from investment in the production of real values has become less lucrative than the diversion of a growing share of these profits into gambling on the stock, bond and other markets, facitated by an enormous expansion of the credit system.
In the third volume of Capital, Marx discusses what he calls “fictitious capital” – what we know as “securities.” Essentially these are titles to streams of income, which are treated as commodities and bought and sold on financial markets. There are significant differences between types of securities. Some represent corporate debts, as with bonds, some represent consumer debts, as with mortgage backed securities, and others represent capital investments, as with shares of stock. But the common aspect of all these different securities is that they all give their owners a right to a stream of income, hopefully leaving them with more money than they started off with. The security owners therefore looks upon their securities as capital.
While securities might seem like capital, there is a key difference. Unlike an investment in real capital, by which I mean, means of production and labour-power, an investment in a security is just the purchase of a legal title. The legal title gives its owner a claim on a stream of income, but doesn’t itself produce any income. The income is produced elsewhere, in the production of commodities.
Furthermore, this legal title can be resold on a secondary market. So for example, a shareholder might sell his or her share to a third party. When this is done, no money passes through the hands of the business that originally issued the share of stock. The same thing can be done with a bond or a mortgage-backed security. No new loan or capital investment is made by these subsequent transactions; there is only a transfer of a claim on income to a new person. But because others are willing to pay for these claims on streams of income, they continue to circulate on the market long after their issuers have actually received their capital or their loans.
Marx has three reasons for calling securities “fictitious capital”.
- The first reason is specific to shares of stock. With the creation of shares of stock, it appears as if capital has doubled; as if capital is not only the real capital that firms possess, but also the property titles created to represent that capital. So for Marx, shares of stock are fictitious capital because while they merely represent real capital, they also seem to multiply that capital.
- The second reason Marx calls securities “fictitious capital” is that their value can fluctuate in ways that are entirely independent of the real capital that they represent. A change in interest rates, a rise or fall in profits, the inability of a borrower to repay debt – all of these things lead to a change in the market-value of fictitious capital without at all effecting the value of a firm’s real capital – the cash the firm has on hand, its machinery, buildings, and so forth. The value of all those things can remain constant while the value of a firm’s stocks and bonds rise or fall.
- And lastly, a security may never have represented any capital at all. Take the case of residential mortgage-backed securities. The income that accrues to their holder is derived from the repayment of a home loan. The home was not capital for the homebuyer – the homebuyer did not create surplus-value with it. It was just a dwelling. So the initial sum of money advanced was never used as capital at all, although the holder of the security views it as “capital”.
Marx saw the stock exchange as inherently speculative. Because a share’s price fluctuates completely independently of the real capital it represents, shareholders have no inherent interest in a company’s real capital. The shareholder is primarily concerned with the shares’ price. Real capital investment was thus subordinate to securities speculation.
Marx pointed out that this has nothing to do with the “mobilization” of real capital investment. Money invested in means of production is fixed. This money only returns as the fixed capital wears out, as it depreciates. This process can take years. The fact that the investor in company stock that represents that fixed capital does nothing to change this fact. The sum of money given to the seller of a share of stock does not come from the capital that the share represents but rather from someone else’s floating capital – from another capitalist. All that is mobile is the property title, the share of stock. Therefore, the so-called “liquidity” of capital investment arising from the development of joint-stock companies means nothing more than that a large part of capitalist society’s savings, its floating capital, is pressed into the stock exchange.
The way in which the credit system and the development of securities (or fictitious capital) tends to misallocate real capital is fundamental to understanding the most recent credit crisis. The development of fictitious capital based on housing loans – the infamous mortgage-backed securities and collateralized debt obligations – these were promoted as a means of making society’s investment in housing more liquid. Banks would be more willing to extend credit to homebuyers, keeping credit cheap, because they wouldn’t have to worry about the long-term prospects of their loans – they could just sell them off to other banks. These banks would then pool the mortgages together and issue securities on their basis. Other banks would buy these mortgage-backed securities and create new securities on their basis – the so-called Collateralized Debt Obligations (or CDOs). Banks would sometimes buy these CDOs and create CDOs based on CDOs. And occasionally the process would go even further, giving rise CDOs based on CDOs based on CDOs. And here we see what Marx meant when he said in the third volume of Capital that:
“With the development of interest-bearing capital and the credit system, all capital seems to be duplicated, and at some points triplicated, by the various ways in which the same capital, or even the same claim, appears in various hands in different guises.”
“… everything in this credit system… is transformed into a mere phantom of the mind.”
All of this “duplication” and “triplication” certainly made the position of the mortgage lenders more “mobile” and “liquid.” The mortgage lenders were able to continually extend loans and then sell them off to other businesses, giving them money with which to extend more loans once again. Combined with a housing price bubble, this greatly increased the allocation, and as it turns out, misallocation of capital to the housing industry. Huge numbers of houses were built, the prices of all sorts of fictitious capital soared, and the savings of not only the capitalists, but also the workers, were pressed into the speculative bubble.
Rather than the actions of rogue traders or poor regulation, the 2008 credit crisis was the result of the feverish boom based on the overproduction of commodities, in this particular case, homes. Today, after the collapse of this speculative bubble, it is obvious that much of the “fictitious capital” created in the boom was a claim on wealth which never existed and never was to be created.
The sub-prime mortgage market, collateral debt obligations and the variety of other dodgy financial packages are examples of what Marx described as "insane forms of money". Marx quoted the likes of the banker Lord Overstone and the director of the Bank of England, Mr Norman, who on the verge of the credit crisis of 1857 assured a parliamentary committee that the banking system was safe, that the huge rise in credit was a sign of healthiness and that their ever-greater profits in the form of interest were well-deserved. A few months later they were plunged into chaos (in fact Overstone had done exactly the same thing before the crisis of 1847, even advising on new banking laws).
Overstone and Norman were mirrored in the US and Western Europe by the leading bankers, the press and capitalist politicians, who up to the middle of 2008 were arguing that globalisation had dragged capitalism out of its pattern of repeated cycles of recessions, and who were even declaring until September 2008 that little was wrong with the credit system. In 1857, as today, the speculation that accompanies booms was seen as an example of the near unlimited potential of capitalism and not of the swindling that is integral to the system.
In volume three of Capital, Marx described the economic crisis of 1847 in Britain and the European-wide crisis of 1857. He exposed the speculation and swindling that took place and predicted that the massive expansion of credit that was needed for the globalisation of capital would see only more cheating among the "money-dealers".
Credit is based on the rising trade in commodities and the use of bills of exchange, i.e. it is a means of payment between buyers and sellers of commodities. Marx emphasises that credit does not rest on the circulation of metal money, i.e. gold or silver coins, or notes issued by a central bank but on the circulation of commodities.
Credit also creates a stratum of people whose function is to deal in money, either to lend or to borrow, and these people Marx calls the “money-traders”. These people work at banks: the banks concentrate huge amounts of money via deposits and loan money out to other capitalist businesses. The difference between the interest offered by the banks on deposits and that offered on loans becomes the source of their profits. As Marx wrote: "A bank represents a centralisation of money-capital, of the lenders, on the one hand, and on the other a centralisation of the borrowers. Its profit is generally made by borrowing at a lower rate of interest than it receives in loaning."
Marx describes in great detail the various forms of loans: bills of exchange, cash, credit etc, and the many ways in which money is deposited or enticed into the bank such as gold, banknotes, and deeds to fixed capital or collateral. A bank only need keep in its vaults the amount of money it believes it will have to pay out to customers in any given day; it can create more money by lending credit. For example, a bank may have £10,000 in it vaults but loan out £20,000 in the form of credit. Only when people wish to withdraw more than £10,000 would there be a run on the bank when its customers realised that their money was at risk if it stayed at the bank.
Such a system opens itself to speculation. Marx describes the great English railway swindle of 1847, brought on in part by "overproduction in industry, underproduction in agriculture", which "gave rise to an increased demand for money capital i.e. for credit and money." He describes how a massive increase in trade led 1845-47 railway construction swindle, with its manic speculative trade in the stocks of railway firms. Many railways were built that would never operate profitably or were not completed because construction costs over-ran projections, but large amounts of money were spent on promoting them to boost railway companies’ stock prices; stocks which were bought on credit. Market capitalisation of UK railways hit a peak in July 1845; by 1850 those shares were worth less than half the money spent on them. Marx observed: "The easier it is to obtain advances on unsold commodities, the more such advances are taken, and the greater the temptation to manufacture commodities …just to obtain advances of money on them. To what extent the entire business world of a country may be seized by such swindling, and what it finally comes to is amply illustrated by the history of English business during 1845-47. It shows us what credit can accomplish."
Marx referred to joint stock companies, which were only beginning to become the dominant form of capitalist business organisation when he wrote Capital, as being the “ultimate development of capitalist production” because “it is a transition toward the conversion of all functions in the reproduction process which still remain linked with capitalist property, into mere functions of associated producers, into social functions… This is the abolition of the capitalist mode of production within the capitalist mode of production itself, and hence a self-dissolving contradiction, which prima facie represents a mere phase of transition to a new form of production. It manifests itself as such a contradiction in its effects. It establishes a monopoly in certain spheres and thereby requires state interference. It reproduces a new financial aristocracy, a new variety of parasites in the shape of promoters, speculators and simply nominal directors; a whole system of swindling and cheating by means of company promotion, stock issuance, and stock speculation. It is private production without the control of private property."
It is this transition that we find in Lenin's theory of finance capital and monopoly capitalism as being the highest stage of capitalism. Joint stock companies facilitated the creation of monopolies and finance capital. Lenin called it "moribund" or capitalism "in decline" not because of any failure to grow but because the actual process of its growing was undermining capitalism's innermost laws and even private property itself, laying the economic basis for the transition to socialism, to a society of associated producers. However this transition is not automatic. It requires the conscious act of the working class and its allies to overthrow capitalist property, the capitalists and their supporters, and create socialism through mass direct action.
The recent crisis in the credit system, like all its predecessors, while appearing as a function of exchange, really originated in the overproduction of commodities, not in the realm of trade but in the process of production itself. It only appears at first as a crisis in the credit system as this is the main lever of "over-production and over-speculation". Marx wrote: "The two characteristics immanent in the credit system are, on the one hand, to develop the incentive of capitalist production, enrichment through exploitation of the labour of others, to the purest and most colossal form of gambling and swindling, and to reduce more and more the number of the few who exploit the social wealth; on the other hand, to constitute the form of transition to a new mode of production.”
Of course the actual transition to a new mode of production, based on the means of production that have been objectively socialised by finance capital the property of the associated producers, the working class, can only be achieved by through the centralisation of these means of production into the hands of the proletariat organised as the ruling class.