[OPE] Origins of "Finance Capital"

From: <glevy@pratt.edu>
Date: Fri Mar 20 2009 - 15:13:21 EDT

via Antonio Pagliarone:

Origins of "Finance
The Theorization
[by] Will Barnes
loanable money capital.[1]
As a product of its circulation by
bankers and in markets altogether distinct from production, it develops a
separable sphere (i.e., it is neither funds generated by savings out of
income, nor liquidity that is accumulated by storing money as a means of
exchange). A specific view consonant with Hilferding holds that loanable
money capital has its origins in idle money hoards that are methodically
formed by industrial firms and are, in turn, mobilized by different
financial institutions. In this form, money capital is more easily
mobilized and less determinate that commercial or industrial capitals
linked to specific commodities or to productive capacity.
Now, for
Hilferding following Marx, the average rate of interest on loanable money
capital tends to be lower than, correspondingly, average rate of profit of
capital engaged in production or circulation. Since loanable money capital
is not immediate engaged in production (and circulation) of surplus value
in its phenomenal form as profit, it's not, functionally speaking, part of
the total social capital, and accordingly it does not "earn"
returns in the same manner as industrial or commercial capitals: The
return of this form of capital, interest, is created in production as a
share of profits accruing to industrial capitals, circulated by commercial
capitals. Thus, there is no "natural" rate of interest, its
market rate decided by availability and demand. At the same time, the
relations between industrial and loanable money capitals are not
determined, or not fully, by equalization of a general rate of return
through competition, instead it is based on the specific character of
interest as revenue, as a share of profit (surplus value) created in
On this foundation, Hilferding elaborates a theory of
banking as a form of capitalist activity that is focused on, by gathering
to itself and advancing, loanable money capital. He begins with trade
credit, the sale of finished goods in exchange for promissory notes, bills
of exchange, instead of money. This is rudimentary, an elemental form of
activity of capitals themselves as they engage in production: At this
level, capitalist firms (and by this hereafter we intend industrial and
commercial enterprises unless otherwise noted) do not require financial
institutions as such, since they immediately and without prior planning
provide circulation credit for one another. Inter-firm relations
spontaneously tend toward trade credit, toward systematic drawing credit
from one another, from clearing and settlement of bills of exchange to
facilitate circulation. On this basis, financial institutions, banks in
particular latter develop.
Enter the banks.
The original
purpose here is to put in order and ease movement of trade credit
transactions among capitalist firms. At first, banks provide their own
credit to firm by discounting bills of exchange. In doing so, banks tend
to substitute their own liabilities, issuing bank notes, for the bills of
exchange that circulate among firms. As soon as a series of systematically
linked banks appear, issuance of bank credit replaces the immediate,
direct trade credit established among capitalist firms, with banks
assuming clearing and settlement operations relative to bills of exchange.
This is, it should be noted, intended as an ideal account of the logical
genesis of a specific form of banking within capitalism, not a historical
account since banks predate capitalism.
Accordingly, Hilferding
notes that banks, providing at this elementary level short-term credit to
underpin movement of goods among capitalist firms, require no significant
amounts of their own capital. But banks can acquire the necessary
liquidity to cover their notes by drawing on the monies of industrial
capitalists, as deposits, that is held back for payment of bills of
exchange by offering interest as a return.
At a certain point of
requisite scale, banks, as an interrelated system, are able to marshal
hoarded money so-called across the entire economy. This is the basis for
issues of credit in the form of loanable money capital, of credit as
capital or investment. It has these features: First, it is not tied to the
relation of commodity sales and promissory notes; and, second, it
mobilizes money otherwise unused and inactive within the entire economy,
thereby augmenting the money capital to hand for the capitalist as a
Hilferding assumes this investment credit, loanable money
capital, is readily accessible to firms with a view to increasing either
technological inputs, i.e., plant, equipment, machinery, considered as
fixed capital, capital that remains for several turnovers of industrial
capital where each turnover consists in input purchase, production of
goods, sale of goods in that order, or a circulating capital, that is,
outputs (the production of goods) that last only for a single turnover of
industrial capital.
Accordingly, when loanable money capital is
invested in a firm's fixed capital, the money is tied, inaccessible, for a
prolonged period of time, i.e., several turnovers. Now, Hilferding notes
as a consequence that banks lose some of their liquidity, flexibility and
maneuverability in their operations, they effectively now have a stake in
the future of the firm. Just as effectively, in the long term, these types
of long-range involvement with industrial firms throws bank's solvency
into question. This forces the bank to hold substantial reserves of its
own. Leading to the central, decisive assumption:
The borrowing
needs of industrial firms grow as the development of capitalism itself is
manifest in the expanding scale of production, and firms are unable to
marshal this money capital themselves and thereby seek extra-firm sources
for their funding requirements, secured by way of long term funding from
banks. To this point, bank lending has been primarily short-term, hence
only a small portion of loanable money capital can initially be utilized
for fixed investment.
Before banks can engage in regular fixed
investment, they must achieve a certain size, volume, quantity of
reserves, and they must spread risk out lending to a number of firms, for
investment in fixed capital as a rule requires much larger sums. But once
they reach this order of scale and diversification and undertake long-term
investments, the relation between banks and firms changes qualitatively as
the industrial system as a whole tendentially becomes bank-based. Banks
are increasing interested in the fate of the firm: The capacity for loan
repayment, for instance, is contingent on whether that machinery,
equipment, etc., that was originally funded enhances a firm's
profitability, the project (e.g., new product line) for which it was
intended. Banks, in other words, are compelled to increasingly monitor
firms' performance, and, as a result, develop a close relation with them.

This is, for Hilferding, finance capital at its origins, i.e., the
ascendancy over and organization of industrial capitals by banks
themselves now critically understood as a specific category of capitalist
development: The flexibility of loanable money capital described above,
together with its non-immediate relation to production, permit banks to
exercise some control in the direction of firms, which increases with the
penetration of banking capital in firms' operations: Banks are the more
powerful agency. This control is heightened relationally because a bank is
not dependent on the outcome of any specific transaction as industrial
firm may be.
This increasing control has a triple root: First, trade
credit moves tends to move within the world as its domain, demanding not
only business contacts, but large amounts of liquidity; second, the demand
for investment capital invariably expands with the growth in the scale of
production; and, third, banks are increasing involved in the operations of
share offerings in the stock market.
Capitalism expands in scale as
the scale of individual industrial firms grow. Typically, joint-stock
companies, shareholder corporations, develop as the projects undertaken by
industrial firms grow in scale to the point where it became necessary to
locate various sources for the capital to fund these projects.
Shareholding is appealing to capitalists because it allows them to
minimize their exposure to losses while preserving potential capital
liquidity. They can, after all, always sell their shares. Joint stock
companies, corporations, are best suited to the international character of
capitalist production as its scale develops: This scale requires ever anew
introjections of fresh fixed capital, and in larger amounts. Corporations
facilitate realization of this requirement through equity issuances,
rendering restructuring production easier, with less instability; they
also ease mergers and acquisitions (horizontal and vertical integration),
developing and deepening capitalist concentration. All this enhances the
accessibility of bank credit. Banks look on corporations (relative to,
say, family ownership) more favorably since the ease with which the former
can raise capital facilitates the recuperation of bank funds.
Hilferding's concept of finance capital is based on this close relation
between banks and industrial firms as joint-stock companies
(corporations), a paradigmatic example of which is the railroad. Decisive
here, for banks, is the facility and safety of loans made to this type of
firm. As the provision of investment credit to corporations grows so does
the closeness of this relation: Banks institute regular forms of
supervision over these firms, including permanent board representation
that, in turn, entails actual power in and over the activities of these
companies; including deepening involvement in share offerings.

Lenin and Imperialism: A Historically Specific,
N0on-Universal Category of Capitalist Development

The control,
in our terms ascendancy, of banks over industrial firms in corporate form
signifies the development by banks of investment banking functions, and
methodical and regular receipt of the "promoter's profit"[2]:
Finance capital is the "amalgam," interpenetration of banking
and industrial capital and in this process the ascendancy of the former
over the latter, deepening and intensifying as the scale of capital
accumulation grows and fixed capital requirements balloon.
A careful
reading of his Imperialism indicates that Lenin relied on Hobson for a
mass of empirical data, and on Hilferding, not at all on Hobson, for the
centrality of category and reality of finance capital.[3] But what
Hilferding, and Lenin following him, altogether failed to grasp was that
the origins and development of "finance capital" so-called was
geographically circumscribed and was possessed of a socio-historically
specific, "national" character:
On the continent, the
major innovation in industrial financing was Crédit Mobilier,
founded 1852. Crédit Mobilier, as well as other banks modeled on
it, was responsible for not just French economic development but that of
continental Europe as a whole as well.[4]
Those who undertook to
institutionally replicated this bank included Darmstadt (Germany),
Kreditanhalt (Austria), and a number of banks instituted in Italy and
Spain by Crédit Mobilier and its French competitors. Still other
banks in Sweden and Belgium came under its influence in their development.
These industrial or "mixed" banks can be traced back to the
Société Générale de Belgique in the 1820s.
A slue of banks in England also modeled themselves on Crédit
Mobilier, but all collapsed in the Overend, Gurney panic of 1866. By and
large thereafter, British banks made only short-term credit available to
industry, leaving long-term loaning to be undertaken in local markets or
by the London stock exchange.
In France, after the 1860s, new banks
largely abandoned long-term industrial lending: Most great capitals
financed internal development out of profits; and, after 1919, banks
engaged primarily in government loans and in foreign exchange speculation.

In Germany (exclusive of Frankfurt and Hamburg), however, the
situation was different: There the Crédit Mobilier model was
elaborated at its extreme, where the great banks developed close relations
to industrial and mining concerns. Deutsche Bank, for example, was a state
created financial institution formed in 1872 to free Germany from British
(London's) tyranny over the European foreign currency exchange market and
was established with the explicit intent of financing foreign trade.[5]

In point of fact, finance capital came into existence largely,
though not exclusively, in central Europe. But financial capitals did not
exist in this form in Britain, Sweden (Scandinavia as a whole),
Netherlands, Belgium, Switzerland and France.
Finance capital was a
historically specific response of those countries arriving late to
capitalist development.
In his Imperialism, The Highest Stage of
Capitalism, Lenin outlined a popular presentation of the development of
cartels, syndicates or trusts, that is, the development of capitalist
"monopoly." The combination of large and small capitalist firms
into single gigantic, often vertically integrated enterprises was a
tendential direction of capitalist development which Marx treated in terms
of a practical logic that created concentration out of free competition.

It was the central European specific relation of banking to industry
that Rudolph Hilferding theorized, illicitly generalizing it, in his work,
Finance Capital, and, on the basis of this work, which Lenin discovered at
the foundations of imperialism as a "higher stage" in capitalist
The specific, if not unique, relation of banking to
industry which formed the underbelly of Hilferding's systematic reflection
was that the developed in Austria, Germany, Italy, and Hungary and Spain,
and, in a less structurally rigorous manner, in the United States. Often
referred to as "industrial banks," two features distinguished
them, the issuance of long terms credits used to finance industrial
expansion often including investments in fixed capital and, as loan
collateral, the purchase of industrial firms' equities, the basis of an
industrial capital's existence as a corporation or joint stock company. It
is these features that led straightaway, first, to penetration of the
great industrial capitals by their financial counterparts, the seating of
representatives of banks in the boardrooms of industrial firms as
directors, and, then, to the ascendancy of finance over industry through
the complete control over the fate of the firm based on majority
stockholdings. This was a situation that never developed in Britain,
France, Belgium, the Netherlands, Sweden, etc., where great industrial
firms financed their expansion out of profits and through stock market
based issuances of securities, and where banks by and large engaged only
in granting short term credits to industry.
The geographical
delimitation of this relation largely coincides, in Europe, with the
status of those countries that were latecomers to capitalist development.
(In this regard, Hilferding mistakenly based his Finance Capital on a
universalization of this geographical circumscribed experience, and Lenin
also in his Imperialism in following him, imputing this societally
specific banking structure to all forms of capitalist development at a
certain phase, and as a necessary phase, in that development.) Surrounded
by aggressive powers (France, Britain, etc.) with large territorial
ambitions, these countries, or rather the states that organized societally
them, had none of the advantages possessed by Britain (insularity) and
those accruing to the United States (isolation and great, seemingly
inexhaustible natural resources). The last point in particular is of
transcendent significance: These states, as latecomers, were already
locked out of immediate (colonial) access to resources, industrial raw
materials, and markets, access that was often, perhaps even largely,
achieved through issuance of international loans. If the first dramatic
hurdle they had to clear had been the capitalization of agriculture in
order to revolutionize productivity in agriculture to simultaneously
create a surplus and proletarianizing the peasantry (Loren Goldner,
"Communism is the Material Human Community"), the second great
barrier was a question of overcoming the similar disadvantages domestic
industrial capitals faced in the struggle for resources and markets in the
arena of the world. Britain, for example, had the advantage of years of
manufacturing experience that assured product quality, disciplined labor,
a well-established network of trade and distribution, and the most
formidable navy in the world backing up the latter. The newly emergent
American power had those vast natural resources (which relative to other
newcomers made for economies of scale in the acquisition of industrial raw
materials) and technologically advanced production processes that greatly
enhanced labor productivity. In these formerly backward, arriviste
countries, mediated by the State as the "motor" of capitalist
development, the ascendancy of finance over industry was the socially and
historically significant response to this crisis. It permitted them to
reduce what ultimately was an indirect cost of immediate production, the
(sometimes enormous) cost of capitalization of industrial development.
Moreover, the "ready-made" concentration of financial resources,
so to speak, facilitated a far more rapid centralization of production
(mostly through horizontal integration of existing firms), eliminating or
absorbing smaller firms and inefficient ones, and allowing the great
industrial capitals to operate on a domestic or "national"
economic terrain in a manner that had the appearance of
"monopoly" that is, that assured a steady stream of sales and
income, at least in most phases of a cycle of development. These were the
specific advantages that the latecomers to capitalist development brought,
some (Germany) more successfully and other less so (Italy), to that aspect
of imperialist activity that involved struggles over markets and

[1]For this, see Marx,
Capital, III, chapters 21-24; Rudolf Hilferding, Finance Capital. London,
1981 (1910): 70-124; and Costas Lapavistas, "Hilferding's Theory of
Banking the Light of Steuart and Smith," in Paul Zarembka and Susanne
Soederberg (eds.), Neo-Liberalism in Crisis, Accumulation and Rosa
Luxemburg's Legacy. Edmonton, 2004: 161-180.
[2]Capitalist firms
sell shares at market prices that are decided by discounting the returns
anticipated of firms' projects. The discount rate is, in turn, determined
by the risk adjust rate of interest. The basis for this determination is
the view that no significant difference between share yield and interest
rate can be sustained as long as idle money can be allotted to equity and
debt freely. Now the rate of return on money capital invested in a project
is, anticipatory, equal to the average rate of profit, while the expected
return on money capital invested in stock market shares, raised if you
will for such and such a project, is equal to the return discounted by the
rate of interest. So that for any project, the money capital raised
through floating shares should exceed that actually invested. This,
Hilferding calls a "promoter's profit" (Gründergewinn),
part of which returns to the financiers' who manage share offerings.
Costas Lapavistas, "Ibid," 167.
[3]At this point, it might
also be noted the export of capital is not significant solely for Lenin.
Rosa Luxemburg, whose theorization on this score is today often
counterposed to his, relies on it, seeing it as decisively characteristic
of imperialism as does Lenin. See, in particular, her Antikritik, chapter
6 ("Imperialism"), where, in defining imperialism, she
explicitly notes and includes. the export of capital: "Accumulation
is impossible in an exclusively capitalist environment. Therefore, we find
that capital has been driven since its very inception to expand into
non-capitalist strata and nations, ruins artisans and peasantry,
proletarianizes the intermediate strata, [and entails] the politics of
colonialism, the politics of opening-up and the export of capital. The
development of capitalism has been possible only through constant
expansion into new domains of production and new countries" (emphasis
[4]For this overview, see C.P. Kindleberger, "Banking
and Industry between the Two War: An International Comparison" in
Banks and Industry in the Interwar Period. Special Issue of the Journal of
European Economic History, 13, no. 2 (Fall 1984): 7.
[5]It, above
all among German banks, should have kept apart from industrial lending. It
didn't. In particular, tight ties were established and cultivated between
Siemens and Deutsche Bank, AEG and the Berliner Handelsgesellschaft,
Gelsenirvchen Bergwekgesellschaft and the Disontogesellschaft.
the aftermath of the last imperialist world war, the victorious American
imperialists created an international financial structure that encompassed
(through its mechanisms and the flows that constituted it) mere national
movements of money and value, and, not so much smashed but, based on
Bretton Woods forcibly re-integrated into a boarder world structure the
entire reality of national finance capitals lording over domestic

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