In beginners guide 3 (On Capitalism) the source of the profit on productive capital was traced to the surplus-labour performed by working people during an unpaid part of each working day. This unpaid surplus-labour yields a monetary value once the extra commodities or services created are sold. The huge amounts of surplus-value created by millions of workers in thousands of factories, warehouses, docks, mines, engineering firms, shipyards, locomotive and automotive plants, over many years, was indicated.
Once that continuous yearly flow of monetised surplus-value is understood something else becomes obvious. The mounting deposits of unused money in bank accounts, became more than could be profitably invested in the production of more of the same (or similar) commodities or services. Within national markets that would lead (and did) to, unsold products, income/capital losses and bankruptcies. Another form of investment was needed and not in different commodities or in different locations, but in a form not directly involved with production.
Dormant money in many bank accounts was therefore creatively transformed into loan-capital and offered to other capitalists or speculators for a set period at a rate of ‘interest’. The term Finance-Capital replaced ‘loan-capital’ so as to include further complex ways of utilising the accumulating money. The process of money directly producing ‘interest’ can be misleading. In the finance-capital sector, money appears to have an innate property of expanding itself simply by being loaned.
But of course, money cannot directly create anything. The return of the amount loaned and the interest has to come from the financial or productive activities of someone else. In many cases it comes via a complex chain of borrowers and lenders. The links between lenders and borrowers may be obscure, but somewhere along the chain of transactions the value of the loan plus added interest is created by the transformational application of human skills and labour. The only other way is by someone making a gain as a result of someone else making a loss.
The economic foundation of interest is nothing more than a deducted portion of the monetised surplus-value created during capitalist production and passed along a chain of obligations back to the lender. Productive-capital is therefore directly parasitic upon the labour-power of workers, whilst finance-capital is parasitic on productive-capital. The vast amounts of monetary wealth accumulated over decades has made the Finance-Capital sector so rich and powerful that it not only influences industry and commerce but also national governments.
The ability of the finance-capital sector (banking, insurance etc.) to reward favours with grants, lucrative posts and consultancy fees makes it able to promote self-serving changes in government policies. Institutions such as the World Bank, the International Bank of Settlements, and International Monetary Fund are the global pinnacles of this sector. They and their proxies have conduits of influence reaching deep into industry, politics and governance.
Lower down the institutional pyramid of finance there are organisations (stock exchanges, Hedge Funds etc.) whose activity is also global. This includes investment openings, speculative possibilities and asset stripping opportunities. Industries paying high wages can have difficulty obtaining capital, whilst other’s paying low wages may find it easy. Financial institutions (developed from merchant bank organisations) also originate and circulate financial instruments known as Asset Based Securities (ABS’s), Mortgage Based Securities (MBS’s) and Collatoralised Debt Obligations (CDO’s) among others.
Basically these speculative instruments are nothing more than complex, upmarket IOU’S and like loans cannot directly preserve value or create any new surplus-value. Since IOU’S, no matter how sophisticated, are paper promises to pay at a later date, they can circulate like huge denomination bank notes. Buying and selling them at discount and hoping to make money on any difference in purchase and selling price has long been routine in the finance-capital sector. As long as participants can pay when due dates arrive there is no widespread problem.
However, these, and other pass the parcel antics, are part of a system of speculation in which asset bubbles are created. Purchasing power, (real money, credit or even temporary ‘spoofing’ orders) are used to purchase or pump up asset values in order to sell them at a higher cost than bought. This leads to price escalation far beyond any intrinsic asset value. When confidence wanes and the price starts to go down, purchasers hurry to sell before a price collapse occurs (the bubble bursts). This leaves some unable to pay (or unable to borrow to pay) when it becomes due.
The general 2008 financial crisis, triggered as it was by the collapse of the housing mortgage bubble in the USA, revealed the vast international network of financial instruments (ABS’s; MBS’s ; and CDO’S etc.) then circulating around the globe. Some people in the financial sector had long suspected a looming problem, but not even the expert regulators of these, fully understood their complexity, the amount of leverage based upon them, and the magnitude of defaulting when the bubble burst.
This unravelling of financial speculation again demonstrated that financial crises, don’t remain within that sector. The 2008 crash caused bankruptcies in industry and commerce, redundancies in employment, as well as public sector shrinkage and austerity. This is because the ‘finance sector’ is connected to the general commodity and service circulation system, the private productive-capital sector and the public sector. Any sizeable crisis in the finance sector instigates a general economic and social crisis and visa versa.
Despite their culpability, those in the financial sector were bailed out and their losses made good or simply written off. This, as much as anything, demonstrated the power and influence of the finance sector over the economic and political classes. Few in the banking and financial sector thought they had done anything wrong and have continued doing what they did before. Consequently, another financial crisis lies ahead – only it’s timing is uncertain! Meanwhile, the sector carries on, granting itself huge bonuses for selling unstable financial instruments, and naive speculators within ‘the system’ continue to buy them.
Roy Ratcliffe ( September 2019)