Tony Norfield preface 1, britain finance and the world economy

he head of eurobond trading at Bank of America International in London was an intense and exacting man, not known for his sense of humour. So, as the new analyst in the securities dealing room, I had to be careful responding to the question he put to me: ‘Where is value?’ At first, I didn’t know what he meant. He dealt in financial securities, and there is no ‘value’ in them, only a price that goes up and down for reasons I had not yet fully worked out. Surely, this wasn’t an expression of existential despair. Did he want to chuck it all in and do something useful? No, he wanted to find a security that offered an attractive return, especially one whose price would not fall just after he had bought it. So I said, ‘I’ll have a look and get back to you in half an hour.’ This seemed to placate him, although he would not have been pleased to know I had barely gotten to grips with the array of flickering grey-green numbers on the terminal screens.
That was in the summer of 1987, less than a year after the Thatcher government cut restrictions on UK financial markets with the ‘Big Bang’ reforms. Those reforms encouraged foreign banks, including Bank of America, to expand operations in the City of London, and enabled the City to benefit from an extended boom in world financial markets – a boom halted only temporarily by the October 1987 stock-market crash and by other market upsets. It was also the start of my career in finance that lasted nearly twenty years, and took me to three more banks, Japanese, British and Dutch, where I witnessed the inner workings of the financial markets. I worked in dealing rooms and travelled to forty countries to visit the banks’ government, corporate and financial clients. Over time, the dealing room screens grew bigger, with multi-coloured prices and graphics, and the computers got faster and more sophisticated. But the search for ‘value’ was the same.
If the dealer found ‘value’, a portion of it would find its way into his (rarely her) bonus and into the bank’s profits and dealing revenues. This was, and remains, the focus of City activity: making a good bet, or at least not getting caught out by the market. Many people conclude that the City is a casino, but the analogy is misleading. While the City does not turn away prospective clients who have more money than sense, its primary role is to manage financial deals for capitalist companies and governments. It is the financial nerve centre of the global system, not a betting shop, and this position also places it at the forefront when crises occur.
There was no small irony in my going to work in the City. I had decided some years before that organising society on capitalist principles was a bad idea, so the financial sector was not the obvious choice for me. My views hadn’t changed. But needs must, and, letting discretion be the better part of valour, I kept my sense of self by injecting humour into the market reports I broadcast to the dealing rooms where I worked. Once, I even got a joke about US President George (‘Dubya’) Bush on the front page of the Financial Times. I said that Bush had a ‘pronuncification’ problem when he used the word devaluation instead of deflation, an error that led to some turmoil in currency markets.1 Luckily, I managed to avoid extraordinary rendition.
This book is about how the global financial system works, and in whose interests. Although I give a number of examples from my personal experience, it is not my City autobiography. I will not distract the reader from my main objective with stories of agony and ecstasy in dealing rooms and the idiosyncrasies of financiers. Contrary to appearances, the City does not exist to launch a business elite into the upper stratosphere of wealth, although it can certainly do that. The real City story is that it plays particular roles for British capitalism, and that it could not do that unless it was also servicing a global system. So my focus is far from being just on the City of London. It is much more on how major companies and countries use financial operations to take control of the world’s resources. The City generates dealing revenues for the British economy from worldwide transactions and it offers easy access to funding for favoured corporations and governments. In doing so, it facilitates the global mechanism of finance and helps to centralise economic power.
Another aim of this book is to explain why it is wrong to counter-pose finance to a more favoured, productive version of capitalism. Financial operations inevitably arise from capitalist market production, as one can see simply by considering what any company must do to obtain funds to buy goods or when making its regular payments, let alone when embarking on new investments. But more than this, a ‘productive’ company, especially a large one aiming to boost its market position, will also get heavily involved in financial dealing. Typically, this means merging with or taking over its rivals in stock-market deals, or using the equity and bond markets to increase its financial strength. My argument is that if you do not like ‘finance’ but have no problem with the capitalist market system, you ought to think a little more about that perspective, since the two are inseparable.

CH 1

This business of [being] a second-tier power – we are probably, depending on what figures you use, the fifth or sixth wealthiest nation in the world.
We have the largest percentage of our GDP on exports, apart from the tiny countries around the world, we run world shipping from the UK, we are the largest European investor in south Asia, south east Asia [and] the Pacific Rim, so our money and our wealth depends on this global scene.
We are a permanent member of the (United Nations) Security Council and I think that gives us [a] certain clout and [a] certain ability.
These mean we are not a second-tier power. We are not bloody Denmark or Belgium, and if we try to become that, I think we would be worse off as a result.
Admiral Lord West, Baron of Spithead, September 2011
With this angry statement at a British Labour Party press conference, Lord West, former head of the navy, caused a minor diplomatic embarrassment, followed by apologies to ‘bloody Denmark and Belgium’. His outburst was blunt, and in stark contrast to the usual rhetoric on human rights and democratic values that characterises discussions of international affairs. Yet, although arguably a more obvious indicator of Britain’s status as a major power, Lord West did not mention the UK’s numerous military interventions. A military man himself, he might have noted Britain’s participation in no fewer than five wars under the 1997–2010 Labour government.1 Just months before he spoke, Britain had added the bombing of Libya to a list that has not ceased to grow. Lord West is a forthright defender of British power – including putting himself on the front line, commanding a ship that was sunk in Britain’s war with Argentina over the Malvinas in 1982 – and he would no doubt see militarism, covert operations and the use of political ‘clout’ as important tools for sustaining it. War, as von Clausewitz famously wrote, is a continuation of politics by other means, and politics, in Lenin’s phrase, is ‘a concentrated expression of economics’. There can be little doubt that Lord West also appreciates these links, although the main theme of his outburst was Britain’s economic position.
In the same vein, this book focuses on the economic foundations of Britain’s global status rather than on its military escapades. My expertise is in the former, not the latter, and particularly in the financial dimensions of British economic power, something also absent from Lord West’s protestations. I worked for nearly twenty years in City of London bank dealing rooms, witnessing at first hand the major expansion of financial operations from the mid-1980s onwards. Unlike the soldier fighting in a war about which he may know very little, the basic mechanism of finance is clear to anyone who witnesses it from the inside, particularly to those who are more than a little sceptical about the benefits of capitalism.
Global finance is an integral part of the world economy today. Britain uses the financial system to gain economic privileges by appropriating value from other countries while appearing to do them a service. This examination of Britain’s financial power also reveals how others use the system. Readers who may care little about what the Brits are up to might be surprised to learn how important UK-based finance is to the world economy, how it evolved and also where their ‘home’ countries fit into a network that encompasses the United States, Germany and France, Japan and China, the offshore tax havens and elsewhere.
World economic and financial power

Critics of modern capitalism usually focus on the United States. Often, especially in Europe, their argument ends up being pitched not against capitalism per se but against the US domination of it. This overlooks the stake in the system held by other countries and the consequent role they play in the oppression of others. Lord West, in contrast to such US-focused critics, was forthright in asserting British economic and political power. But, surprisingly, he failed to mention British ownership of many of the world’s major corporations or the UK’s leading role in financial markets as part of his evidence. These are the economic foundations of Britain’s status.
In 2013, Britain had the second largest stock of foreign direct investments, worth $1,885bn.2 This figure measures significant or controlling stakes in foreign companies and property. While the UK figure represented only 30 per cent of the total US investment stock of $6,350bn, it was larger as a share of the national economy. Data from a Financial Times table of the Top 500 global corporations in 2011 show a similar position. The UK was in second place behind the US, with thirty-four companies having a total market value of $2,085bn. The US had 160 companies with a value of $9,602bn.3 Another survey shows that, of the world’s top 100 non-financial corporations in 2013, ranked by the value of their foreign assets, twenty-three were US companies, sixteen were British and eleven were French, while Germany and Japan each had ten. The three biggest UK-based corporations held the second, sixth and seventh places: Royal Dutch/Shell Group plc, BP plc and Vodafone Group plc.4
These billions can be difficult to imagine – they have an unearthly quality compared with the money in your bank account – but they reflect real economic influence in the world. They show that while the US is clearly the most powerful country, there are also others with significant power.
Another United Nations report listed the top fifty financial companies in 2012, ranked by their geographical spread. Britain was still in second place to the US, having six compared to ten banks or other financial institutions in this top group. Britain’s HSBC was present in sixty-five countries, while Barclays Bank was operative in forty-six.5 Before the near-death experience of Royal Bank of Scotland and a few other UK banks in 2008, Britain was more closely tied with the US in global finance, even though foreign banks and institutions account for a large part of the City of London’s business.6 As for other powers, Canada, France, Germany and Switzerland each had four institutions in the top fifty; Italy, Japan and Sweden each had three. There can be no doubt that Lord West was correct in his assertion that Britain is a major world power, even if he omitted mentioning these other qualifications for that status.
The importance of British finance can be demonstrated in other ways. In 2013, the assets held by UK-based banks – a measure of the scale of their lending – were more than four times the value of UK GDP, or the annual national output. When the size of the equity market and debt securities, such as government and corporate bonds, was added, the total came to eight times GDP.7 Only much smaller countries, such as Switzerland, Luxembourg and Ireland, have a bigger financial sector compared to their domestic economies, based on the particular niche they occupy in world markets. The UK – which is to say, London – is one of the world’s leading financial centres and is the most international in its business reach.
The financial system is an integral part of the capitalist economy, not an anomaly that can be wished away. Rather than being like a cancer that surgery might remove to restore the capitalist body to health, it is more like a central nervous system: without finance, modern capitalism is dead. Naturally, people get angry about the behaviour of banks and the public bailouts of financiers, but, to be effective, this anger must be supplemented with an understanding of what is really going on. Why do governments in the major countries continue to support the financial sector and how do financial operations help maintain economic power?
Three topics are covered in this book. The first is the nature of the economic relationships in global capitalism. A small group of powerful countries has a privileged position in production, commerce, investment and financial relationships compared to all the others. The second is the financial system. It does not sit on top of, or alongside, what almost all economic commentators call the ‘real economy’; it pervades all economic activity. The third is the position of the British economy in the world, particularly Britain’s external transactions and its flows of investment and business revenues. Each of these three dimensions adds to an understanding of the financial form taken by the world economy today.
The term ‘finance’ is often used in relation to particular financial institutions, especially banks, or to single out the ‘financial’ sector of an economy from the ‘non-financial’ sector. This book refers to banking and other financial operations, but it is important to note that the concept of finance is not tied to a particular type of institution, or to a separate ‘financial sector’. All kinds of capitalist companies conduct important financial operations.
An example often given to illustrate this is the Ford Motor Company, when it set up Ford Motor Credit in order to offer its customers loans with which they could then buy Ford’s auto products. Similarly, GE Capital is the financial services arm of General Electric. But what about the commonplace occurrence in which an industrial company takes over its rival in a stock exchange transaction, or buys an equity stake in its suppliers? Or the information technology firm whose investors and managers want to get the company bought out by Google or Facebook, so that they can become instant billionaires? These are not examples of producers who have inadvertently strayed from industrious activity into an alien world of finance. On the contrary, they are typical examples of how capitalism operates today.
Equally, it is not just private capitalist companies who manage financial deals, since government finance ministries and central banks do so too. Governments sell securities to private investors, whether companies or individuals, and to other governments, in order to raise funds for public spending and to manage the state debt. Central banks also oversee the operations of the financial system, determining the interest rates at which they will lend (or receive) funds, how much will be lent and to whom. This puts the state, and especially powerful states, in a key position.
Under imperialism – by which I mean the present stage of capitalist development, where a few major corporations from a small number of countries dominate the world market – access to finance both reflects economic power and is a means of retaining that power. While poor countries also have banks, and while their companies may also issue bonds and equities, their ability to gain privileges by way of the global financial market is equally poor. This is because they have to operate in a system run by the major powers, one in which they take the prices offered to them and have little say over the terms of the deal. Details of how the rich countries dominate the world’s financial markets will be set out in later chapters.
There are some 200 countries in the world, but only twenty or so count as major players in world affairs, and even among those there is a clear hierarchy. As a rule, the rest must accept whatever changes in trade relations are imposed, bow to political pressures, and be wary of military intervention or other hostile actions. This also has implications for ordinary people. An old saying is that if you want to get on in life, the most important thing you can do is to make sure you are born to wealthy parents. From a global perspective, the best way to avoid being among the billions facing penury is to be born in a rich country. Then, if you have a job, the likelihood is that you will be able to spend as much on a morning coffee in Starbucks as the daily wage of the factory worker in Bangladesh who made the shirt you are wearing.
Understanding the day-to-day workings of the financial system in its international dimension is crucial here. Financial crises may hit the headlines, but they result from this regular daily mechanism and quite often distract attention from it. Above all, the financial system cannot be understood on a national basis. For example, the US dollar is the national currency of the United States, but it is also treated as ‘world money’ thanks to the international economic and financial power of the US. Decisions made in the US, especially those of the Federal Reserve on interest rates and credit policy, impact the global financial system. But world flows of finance also condition what happens in US financial markets. To a lesser extent, other major powers also have some influence, with the weakest countries condemned to being only on the receiving end.
Britain’s invisible empire

From 1979 onwards the UK financial markets experienced a boom, exponentially so after the ‘Big Bang’ reforms of 1986 destroyed the previous cosy cartel of British financial firms. The volume of dealing grew dramatically and international banks flocked to the City of London. It is surprising, then, that there has been no substantial review of this from a radical perspective since the 1980s. The links between finance and Britain’s international economic and political power have thus remained by and large invisible. There are three reasons for this.
Firstly, finance is often seen as something outside the realm of power: it is simply another line of capitalist business, while power is confined to the political sphere. But this perspective ignores the financial privileges of leading countries, which are quite distinct from their military or political strengths. As will be explained later, financial privilege is a form of economic power, and the countries that enjoy it use the financial system to draw upon the world’s resources. Those that are important financial centres receive big revenues from international financial dealing, while companies based in the richer countries have greater access to investment funds and are in a stronger position to use their financial ‘clout’ to take over rivals and extend their economic influence worldwide.
Secondly, the dominant position of the US is usually seen as the decisive factor in world developments, or even as the only one. For example, during the 2003 invasion of Iraq, Britain was frequently viewed as being the ‘lapdog’ of the US.8 There was little recognition that the British state might be acting in British imperialism’s own economic interests. This happens a lot when the focus is on politics rather than economics.9 While some writers do discuss Britain’s role as an imperialist power, their analyses are most often conducted from a historical, political or diplomatic perspective, with little or no focus on the economic dimensions.10 One exception, a major historical work entitled British Imperialism: 1688–2000, does offer detailed coverage of the economic aspects of Britain’s relationships with the rest of the world, but, in its more than 700 pages, it reserves barely eight for the years after 1970.11
The third reason for the lack of comment on finance and British imperialism today is that the prominence of the financial sector is seen as a result of government policy-making, not as an outgrowth of imperialist economic power. Thirty years ago, some authors did discuss the historical evolution of finance alongside British power, but their principal concern was the relationship of the City to British economic policy – especially in debates over whether financial interests were affecting government decisions to the detriment of manufacturing industry.12 More recent analyses have had a similar focus, whether they laud the City’s operations as a successful example of how to provide competitive financial services in the world market, or whether they are critical of the City and how it supposedly dominates UK economic policy.13
Understanding finance and imperialism

Media stories are full of the deeds and misdeeds of financial dealers. News broadcasts are also incomplete if they fail to note the latest level of the equity market and the exchange rate: the FTSE 100 or the S&P 500, or what the dollar, euro or sterling is worth in the market today. But what kind of world works like this? Why should the lives of millions of people be influenced by the vagaries of financial market prices? This only looks normal, rather than weird, because we are used to it. Financial prices are (somehow) related to what is happening in the economy. The collapse of those prices can lead to economic disaster, while a boom will bring joy to the world, or at least to those who own its financial assets. What kind of economy is this? Every year may bring new improved electronic gadgets or breakthroughs in science and medicine, but year after year, decade after decade, the dysfunctional economic system that destroys lives and condemns productive individuals to unemployment remains in place. Improvements in knowledge do not change these relationships of the capitalist economy, the very relationships that lead to economic disasters.
The financial system develops as an integral part of capitalism. For example, while financial operations include trading in company shares on the stock market, or in foreign exchange rates or interest rate derivatives, these things do not occur in a vacuum, or simply on a financier’s whim. They are rooted in capitalist production and commerce. This book will show how these things happen, explaining the role finance plays for the major capitalist countries and their corporations, especially on a world scale. If this context is ignored, then finance will mistakenly be seen as simply ‘what financial companies do’. This would greatly exaggerate the role of banks compared to other capitalist corporations and governments. Just as mistaken would be the political conclusion that, if only financial companies were better regulated or constrained by enlightened government policy, then capitalism could be turned into a viable economic system. The destructive tendencies of a social system dominated by production for profit should not be underestimated.
It would, of course, take more than one book to explain modern capitalism. This one focuses on explaining the financial mechanism that holds it together. Even so, putting this into a coherent story will require a number of chapters. It may be useful give some pointers here on the way the arguments will be developed, before reviewing what some other writers have had to say about these issues.
Firstly, I will deal mainly with the international aspects of finance. My approach stresses that finance is a feature of the world economy, and hence cannot be explained by starting from developments in, or policies enacted by, individual countries, when these are taken out of a global context. For example, most discussions of finance pay very little attention to revenues gained from outside the national sphere. But these revenues can be substantial, and they illuminate an importance dimension of finance. In 2013 alone, US receipts from investments in foreign companies, foreign equities and bonds, etc., amounted to $773.4bn. This was more than the entire economic output of Switzerland, as measured by GDP! US investment income payments on its liabilities – the investments foreigners made in the US – were $564.9bn, which was close to the GDP of Sweden.14 So, the US had a net gain of some $209bn on its foreign investments, equivalent to receiving the economic output of the ten million citizens of the Czech Republic. Put another way, US foreign investments brought in around $3 billion every working day, while they paid out only a little over $2 billion per working day. The scale of these US revenues is exceptional, but compared to the size of the economy the figures are not so different for some other key countries. In the UK, the most important revenues come from international financial dealing rather than from foreign investments.
Secondly, as suggested earlier, my stress on the critical importance of financial operations for modern capitalism means moving away from the common, almost exclusive, focus on the United States. America’s dominant economic position means that it is understandably the centre of attention when it comes to finance. The US set the ground rules for the Bretton Woods world monetary system after 1944, designing it in a way that promoted its interests,15 and US financial and economic power has remained strong, even after a series of crises in the 1960s that ultimately led to the collapse of the system in the early 1970s.16 However, this focus often leads to the assumption that other capitalist powers are, at most, only minor accomplices in America’s plans, ignoring how their own interests are also promoted by their actions. To the contrary, this book argues forcefully that UK policy has been conducted in British capitalism’s interests.
Thirdly, although I will discuss some examples of financial crises, much greater attention is given to the regular, daily mechanisms of finance in modern capitalism. The latter is the more critical, decisive feature, although it gets far less coverage. It may be a single straw that finally breaks the camel’s back, but it was the pile of previous straws that prepared the way. Because financial crises are often dramatic, this build up often gets overlooked, and the focus tends to fall on the evident symptoms rather than on what may be the more hidden causes. Such a perspective gives a very narrow view of imperial finance, disguising the fact that the financial system works each and every day to the benefit of the major powers. It does not require a crisis to do so, even if a crisis may present those powers with further opportunities, while its victims are left with little chance of escape.
Insights, conspiracies and policy contingencies

In his 1999 book The Global Gamble: Washington’s Faustian Bid for World Dominance, Peter Gowan developed a sophisticated view of the role of imperial finance. His analysis was strong in several respects and I would agree with many of the points he made. For example, he showed how the US used its financial strength as a tool of state power, not least by forcing other countries to open up their markets to US financial institutions or risk being cut off from sources of funds.17 He also offered an important insight in arguing that the aim of US financial policy from the early 1970s was ‘to compensate for competitive weakness in its productive sectors through taking predatory advantage of its monetary and financial sector dominance’.18 In other words, the US could use its financial power to compensate, in some respects, for its loss of industrial supremacy. One effect was that the more liberal financial regime established under US auspices from the 1980s meant that international crises often led to flows of finance into the US – both legal and criminal. Many countries, especially in Asia, that had faced financial crises in the late 1990s also feared renewed destabilisation, so they subsequently built up massive foreign exchange reserves as an insurance policy. In practice this meant that the revenues they earned from their trade surpluses were spent on buying US government securities.
These are critical points. Nevertheless, there are two problems with Gowan’s analysis. Firstly, he views world financial developments only from a US perspective; secondly, he sees US power as being so strong that the US government is able to promote financial crises in order to benefit from them. Gowan does mention the UK’s role in establishing the eurodollar market, but he sees this in terms of how it benefited the US, not whether there was any rationale in the policy for the UK. Yet the evidence shows that there was indeed a very strong rationale, as I will explain in Chapters 2 and 3. Similarly, because the UK does not appear as the main driver of global financial policies – and I would not claim that it is – Gowan characterised the City of London as operating ‘principally as a servicing centre for the dollar currency zone and as a satellite of Wall Street’.19 This conclusion followed from his one-sided emphasis, which prevented a fuller understanding of how the financial system develops out of the global capitalist market and is not controlled by particular states, not even by the US in what he called the ‘Dollar–Wall Street Regime’.
This perspective led Gowan not only to see financial crises as being beneficial to the US, which was sometimes true, but also to argue that these crises were planned by the US government in advance.20 While there is little doubt that the major powers do try to steer events in their favour, it is an overstatement to suggest that they can control the huge financial markets their policies have helped to foster. By contrast, this book argues that the privileged position of US imperialism in the global finance system means that it is more able to benefit from that system’s operation in both good and bad times, not that it deliberately plans crises as a means of increasing its power. For example, while US-based hedge funds did bet against a number of Asian currencies in 1997, the bets were based upon the hedge funds’ own assessment of the economic realities and the likelihood of crises. The hedge funds did not push viable economies over the cliff, nor were they encouraged to do so by the US government.21 Still less is there any indication that US government officials had any special inside knowledge with which to tempt the speculators.
At the time of the financial crises in Russia and Asia in 1997–8, I was working in a City dealing room that had begun to trade in ‘emerging market’ securities and currencies. This was seen as the next big growth area for financial business, but these countries often had large trade deficits and had come to rely increasingly on inflows of foreign capital. Their vulnerability to a reversal of short-term inflows of funds was evident to many, even if few would have claimed to be able to calculate when the reckoning would occur, or how dramatic it would be. The systematic nature of crises in capitalism is a sign that they result from the workings of the capitalist system, not that they are the result of a conspiracy.
Eric Helleiner, a Canadian professor of politics, offers a more thorough account of the contemporary role of finance for imperialism, revealing the ways in which different governments, not only the US, have implemented measures to promote the financial system. He also has a more rounded view than Gowan’s, stressing that these measures should be seen in the context of both the industrial and the national interests of the states concerned, rather than as resulting from the interests of one section of capital, the financiers. Helleiner notes, for example, how the dramatic growth in the overseas investments of US corporations from 1945 up to the 1960s led these companies to lobby politicians for the removal of restrictions on international flows of finance.22 This was a critical factor behind the later shift to a ‘free market’ or ‘neoliberal’ ideology that is usually discussed nowadays in terms of the (unexplained) influence of financiers over government policy. Nevertheless, Helleiner’s analysis sees government policy as being influenced by groups of intellectuals, rather than being a response to changes in the global economy. Instead of explaining more clearly how world developments were the driving factors behind what actually happened, he adopts the stance of a critical policy adviser, stressing how things might have been different.
Helleiner examines the key turning points in the expansion of financial markets from the late 1970s to the early 1980s, to illustrate how the economic stresses of the time gave UK, US and French policy-makers little choice but to allow financial markets to grow. The weakness in his argument lies in his conclusion that if controls on markets had been introduced, ‘the globalisation trend would have been set back considerably’.23 To suggest that financial controls could have been introduced contradicts the logic of the material he has previously used to explain the course of events! For example, France did try to impose controls, but was forced to reverse the policy in order to keep to its broader objective of remaining in a key position within European financial and economic affairs. The approach adopted in this book, by contrast, will be to use evidence from world economic trends to explain events and to place policy decisions in that global context.
Helleiner’s arguments are especially unconvincing in relation to British finance. He claims that ‘Britain supported liberalisation in finance because of its “lagging” hegemonic commitment to London’s position as an international financial centre, a commitment derived from its past as a financial hegemon in the nineteenth century’.24 Britain was indeed a nineteenth-century financial (and economic) hegemon. But the British state’s promotion of finance in the late twentieth century, and still today, can be explained by the fact that the UK financial system is a structural part of the international operations of British capitalism, underpinning the role of Britain as an imperial power. Far from Britain having a ‘lagging’ commitment to finance since the 1970s, British policy-makers had a very forward-looking view on how the existing status of the City as a global financial centre could be leveraged to its best advantage.25
The ‘End of History’ revisited

The role of the US in the world economy and global finance comes up in a different way in the work of Leo Panitch, Sam Gindin and their fellow authors, many from York University, Canada. Panitch and Gindin’s book, The Making of Global Capitalism: The Political Economy of American Empire, is worth noting for its many insights but also because it displays some typical analytical weaknesses. Regarding the insights, they argue convincingly against those who underestimate how far other capitalist countries have bought into the global system dominated by the US. This point can be illustrated by how few examples there are of other major powers challenging US policy decisions. But Panitch and Gindin greatly exaggerate both the sustainability and the breadth of this consensus. A key point of the present book is how global developments, often first visible in the financial sphere, can destabilise relationships between the major powers. Their approach also pays too little attention to the economics of imperialism, especially in its financial dimension. As a result, they either fail to take into account the developing tensions, or else dismiss them as insignificant.
The weakness of Panitch and Gindin’s analysis is that it is largely confined to the political sphere, concentrating on the power of the US Treasury and Federal Reserve in the world’s financial system, either in direct negotiations with other states or via the IMF and the World Bank. They mention the resulting economic advantages for US corporations and financial and business services companies, but they report nothing to suggest what the scale of these advantages might be. The closest they get is to cite the widely known example of the final selling price of Apple’s iPod, only a small percentage of which is made up from revenues paid to the China-based factory that produces them.26 Similarly, in the financial sphere, while they note that the US has obtained easy funding for its external deficits owing to the international role of the US dollar – initially from Japan, then mainly from China – they pay little attention to how this acts as a significant subsidy from the world economy to the US, a privilege that results from US financial power.
By omitting or downplaying these factors, they ignore the economic substance of imperialism, especially as it relates to finance. If such factors are sidelined in relation to the US, the ‘hegemon’, then it is not surprising that they are also overlooked in relation to the UK. Panitch and Gindin’s exaggeration of US power follows Gowan’s view, noted earlier, that sees the City of London merely as a ‘satellite’ of Wall Street.27 Major US banks do operate from the City and the US dollar is the principal currency traded, but this ‘satellite’ view ignores some key points. The UK enjoys significant economic gains from hosting the biggest international banking centre, and its own banks also take an important share of this business.28 Furthermore, the nature of the UK banking and credit market is very different from that of the US. Far from US dollar LIBOR – the London Interbank Offered Rate for loans between banks in US dollars – being ‘effectively the internationally “traded version” of the Fed’s interest rate’,29 it is a rate that represents a financial market that does not exist in the US. For historical reasons,30 the US has no equivalent to the UK’s highly developed interbank money market for unsecured loans of different maturities in US dollars, let alone in other currencies. That is why there is no such thing as a ‘NYIBOR’ for New York, for US dollars or for anything else.31
Panitch and Gindin’s political analysis also exaggerates the stability of US domination. Ironically, they trace the different historical phases of US power, but then suggest that the latest phase of US hegemony is one that will last indefinitely. This is a reincarnation of Francis Fukuyama’s ‘End of History’ thesis, where (free market) global capitalism is the final stage of world economic development. Not surprisingly, Fukuyama’s thesis was celebrated by Washington policy-makers.32 But Panitch and Gindin do something similar, making many references to former US Treasury Secretary Robert Rubin’s management of and influence on the resolution of global financial crises and posing the US as the world’s ‘chief financial architect’.33 In this, they badly misjudge the security of the US position.
Many European countries are in a disastrous financial situation and are unlikely to present any serious challenge to the US in the foreseeable future, but this does not mean that major European powers have not tried to do so in the past and may do so again. The currency turmoil of the 1970s following the break up of the Bretton Woods system – seen by Europe as a failure of US power – was the key stage in what later became the euro project, since it produced chaos in European economic relationships, something that Germany and France were particularly concerned to avoid. It is not so unlikely that at some point defensive measures could be imposed by euro-based politicians against what they see as disruptive financial markets, particularly those in which the US and the UK are heavily involved. While that would not necessarily be the first step towards a serious conflict between the major powers, it would go beyond simple economic rivalry between competing countries or companies.
Panitch and Gindin argue that there has been no inter-imperial conflict in the latest crisis, and that it has instead been characterised by cooperation among the main countries, led by the US. They claim that ‘the conflicts that have emerged today in the wake of the greatest capitalist crisis since the 1930s are taking shape … less as conflicts between capitalist states and their ruling classes than as conflicts within capitalist states’.34 But this glosses over the recent problems in Europe, which are already destabilising political relationships between the major capitalist powers and giving support to more xenophobic and nationalist political parties. In Britain, for example, the Conservative government intends to conduct a referendum in 2016 or 2017 on whether the UK continues as a European Union member country unless it can renegotiate more favourable terms, and the UK Independence Party, whose core policy is for Britain to leave the EU, received 13 per cent of the votes in the 2015 UK General Election.
History wakes up

China presents a far more important challenge to the US domination of the world economy and world finance than do the European countries. China’s development is a striking example of how the changing balance of economic forces can create new political trends that upset the status quo, and which must be taken into account in order to understand the dynamic of the system. But Panitch and Gindin discount the possibility of any serious risk to US power from China, arguing that the Chinese economy is embedded in the US-designed structures of the world economy because, for example, it owns a huge volume of US dollar-denominated debt in its foreign exchange reserves that effectively cannot be sold. They are correct to note that there are limits to China’s projection of power, yet they do so by questioning whether China has ‘the capacity to take on extensive responsibilities for managing global capitalism’,35 as if that were the issue at stake! They fail to mention that the Chinese state has used its US dollar funds not only to recapitalise Chinese banks, but also for purposes that have riled US politicians, including overseas investments by state-owned and privately-owned Chinese companies in Africa, South America, the Pacific and elsewhere. In 2011, US Secretary of State Hillary Clinton argued for an increase in her budget on the following lines:
Let’s just talk, you know, straight realpolitik. We are in a competition with China. Take Papua New Guinea: huge energy finds … ExxonMobil is producing it. China is in there every day in every way, trying to figure out how it’s going to come in behind us, come under us … I might also mention China has about a $600m development programme for these Pacific island nations. And what do we have in a response? Zero.36
One might think this merely a self-serving argument on Clinton’s part, but there are many other indications that the US is all too aware of how China’s growing strength represents a ‘security’ threat to its interests as well as an economic one. Since it was created in 2000, a special US-China Economic and Security Review Commission has provided the US Congress with an annual report on all the current issues. Its 2010 report covered US-China economic relationships, China’s ‘growing air and conventional missile capabilities’, its activity in Asia (especially in relation to Taiwan) and examples of China’s ‘cyber attacks’ on the internet. It pointed to the ‘intensification of a number of troubling trends’.37 Later reports have continued in the same vein, with the November 2013 report arguing that China’s ‘military modernization is altering the security balance in the Asia Pacific, challenging decades of US military pre-eminence in the region’.38 These challenges to US hegemony cannot simply be dismissed as exaggerations by the US political and military establishment.
Chapter 9 will cover China’s challenge to the US in the financial sphere in more detail, but it is worth briefly noting some important developments here. In 2014, Brazil, Russia, India, China and South Africa established the New Development Bank, otherwise known as the BRICS bank, funded mainly by China. Its headquarters is in Shanghai, the world’s largest city and busiest container port, and mainland China’s financial centre. The same year also saw the formation of the China-led Asian Infrastructure Investment Bank, which the US failed to prevent its political allies from joining. Furthermore, China’s stock exchanges, including Hong Kong, Shanghai and Shenzhen, are already the second largest in the world in terms of market capitalisation and turnover. Contrary to Panitch and Gindin’s view, this is not a basis on which one would expect China to be willing to remain subordinate to the US.
China’s rise in the world economic hierarchy is relatively recent, but it is an example of how what can look like established, permanent relations of global economic and political power are more fragile than they might appear to be. This consideration also applies to the UK’s changing position in the global economy.
‘New Deal’ and no deal

David Harvey offers another perspective on imperialism and finance, and his focus on the predatory aspects of imperialism is an unusual, and welcome, recognition of events in the world. Harvey’s academic origins in geography led him to focus more than many others on the division of the world economy and the privileges of the imperialist powers, an important theme of the present book. In addition, his work shows how financial crises have wreaked havoc in developing countries from the 1970s, with pressures from the US, other powers and the IMF forcing them to adopt policies that have led to further depredation, as part of a process he calls ‘accumulation by dispossession’.39 Nevertheless, there are also some serious problems with his analysis.
Ironically, by focusing on crises, and how these can help the major powers take control of weaker countries’ resources, Harvey’s approach to the question of imperialism (and finance) ends up by calling for reform. For example, his book The New Imperialism concludes with the proposal that people should fight for a new ‘New Deal’ and a ‘more benevolent imperial trajectory’.40 This not only contradicts his earlier stated view that capitalism/imperialism is in the middle of a damaging crisis, it also represents a regrettable concession to imperialist policy. This political perspective seems to follow from his view that crises can be minimised by reforms to the capitalist system, a view that is consistent with the way he sidelines the crucial regular mechanism of capital accumulation by exploitation and financial appropriation. For example, he puts the issue of finance under the heading of ‘dispossession’ by focusing on crises, leading to the conclusion that a ‘more benevolent’ policy would ameliorate the impact of those crises. In doing so, he ignores the real mechanism of financial power, especially for the US and the UK – a mechanism that this book will spell out.41
There are a few other writers whose work I consider important for understanding the question of finance and imperialism today. One is the French Marxist scholar François Chesnais. He sees imperialism as being ‘centrally related to the domination of a precise form of capital, namely highly concentrated interest and dividend-bearing money-capital’, and he also stresses how ‘financial assets generate legally protected claims on the current and future production and centralisation of surplus [value]’.42 These ideas will be explained in later chapters, but they basically mean that capitalism today has taken on a largely financial form that dominates the production and distribution of social wealth. This is not to counterpose productive capital and ‘finance’ as respectively good and bad, but to recognise that countries with companies that are part of a global oligopoly and the large institutional financial investors of these countries are all ‘partners in the global system of imperialist domination’.43 This is a key insight and one that is also central to my own analysis. One difference of emphasis, however, is that while Chesnais tends to concentrate on the subordination of weaker countries by way of the high costs of borrowing imposed on them by the major financial centres, I consider this to be only a small part of the broader mechanism of value appropriation effected by the key financial powers in the world economy.44
The system

Without an understanding of the role of the financial system, the workings of the world economy and the relationships between countries remain a mystery. Still less can one comprehend why governments make policy decisions to protect finance, decisions which are often unpopular and alien to most people. The financial system is the means by which the corporations and governments of the rich countries control the world’s resources. This is not to say, however, that they can control the workings of the capitalist world economy. The capitalist market system is beyond control, and capable of bankrupting even its most ardent supporters.
This book is not a study of what some academics have called ‘financialisation’,45 nor is it an analysis of the 2007–8 financial crisis and its aftermath. Although I explain important dimensions of that debacle – from the role of financial leverage, to the privileged position of the US Federal Reserve in the provision of finance, to the options open to the City of London in the middle of the crisis in 2008 – this book is instead about how the financial system functions as a key economic feature of contemporary imperialism.
The US is the world’s hegemonic power, but it is not pre-eminent in all areas of financial business. Chapters 2 and 3 explain how the global financial system evolved historically, in a process marked by both rivalry and cooperation between the US and the previous leading power, the UK. Other countries also played a part in this development after the Second World War, but the end result was that the UK was able to play a much stronger role in the world financial system than its economic status would have suggested. These historical developments also help to explain why Britain was reluctant to participate in the various European projects for monetary cooperation and eventual monetary union, and why it is in a quandary over EU membership today.
Having set out the evolution of the financial system, I continue in Chapter 4 with a closer look at the different types of financial institutions, the process of credit creation by the banks, and how the prices of financial securities are determined. Bank credit creation is often misunderstood, even in economics textbooks. It can also appear to break free from any link with economic activity, although there is always a reckoning at some stage. Similarly, the prices of financial securities look like they are driven only by speculation in the market, although these securities reflect the economic power of both financial and non-financial companies, enabling them to command astronomical sums of money.
Tracing the evolution of finance is important especially when the historical evidence contradicts widely held beliefs. But there is also a particular dynamic in the capitalist market that results in a small number of companies from a small number of countries enjoying privileged positions in the world economy, such that they dominate production, commerce and finance. This will be discussed in Chapter 5, highlighting the fact that my main focus is on the financial system – and not simply ‘the banks’ – since it is this that underpins the network of imperial domination.
The links between the financial system and the economy are analysed further in Chapter 6 by showing how profitability, a decisive signal for capitalism, is influenced by financial developments. For example, financial ‘leverage’, or borrowing, can change the rate of return recorded by capitalist companies. A country’s position in the world economy will also change the way in which any data on profitability should be interpreted. This is particularly true for the US. Its privileged position means, among other things, that part of the profits recorded by its companies on domestic operations derive from its worldwide commercial and financial power.
Rounding off this theme, Chapter 7 undertakes a review of the different forms of financial privilege and how these work for different countries. The US has a special position, given that the US dollar is at the centre of international banking relationships and the US government can restrict who does business in dollars. But other countries also play a part in the global financial network and benefit from the parasitic game.
Chapter 8 returns to focus on the UK, detailing the operations of Britain’s ‘financial machine’ and the flows of trade and finance over the past thirty years. Britain hosts the world’s biggest international financial centre, with the largest volume of international loans, foreign exchange and derivatives trading. Such business is not as divorced from the ‘domestic’ British economy as many believe. For example, it brings in large revenues from around the world to help finance the huge gap between Britain’s exports and imports of goods. The British system also acts as the world’s financial broker, facilitating a myriad of deals, as well as helping to finance US deficits via tax havens.
Recent developments have seen Britain’s financial machine run into a few problems. Foreign investment income has turned into a deficit and the growth in revenues from financial dealing has slowed down, while the UK trade gap has continued to widen. These developments have led the City and the UK government to seek new lines of business, both in so-called ‘Islamic finance’ and in new financial deals with China. But, as Chapter 9 indicates, the global environment for British finance is changing fast, and in ways that are not conducive to the continued, unchallenged domination of the Anglo-American system.