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Encyclopedia of Political Economy edited by Phillip Anthony O’Hara Finance capital In 1910 a young medic, Rudolf Hilferding, published Finance Capital. In this work he viewed finance capital as a specific historic phase of capitalism in which there is an intimate connection between banking, commercial and industrial interests and where the hegemony of high finance prevails. In 1915, Bukharin used the phrase “the coalescence of industrial and bank capital,” and in 1917, Lenin termed finance capital “the merging of industrial with bank capital.” The terms used in these definitions are not substantially different (Brewer 1980:103–9; Howard and King 1989: ch. 5). Nor are they much different from modern-day conceptions of finance capital (Sweezy 1972:143). These definitions each emphasize institutional power bloc characteristics of finance, at the expense of drawing attention to the vulnerability implicit in financial relations. New forms of financial organization This was understandable, perhaps, since during the period from 1870 to 1920 it appeared that a new institutional form, “finance capital,” had achieved hegemony over the entire world economy (Sweezy 1972:179). Evidence was found in the concentration and centralization of the major financial institutions; the organization of cartels of industrial capitalists, often by financiers; the exercise of financial control over corporate development more generally; and the powerful impetus of financiers in imperialism, manipulation of state policies and the formation of ideologies. Indeed, many political economists believed that banks and other financial institutions had actually pushed capitalism into a new and perhaps final stage, the era of monopoly, imperialist, finance capitalism. The leading Marxist theorists of the first decades of the twentieth century (Hilferding, Kautsky, Bauer, Bukharin, Lenin and others) adopted this broad argument, although there was conflict about whether this final stage was one of strength or one of decay (Tickten 1986). However, the banks that were supposedly at the center of power in this new era of capitalism suffered tremendous bankruptcies, culminating in system-wide crashes that left the financial system in tatters during the GREAT DEPRESSION of the 1930s. Nonetheless, until then the theory of finance capital had much to recommend it. Hilferding, for example, contended that the problem of rising overaccumulation in highly concentrated branches and sectors of production could be displaced, thanks to the coordination functions of finance capital, into the more competitive, non-cartelized sectors of the economy. Thus for Hilferding (1910:298), intensified uneven sectoral development during crisis would not generate further destabilization of the economy, but rather stabilization through deepening cartelization. The subsequent shakeout of the smaller producers would permit the finance capital cartel to increase the level of industrial concentration and survive the broader downturn. Institutional stability Indeed, Hilferding posited that several factors “militating against a banking crisis” would combine with finance capital’s increasing range to ensure that conditions of crisis could be ameliorated. Those factors included, first, the ability of finance capital to manage and share risk effectively; second, the belief that a strong gold reserve and other state regulatory policies could shore up the creditworthiness of the system; third, a decline in the volume and importance of speculative activity (at the powerful urging of key institutions of finance capital); and fourth, the ability of joint-stock companies to continue to produce during a downturn because production need not realize an immediate return. Hilferding (1910:291) concluded that it was “sheer dogmatism to oppose the banks’ penetration of industry…as a danger to the banks.” Hilferding (1910:180) even expressed faith that the centralization and concentration process would result in an “increasingly dense network of relations between the banks and industry…[which] would finally result in a single bank or a group of banks establishing control over the entire money capital. Such a ‘central bank’ would then exercise control over social production as a whole.” Bukharin (1917:73) also predicted a “gigantic combined enterprise under the tutelage of the financial kings and the capitalist state, an enterprise which monopolises the national market.” Politically this was extremely important, for it justified seeking a route to socialism that entailed the socialization of capitalist relations via finance. At one point Hilferding (1910:368) even asserted that, “taking possession of six large Berlin banks would mean taking possession of the most important spheres of large scale industry, and would greatly facilitate the initial phases of socialist policy during the transition period, when capitalist accounting might still prove useful.” Hilferding was German Finance Minister later in his career (for a few weeks in 1923, and in 1928–9), and was considered a reformist Marxist in the Bernstein/Kautsky tradition. On this point his greatest subsequent rival, Henryk Grossmann (1929:198), offered scathing comment: “Hilferding needed this construction of a ‘central bank’ to ensure some painless, peaceful road to socialism, to his ‘regulated’ economy.” Even as German Finance Minister (under difficult circumstances in the late 1920s) Hilferding failed in any such mission. Yet notwithstanding emerging problems with the finance capital concept (such as the collapse, not strengthening, of financial empires), even as late as 1931 Hilferding maintained his thesis (Sweezy 1942:298). Critique of “finance capital” Where did Hilferding go wrong in miscalculating the power of finance capital? According to de Brunhoff, Hilferding made a critical mistake that led him to dissociate money and the credit system (“money as an instrument of hoarding” is ignored, she complained). “This dissociation has probably been one of the reasons for the overestimation of the role of ‘finance capital’” (1976:xiv). Further objections emerge to the internal logic of Hilferding’s “finance capital,” as well as to its contemporary relevance. He underplayed the extent to which, for instance, finance was utilized for the financing of labor power as against means of production (especially through pension, insurance, consumer credit and government sources), and the rise in the social wage. In addition, Hilferding’s conclusion ran contrary even to much of his own prior analysis. First, the same problems in the productive sector that lead to falling profit rates also force banks to look further afield, geographically and sectorally, in order to maintain lending and a healthy deposit base, which brings added risk. Second, rather than declining in importance, financial speculation tends to increase dramatically prior to the climax of a crisis. Third, Hilferding’s argument that jointstock companies were relatively immune from downturns was contradicted by his analysis of how vital credit was to the smooth operation of stock exchanges. As Sweezy (1942:267) observed, “Hilferding mistakes a transitional phase of capitalist development for a lasting trend.” The transitional phase was one of recovery from the 1870s–1890s financial crises; these crises would emerge again during the early 1930s and 1970s–1990s. See also: capitalism; capitalist breakdown debate; financial crises; financial instability hypothesis; money, credit and finance: major contemporary themes; monopoly capitalism; speculation Selected references Brewer, A. (1980) Marxist Theories of Imperialism: A Critical Survey, London: Routledge & Kegan Paul. Bukharin, N.I. (1917) Imperialism and the World Economy, New York: Monthly Review, 1972. de Brunhoff, S. (1976) Marx on Money, New York: Urizen Books. Grossman, H. (1929) The Law of Accumulation and Breakdown of the Capitalist System, London: Pluto, 1992. Hilferding, R. (1910) Finance Capital, London: Routledge & Kegan Paul, 1981. Howard, M.C. and King, J. (1989), A History of Marxian Economics, vol. 1, Princeton: Princeton University Press. Lenin, V.I. (1917) Imperialism, Moscow: Progress Publishers, 1986. Sweezy, P. (1942) The Theory of Capitalist Development, New York: Monthly Review, 1968. –––(1972) “The Resurgence of Finance Capital: Fact or Fancy?,” Socialist Revolution 1(8). Tickten, H. (1986), “The Transitional Epoch, Finance Capital and Britain: The Political Economy of Declining Capitalism,” Critique 16. PATRICK BOND |
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