Monday 22 October 2012

Historical Materialism conference in London

The journal Historical Materialism is holding its ninth annual conference, entitled 'Weighs Like a Nightmare', in central London on 8-11 November 2012.

The venue is SOAS, near Russell Square, London WC1.

For those interested, I will be presenting a paper on 'Profit, finance and imperialism', based on some work published on this blog and other material. The session schedule for this seems to have CHANGED ONCE MORE. It is now on Sunday 11 November, from 10.00 - 11.45 in Room G3.

Other session changes too!

Tony Norfield, 7 November 2012

Wednesday 3 October 2012

The City of London: Parasite of the World Economy

This article examines the City of London. My focus is on its international trading, bringing together some important material on British imperialism and finance. I will not be discussing whether banks based in the UK are ripping off consumers, failing to lend cash to struggling companies, mis-selling financial products or manipulating LIBOR. These matters are mere bagatelles. The bigger story is how tens of billions of pounds are extracted every year from the labour of others in the world economy by the regular daily mechanism of British finance.

1. Economic decline, but financial power

Most people know that the City of London is a big financial centre. However, the large scale of its operations is striking given that the British economy is a second-tier economic power at best, ranking well behind the US, behind China, Japan and Germany, and even behind France and Brazil, according to GDP data for 2011. When it comes to finance, the UK moves from being an also-ran to one of the major global medal winners.

Britain first achieved the position of being the world’s premier centre of commerce, credit and finance in the 19th century. This was a natural complement to its domination of trade and its rule of a global empire. Some historians have characterised Britain as being more the ‘warehouse of the world’ than the ‘workshop of the world’ at this time. However, even when Britain’s position was challenged by rivals and weakened by two cataclysmic imperialist wars in the 20th century, the prominence of commerce, and particularly of finance, continued as a critical dimension of the British economy. From a relatively weak position as a major power post-1945, British governments took every opportunity to prop up British economic privileges. First this happened by bleeding the colonies to help pay for the ‘welfare state’ and to subsidise British living standards. Then, until the 1970s, it was by using privileged trading and financial deals with ‘Commonwealth’ countries to protect British economic interests. But, it was clear to British governments that competition was tough, even in the post-war boom years, and that Britain’s economy was falling behind and losing market share to more successful countries. This was the backdrop for a succession of policies that promoted – or at least did not impede – the growth of the City’s international financial business.

From the late 1950s, this City business developed not on the back of UK sterling, as in the glory days of Empire, but by using the US dollar. American corporations were dominating world trade and the dollar was now the key currency for international transactions and most financial deals. However, government restrictions on financial markets in the US and elsewhere – but far less so in Britain – enabled the City of London to build up a strong business in dollar lending and borrowing. It was not as if the City was starting from scratch; it was already an international bank dealing centre. However, the eventual impact of this new development of the ‘eurodollar’ market – transacting in dollars outside the US, and outside the jurisdiction of the US government – was dramatic. It was a major step in the growth of global financial markets. By the early 1970s, the gross size of the eurodollar market in loans had already exceeded $500bn, exploding to some $3000bn by the end of the 1980s, helped by huge current account imbalances worldwide and credit expansion by international banks. By the 2000s, the eurodollar market’s size, some 75% of the total eurocurrency market, had reached $5000bn. These expansions of credit helped underpin a boom in all kinds of international financial deals.

Such developments should not be understood in narrow financial terms. They reflect firstly the chronic problems that capital accumulation encountered by the early 1970s, depending more and more upon credit expansion to keep the system ticking over, although this entailed more frequent financial crises. Secondly, the opening up of financial markets worldwide, promoted especially by the US, but in close cooperation with Britain, meant that the already limited scope for national-based policies had diminished to vanishing point. Hence, the minuscule differences in economic policy among political parties in all countries. Thirdly, this new financial system helped put the powers at its centre in a surprisingly strong position, at least in a position much stronger than would seem consistent with their not-so-competitive economies. The two powers at the centre of the world financial system are the US and Britain. Most analysts focus on the US as the hegemon of global finance. While this is an understandable bias, it overlooks the role played by the UK, imperialism’s broker-dealer.

2. Uptown Top Ranking

The size of the financial system in Britain compared to the national economy is far bigger than it is in the US. One measure of this is to look at the size of bank assets compared to GDP. In the UK, total bank assets were roughly four times GDP in 2011; in the US they were only a little larger than GDP. US bank assets were still larger than those in the UK in absolute terms, reflecting the much bigger US economy. However, other measures of absolute financial weight put the UK in a top ranking position. These measures are not all based on British-owned financial companies, but on financial companies with operations based in the UK. Nevertheless, this UK-based business is vital for the fortunes of British imperialism.

In summary, before giving the statistical details, the City of London is:

-         the world’s largest international money market
-         the largest foreign exchange market
-         the largest ‘over-the-counter’ interest rate derivatives market
-         the 2nd biggest issuer of international debt securities (after the US)
-         the 4th largest location for the listing of equities (after the US, China and Japan)
-         one of the two largest net earners of revenues on financial services

While there are diverse ways in which to measure such things, these results are persistent features that emerge in many different methods of calculation. They reflect the structural privilege that Britain has in world finance, privileges that bring significant rewards (see section 3).

Table 1 details the UK’s international banking position compared to other countries. The totals in the table are for 44 countries that report to the principal body that collates these figures, the Bank for International Settlements, based in Basel, Switzerland. Notably, the UK has by far the largest total of claims (loans to) and liabilities (deposits from) other countries. The data are for banks located in a particular country, including these countries’ so-called ‘offshore’ banking facilities. The UK has 20% of total outstanding business; the US is in second place with a 12% share. UK-owned banks do not all this business; foreign banks in the City do a large share. However, a separate table compiled by the BIS on the business done by banks according to their nationality does show that British banks have a larger volume of international business than the banks of other countries. The listed UK figures in the table exclude the separate banking business of a variety of tax havens outside the UK, including the Cayman Islands, the Bahamas, Bermuda, Jersey, Guernsey and the Isle of Man. While these islands are not technically part of UK territory, they all sing ‘God Save the Queen’ and are each given a special status by the British authorities. Together, they would rank third in the table, making up 9% of international bank business.

Table 1:           International positions of banks by country, March 2012

                        ($ billion, amounts outstanding in all currencies)

Claims + Liabilities
Share of Total
Cayman Islands
Hong Kong

Source: BIS

Table 2 details another dimension of global finance: the foreign exchange market. Banks in the UK (basically, London) have a clear and persistent lead in terms of market share. Foreign exchange dealing is not bank lending or borrowing; it is exchanging one currency for another. Banks make money on these deals by taking a dealing margin. The margin can look very small – for example, one or two hundredths of a percent of the value of the deal for widely traded currencies. However, given the huge volume of dealing – 5 trillion dollars daily in 2010 - this can add up to big earnings! In the latest BIS triennial survey, London had by far the biggest share of the global FX market in spot, forward, swaps and options transactions. This might not seem surprising, given London’s historical role that grew out of international commerce. However, Britain has twice the volume of currency dealing of the US despite being only in sixth position in world trade in goods and services, compared to the US’s top position in trade. The size of London’s foreign exchange market is the clearest sign of British imperialism’s role as the broker for global capitalism, taking a cut of more than one-third of the value of foreign exchange deals in the world economy.

Table 2:           Foreign Exchange Turnover By Country, 1995-2010

                        (Daily averages for April in each year, $ billion)

% of 2010 Total
Hong Kong

Source: BIS

Table 3 shows an even stronger picture of London dominance in the so-called ‘over-the-counter’ (OTC) interest rate derivatives market, which comprises direct deals between banks and their customers. OTC trading is the biggest part of the derivatives market, principally made up from trading of interest rate swaps. Other trading of derivatives takes place on exchanges, and the US is home to the biggest exchanges for derivatives, mainly based in Chicago. However, the volume of trading on exchanges is a small fraction of that in the OTC market.

Table 3:           Over-the-Counter Interest Rate Derivatives Turnover, 2010

                        (Single currency derivatives, daily average for April 2010, $ billion)

% World Total
Hong Kong

Source: BIS

UK and US financial centres together account for 70% of the world market, once more illustrating the concentration of global financial trading. The US authorities have been angered by the way that trading derivatives in London has led to big financial scandals hitting their own pockets, from the collapse of AIG in 2008 to the recent loss of $6 billion by JP Morgan’s ‘London Whale’. However, this overlooks the fact that an Anglo-American partnership designed this system, with implicit and explicit government approval, and it has been mutually beneficial to both powers. The US and the UK are also the leading issuers of international debt securities (to which a lot of this derivatives trading is linked), giving them easy access to investment funds from across the world.

Another means of getting access to global funds – and also to the revenues from trading in securities – is via the equity market. Here, the UK is less able to compete with the US in terms of equity market size, since the US economy is around six times bigger than the UK’s and nationally-owned and controlled companies tend to list their stock on national stock exchanges. Nevertheless, the market capitalisation and volume of trading on the UK stock exchange is high, and is the largest in Europe. Companies listed on the London Stock Exchange do not have to be UK-owned or controlled, and stock exchanges compete with each other as markets for attracting international funds and international company listings. My calculations indicate that around 30% of the capitalisation of the FTSE100 index is made up from companies that are principally foreign owned, eg Glencore and Kazakhmys.

Table 4 details the countries with the largest stock exchanges, ranked in order of market capitalisation. The ups and downs of share prices affect the data, but the relative sizes do not change much over time, with the exception of one country that has risen to prominence in this area of global finance: China. I have added together the two ‘mainland’ exchanges to Hong Kong to give a total for China, but even without Hong Kong, China would have the second rank in terms of global market capitalisation of companies. The London Stock Exchange ranks behind Tokyo’s, but is far bigger than the exchanges for other European countries, including the combined Euronext exchange figures for Belgium, France, the Netherlands and Portugal.

Table 4:           Equity Market Capitalisation and Turnover, 2012

                        (All figures in $ billion)


NYSE Euronext (US) plus NASDAQ



Shanghai plus Shenzhen plus Hong Kong Exchanges


Tokyo Stock Exchange

London Stock Exchange

Belgium, France, Netherlands, Portugal
NYSE Euronext (Europe)



TMX Group

Deutsche Börse

Notes: (1) Market capitalisation for end-June 2012. (2) Electronic order book volume of trades for first half of 2012. Turnover data for Hong Kong estimated by the author.
Source: Calculated using data from the World Federation of Stock Exchanges.

There are other dimensions of global finance than those noted above, including commodities trading and pricing, fund management and insurance. I will not risk drowning the reader in a further torrent of data, however, and just note that the UK ranks at the top end of these global tables too, usually second only to the US as a base for these operations.

3. How to make money by making nothing

The term ‘finance’ in this article has been used to encompass all the lending, borrowing and trading operations of financial institutions. In Marx’s theory of value, two important dimensions of such activities are identified. The first is ‘money-dealing’ activities that are part of the process of buying and selling commodities, and of providing the liquidity that may be necessary for industrial and commercial companies to continue their business. This money-dealing includes discounting bills and providing foreign exchange transaction services. The second is borrowing and lending of money by banks, especially for investment, which comes under the heading of what Marx calls ‘interest-bearing capital’. Out of this form of interest-bearing capital, capitalist financial markets also create various securities that attract forms of interest payment – bonds and equities. One step beyond this is to create derivatives, securities whose value is derived from the prices of bonds, equities and other financial instruments. The demand for derivatives initially arises out of a need for a form of insurance against the volatility in prices of these securities, but this soon builds a momentum for speculative, leveraged trading, especially when capitalist profitability is under pressure.

Issuing these financial securities (bonds, equities and derivatives) can attract investment funds from around the world – especially if pressure has been brought to bear on countries to relax any controls they may have on capital flows! Furthermore, the trading in these securities, the exchange of currencies that may be a part of such trading, and the provision of legal, advisory and custodian services that come with the investment in financial titles, all amount to the build-up of a huge financial infrastructure that can demand its cut for the ‘services’ rendered.

There is a problem, though. All these financial operations are not producing anything; they are simply dealing in titles to things that others have produced. All the costs of such operations are a deduction from social output. Even if one person’s financial deal makes a profit, that profit is offset by a market trading loss for someone else. The most that these financial services can do is to be more efficient, and so waste less money. In capitalist market terms, this is seen as being ‘productive’, and the more efficient financial services company would gain market share. Nevertheless, the financial sector is an economic burden and this fact puts a limit on how big it is likely to grow in any particular country.

However, such limits are greatly relaxed for an imperialist power like Britain that can use its privileged position in the world economy to be the banker, broker, dealer, securities trader and derivatives provider for everybody else. That is why financial services in Britain are so outsized compared to the domestic economy. Of course, having a large financial services sector does not make sense if it does not absorb money from elsewhere. But that is exactly what the UK financial services sector does.

Table 5 details the UK’s net earnings from financial services. These are the summary revenues from overseas for each sector, minus the foreign payments made by these sectors. In total, the net financial services earnings amounted to nearly £40bn in 2011. This covered almost 40% of the UK’s £100bn trade deficit in goods in that year and was roughly 2.5% of UK GDP. The UK has the second biggest surplus on financial services in the world, usually just behind that of the US. If insurance services are added to the reckoning on this account, then the UK surplus is the highest, given that the UK has steady net revenues on insurance (around £8-12bn per annum, not included in Table 5) while the US has a large deficit. These net foreign revenues are a good measure of what value is deducted from the world economy by financial operations based in Britain.

Table 5:           UK Net Earnings from Financial Services, 2009-2011

                        (All figures in £ billion)

Monetary financial institutions
Fund managers
Securities dealers
Baltic Exchange
Other institutions

Source: UK ONS

‘Monetary financial institutions’ are what normal people call banks, and they account for the bulk of the revenues. In 2011, the banks’ net interest income on loans made up only about a third of their net foreign income, with fees and commissions about a quarter. The bulk of their earnings, nearly half, came from dealing spreads – amounting to £14.3bn in 2011. Securities dealers outside the banks gained almost all of their income from commissions and fees, rather than from dealing margins. Fund managers based in the UK are less important in the totals, as is the Baltic Exchange, which is linked to dealing in ‘freight futures’, and is the main broker for dry cargo and tanker fixtures, including the sale and purchase of merchant vessels.

The striking thing about the earnings data on financial services is that they have shown little sign of being affected by the financial market slump. In the immediate pre-crisis years 2006 and 2007, the total UK net earnings were close to £24bn and £33bn, respectively, and in the five years before that the figures were in the range of £15-20bn. These are below the numbers seen in 2010 and 2011. The figures give one indication of the material basis for successive British governments backing financial market trading.

4. Conclusion

The legacy of the financial crash has led to recriminations against banks in the UK and elsewhere. However, in the UK the focus has been on the stupendous salaries and bonuses of the lords of finance, and on how to regulate banks in order to avoid economic trouble. There is little investigation of the system itself, and no acknowledgement that the British financial system is a parasitic leech on the world economy. It provides services for the functioning of the capitalist market, taking a cut of the value of every deal. This pays not only for the bank executives and traders, not only for those in other financial operations, but also for a myriad of other functionaries in legal, accounting and other jobs that depend on this huge financial services centre. The ‘City’ also pays the UK government tens of billions in taxes and, as the previous section showed, revenues from its services cover a large portion of the UK trade deficit.

Marx once famously summed up capital as ‘dead labour, that, vampire-like, only lives by sucking living labour, and lives the more, the more labour it sucks’. To continue the metaphor, British imperialism has developed a financial system that acts like a blood bank for the value produced worldwide, one that takes a sip of every value flowing through it.

Tony Norfield, 3 October 2012