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Here is an interview I did recently with Esteban Mercatante for the
Argentine-based Spanish language journal Ideas de Izquierda and which I believe will also be published
in the near future at leftvoice.org. His questions centred on my book, The City. My answers give some background to the analysis and comments on
recent developments, including Brexit.
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Q1 You
show in your book that the City of London is the pre-eminent international
financial centre for the world economy, despite the fact that the UK's own
currency, sterling, is not so important on a global scale as it used to be
before WWII. What are the main global transformations in the flows of capital
that London could take advantage of to maintain its international status? And
in what way has it been favored by geopolitical processes?
--
A1 The
financial business of the City of London was damaged by WWII and the disruption
to international trading and investment in the immediate years afterwards, in
addition to the weaker economic position of the UK. However, the City had many
established international links, arguably more than New York, despite the very
powerful position of the US in the world economy. These links evolved in the
1950s to use the US dollar rather than sterling as a financing mechanism, and
this was helped by the restrictions the US government placed on the domestic US
financial system at the time.
Big corporations demanded access to funds on a scale that was not
easily available in the domestic banking markets, and by the end of the 1950s a
‘eurodollar’ market had evolved to supply this new form of credit. It was
mainly located in London, but it could draw upon US dollar funds from around
the world. A ‘eurobond’ market was also established in the early 1960s. Both
types of euromarket grew very rapidly and the City of London benefited most
from this. So the business of the City changed from the pre-war forms of
dealing and it also became less directly dependent upon dealing with the
British Empire/Commonwealth countries. Britain’s close political links with the
US undoubtedly helped this process, limiting the risk that there would be any
constraint on US companies and banks dealing in the London euromarkets.
By the early 1970s, the operation of global financial markets was in
turmoil, as international imbalances and the changing positions of the major
powers were no longer compatible with the previous Bretton Woods exchange rate
system. The City of London’s position benefited further from these disruptions
and from the later removal of nearly all restrictions on international
financial dealing.
Q2 You
have elaborated a power index that includes five measures to define the
relative status of each country (GDP, FDI, Banks, FX, Military). As expected,
US is at the top of the list, followed among others by Germany, China, and
Japan. But it is surprising to see Great Britain in second place. To what
extent does this index reflect the effective global power of the UK today?
--
A2 My
Index of Power is a summary measure that brings out significant features of the
distribution of power in the world economy. It is a very simple tool based upon
publicly available data. While it cannot capture everything, especially the
relationships between countries, it throws an interesting light on where each
country stands in the global system. I was also a little surprised to see that
the UK ended up in second position, and you will have to take my word that the
index was not planned to give this result! The UK’s position reflects the
international investment, trade and finance components of the Index, but these
are also very important in the world system. I think it is also an endorsement
of the value of the Index that the highest ranking countries benefit from other
aspects of international power that are not directly measured. For example, the
UK is a key political partner of the US and is also a permanent member of the
UN Security Council.
Relative positions in the Index of Power have changed over time and will change further,
for example with the rise of China. The UK remains in a prominent position now,
but its status will be damaged by Brexit. Brexit’s impact is likely show up in
at least one of the Index components, that for the volume of international
banking conducted from the UK base.
Q3 In
your book you criticize the notion of ‘finance capital’ as developed by
Hilferding because it misrepresents how the rule of capital is expressed. What
are the risks you see in this notion that the banks are in control of the whole
national capital as it was assumed in Finance Capital?
--
A3 While
Hilferding’s Finance Capital was an important work, ironically, it
showed a poor understanding of the relationship of finance to the power of
capital. It discussed new forms of finance in the capitalist economy, and was
far ahead of other Marxist work in this respect. Yet when Hilferding examined
aspects of the financial system, especially the role of banks in Germany, he
drew the conclusion that these could be taken over – by a progressive
government, of course – for the benefit of the mass of people. In this respect,
Hilferding’s ideas continue to have resonance today, when we see some leftists
call for banks to be nationalised, or for there to be a ‘radical’ national
economic policy that would take more control of the credit system and
investment.
There are
several big problems with these views. First, they all operate in the framework
of national capitalism and pay little attention to how the international system
works. Second, they assume that controlling banks is the same as controlling
finance, when actually the banks play only a limited role. Third, they ignore how
the financial system necessarily pervades all capitalist market relationships.
The financial system is not something external to ‘good’ capitalist production
or a mechanism that could be managed by a progressive government to produce
better economic results.
It is true
that capitalist policy makes mistakes and there have been many stupidities.
However, it is not the job of socialists to offer less stupid capitalist
policies. Those who get into this game end up betraying the people they claim
to represent and endorsing capitalist solutions.
Q4 You say that Marx’s
analysis in Capital described interest-bearing capital as being parasitic,
while other aspects related to the financial sector (like money-dealing) are
not. However, your argument is that “All forms of financial operation can
potentially assist in the transfer of surplus value from one country to another
and so contribute to increasing the power of the dominant countries”, and are
then a form of parasitism. Which are today the main mechanisms of this
parasitism and how do they benefit London and other financial centers of the
world?
--
A4 My discussion of
parasitism in The City showed the different ways in which this term was
used by Marx and Lenin and related this to the forms of finance that we have
today. I would not see ‘finance’ as being something narrowly defined and to
include only banks or other financial institutions. I think that it is best to
understand finance as an important aspect of what Marx called the ‘form of
value’ and to analyse how it has evolved. To understand the forms of capitalism
today, one has to go well beyond the notions of commodity production, buying
and selling. For example, many large corporations use their equity as a means
of payment when they take over other companies in a ‘share swap’. They do not
necessarily use a bank loan or pay in cash, and they may not even use a
financial institution to broker the deal.
If a country
has an internationally important financial centre, then it can get revenues
from dealing with capitalists from all over the world, not just in its national
sphere. It can provide all capitalists with short-term or long-term funding, or
with a market for their financial securities (bonds, equities). These may often
look like specialist financial operations, but they are also closely tied in
with the commercial and productive power of big companies, as reflected in
trade relationships, investment deals, control of intellectual property and
patents, and so forth.
New York has
the world’s biggest bond and equity market, but much of it is US-based. London
has the world’s most internationally-linked financial centre. These and other
centres generate big revenues for the country concerned – through dealing
profits, high paying jobs, government tax revenues, etc. However, it is
difficult to pin down where this money originally comes from! A French bank in
London might gain commissions from dealing with a German company. But the
German company’s transaction might be related to revenues from goods supplied by
factories in Asia and sold in North America.
Q5 In March 2019 Brexit
is supposed to conclude. But the negotiations with EU are at a deadpoint and
May's government is in crisis. What perspective do you see for the process?
--
A5 The Brexit process has
been a complete mess, and I have been astonished at how stupid the British
ruling class has been. It is amazing how the current political establishment
does not seem to understand the EU political mechanisms, ones that British
advisers had played such a big part in developing over the previous 45 years.
What makes
this an unresolvable problem is also what makes it interesting politically,
although it can be tedious to follow all the details. Brexit is clearly bad
from the point of view of British business and it is also damaging for the UK’s
political status. That should have made it avoidable, but the Conservative
government made an unusual mistake and put a major decision of foreign policy
up for a popular vote in the 2016 referendum. A narrow majority Leave vote
resulted. This was made up of many working people who blamed the EU for their
economic problems, especially those who were against the immigration of workers
from other EU countries. Leave voters also included the more traditional
anti-European British nationalists, and some misguided leftists who thought
that reactionary popular sentiment could somehow be given a positive,
anti-capitalist gloss.
Both major
political parties in the UK, the Conservatives and Labour, probably have a
majority of Members of Parliament who think Brexit is a mistake. But they
cannot easily turn their back on the referendum result and snub the electorate
without risking a big drop in support at the next election. It would even be
difficult for them to try and organise another referendum to get the result
overturned, by arguing that the circumstances have changed since 2016 and there
is now a clearer idea of what Brexit will actually entail.
There is a
different problem for big business. Despite growing signs of concern now that
there will be trouble if the UK’s access to the EU single market is not
maintained, companies had been reluctant to get involved in the political
debate much earlier. They have now probably left it too late to have much
influence. Previously, the British business elites were confident that their
interests would be secured by the major parties, and they could keep aside from
taking any public positions and just have a quiet word with the relevant
minister. That view has now been shattered, but it is not clear what they can
do about it.
Britain’s
political idiocy is shown by those pro-Brexit UK politicians who imagine a
marvellous world outside the EU, one that will more than make up for the losses
borne by having less access to the European market. Political leaders in Europe
and elsewhere cannot believe they are witnessing this unprecedented act of
self-harm from what had previously been considered as the most sophisticated
ruling class in the world!
Q6 So far, has the
Brexit vote had any impact on the business of the City of London?
--
A6 There has been little
impact on the City of London so far, but many banks and other financial
institutions have made plans for relocating some of their business operations
to elsewhere in the EU. I cover this question in the Afterword to the paperback
edition of my book, The City. Apart from Brexit, the City’s business has
in any case been impacted by a general downturn in European financial dealing
over recent years, a result of the broader economic crisis. Brexit will make
this worse, especially if British-based banks do not get a ‘passport’ to deal
with other banks in the EU. However, the City of London has a range of skills
that is not easy to replicate elsewhere, at least not for some years. There are
also less visible items, such as the English commercial law that underpins many
financial contracts, which make leaving the City of London more complicated
than it might at first seem.
In the
pre-Brexit years, London had rivals elsewhere in Europe, and some were bigger
in certain areas of finance, such as Luxembourg in fund management. But London
has been the biggest, or one of the biggest, in a very wide range of
operations, from banking, to venture capital funds, to financial derivatives
and foreign exchange dealing. If, post-Brexit, London’s position is greatly
reduced, then no one centre elsewhere in Europe really stands out as a likely
winner to take on London’s former role. Paris and Frankfurt each have some
advantages, but so do Dublin and Amsterdam.
Q7 Besides Brexit, what
are the most important challenges for the preeminent position of London and how
is British imperialism responding to them? In your book you consider Islamic
finance and China as the most important avenues of parasitism to pursue. Are
there any others worth mentioning?
--
A7 There has been little new of significance reported on the City and
Islamic finance in the past year, but developments continue. In early September
this year, there was an ‘Islamic Finance Week’ held in the City, while in late
September the Lord Mayor of London visited Istanbul to boost Turkey’s business
links with the City, in particular on Islamic finance. Regarding China, City
foreign exchange dealing in the renminbi has grown by some 30% in the year to
September and it remains the biggest hub outside Asia, while there are plans to
develop links between the London Stock Exchange and Shanghai. I am not aware of
anything important outside of these developments.
Q8 In your book you
point out that the development of financial assets and derivatives is closely
related to what happens in profitability. Ten years after Lehman's bankruptcy,
we can observe that global debt is much higher than it was in 2008, and there
are several stress factors (rising rates by Fed, the trade war instigated by
Trump). What do you consider is the outlook for world economy? May we be
heading another global slump?
--
A8 Yes, debt levels are higher now than they were in 2008, not just in
absolute terms but also as a share of GDP. This is the clearest sign of a
continuing structural problem for the global economy that has not been
overcome. Whereas 10 years ago the debt was very much concentrated in the major
economies, now it is far more widespread, having risen sharply in ‘emerging’
economies too.
While this
indicates a vulnerability of the world economy, for the major economies the
outcome may be stagnation or slow growth rather than a dramatic slump. The
banking system is less over-extended now and there is probably a smaller number
of high-risk debtors, so that there is less chance of a wave of defaults
causing a credit crunch. Debts in the major countries are more concentrated in
the government sector, which means there is less risk of a series of defaults
and the related panic, although this means there will be continued pressure to
curb government spending.
For the
emerging economies, there is far more risk of a serious economic setback, which
is already occurring in several. The level of foreign currency-denominated debt
can be a high proportion of GDP for some countries, notably Argentina, while
the tightening of US monetary policy is both raising interest rate levels and
boosting the value of the US dollar versus their domestic currencies. At the
end of September, the US Federal Reserve raised the Fed funds rate to
2.00-2.25%, the first time it had been above US consumer price inflation for 10
years, and five-year US Treasury yields had also risen to just under 3% from
less than 2% 18 months ago. These are low levels still, but they remain a big
problem given the high level of debt.
Tony Norfield,
8 October 2018
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