Index of Power

The following chart gives a snapshot of the top 20 countries, ranked by their index of power in the world economy. Readers of this blog or my book, The City, will have seen this concept before,[1] but here the information is updated to 2016-17.

Index of Power, 2016-17

Notes: The height of each bar is given by the country’s total index value, which is then broken down into the respective components. Countries are identified by their two-letter ISO code. Take care, because CH is Switzerland, not China (which is CN), and DE is Germany.

The overall picture shows a small number of countries, led by the US, towering over the rest. Only 33 countries out of 180 have an index that is more than 1% of the US index number! In a chart, most of the columns would look like the x-axis, so here I have shown just the top 20 countries. Of those, only five are close to or above 20% of the US number: the UK, China, Japan, France and Germany.

The UK remains number 2 on these updated figures. But its index value has slipped back in the past few years on most measures, and likely will slip further in future with the impact of Brexit. China stays number 3, but has come in closer, helped by its GDP growth, a greater use of its currency in world markets and by the size of its foreign direct investment assets (FDI).[2] France has edged a little above Germany in the latest ranking, helped by the better relative position of banks in France.

I have excluded from the chart several countries whose ranking is boosted artificially, namely in ways that do not reflect its power. For example, in the latest data the Cayman Islands stood out as an international banking centre and a home of foreign direct investment. But the banks and the assets have little to do with citizens of the Caymans. Ireland and the British Virgin Islands are excluded for similar reasons relating to FDI.

Statistical details

Roughly 180 countries have been taken into account for this ranking. Depending on the statistical measure used, data are available only for 40 to 150 or so.

My five measures are:

- Nominal GDP (2017 estimates, IMF)

- Foreign Direct Investment stock outstanding (at end-2016, UNCTAD)

- Outstanding cross-border lending and borrowing by banks (September 2017, BIS)

- The use of a country’s currency in international markets (April 2016, BIS)

- A country’s military expenditure (2016, SIPRI)

If a country is top in all categories, eg it has the biggest GDP, the biggest military spending, and so forth, then it would have an index number of 100.0. If another country had a GDP half the size of the biggest one, then its number on this measure would be 50; if its FDI were only one-quarter of the biggest country (not necessarily the same country), then its number would be 25; if it had the biggest international bank lending and borrowing, then its number would be 100. Taking each of its five individual measures and dividing by 5 would give the final index number for that country’s power rank. The measures have equal weights.

So what?

The idea behind this chart is to present key features of the world economy in a summary way. At the very least, it gives the lie to the absurd notion that there is an ‘international community’ and instead makes one focus on global power relationships. Each of the measures has limitations, discussed elsewhere, as is true for any set of data. But the evolution of the chart is also useful for tracking how the relative strengths of the major powers change over time.

Tony Norfield, 12 February 2018

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[1] See here for one of the early versions, and Chapter 5, ‘The World Hierarchy’, of The City: London and the Global Power of Finance, Verso 2016 and 2017, for a fuller explanation.

[2] Data for Hong Kong and China should be combined, since they are one country. However, there are difficulties. For example, this can easily be done for GDP, but in the case of FDI, most of Hong Kong’s is in China. So I have included only China’s FDI (most of which I believe is outside Hong Kong). In the China data shown, I have added Hong Kong only for GDP and FX. Banking is taken as the average of the two; FDI and military spending is China only. The resulting index number will probably slightly understate China’s importance.

Tax Havens in the Imperial Network *

“We don’t pay taxes. Only the little people pay taxes.” Leona Helmsley

The motto of the ineffable billionairess came to mind with the publication of the Panama Papers. This huge set of files leaked from a Panamanian law firm, Mossack Fonseca, documented the tax haven dealings of the world’s richer denizens. While the law firm’s name sounds like a toxic cocktail, the information revealed in its files has also been toxic for Iceland’s Prime Minister Gunnlaugsson, who had to resign. So far, there have been no other scalps, but there have been sleepless nights for many and plenty of work for their PR companies.

I would venture to predict that there will be no more casualties from the revelations. Although there will doubtless be more expressions of anger from those who believe an influx of previously elusive tax revenues into the national pot might cushion the iron heel of austerity, this elaborate tax haven-offshore network is entrenched in a capitalist system that most critics do not venture to criticise.

Avoidance and evasion

There is an important distinction, of which many people are unaware, between tax ‘avoidance’ and tax ‘evasion’. Tax avoidance is legal; it just means you arrange your affairs in a way that lowers how much tax you have to pay. However, that also includes putting money in a tax haven, having your revenues accounted for there, and paying their lower tax levels. Evasion, on the other hand, is illegal. It involves not paying the taxes due to the authority in the relevant jurisdiction, for example, not declaring that you have an income to the government and so not paying the tax on it. The distinction between avoidance and evasion can be complicated. Making sure you have the correct set up involves expensive advice, afforded only by the rich, and this is a source of income for tax lawyers like Mossack Fonseca. But this is not the only rationale for the existence of tax havens.

Tax havens rose to prominence largely in the post-1945 period, when income taxes in major countries were often very high for the rich. Havens offered lower rates of tax and, as a result, a flood of rich people from around the world began to park their financial assets, and the income flowing to them, in these welcoming climes, even if they did not move there themselves. This was often done by setting up shell companies that owned the assets. Directors of the shell companies may have been residents of the particular haven, but they were usually acting on instructions from the real owners of the assets and recipients of the income. It was not long before capitalist corporations began to see how they could also play the game, for example, by channelling revenues from the rest of the group that appeared as their ‘costs’ paid into a special company set up in a haven where little or no tax is paid. The subsidiaries doing the channelling could then argue that their ‘costs’ meant they earned little or no profit in the higher-taxed countries in which they were based.

These havens were not necessarily islands or ‘offshore’. Although many were islands, since this was a way for a one-dimensional economy to branch out, when it was otherwise dependent upon seasonal tourism or a single crop or mineral, there was also Monaco, Andorra and Luxembourg in the heart of Europe, plus Ireland and others, including Delaware in the US. In Switzerland, for example, the tiny lakeside canton of Zug is reputed to host 27,000 companies, about one for every four inhabitants! No, Swiss people do not have an unusually high degree of entrepreneurial spirit; this was many foreign people and companies taking advantage of local tax laws. The havens get important revenues – from financial fees paid to the local government, as money paid in the employment of locals who would be ‘directors’ of these companies, and in other ways, including the business generated by a rich elite who might like to go shopping, sail in a yacht or stay in a nice hotel.

Rich people, but powerful companies

Essentially, tax havens are a commonly used release valve for the burden on the revenues of rich people, and companies, from the costs of maintaining the state and public services financed from taxation. In more recent decades, especially from the 1980s as international financial flows became less regulated by the key powers, these offshore and other centres grew dramatically in size, attracting vast volumes of funds. In 2004, when the US Congress passed a Homeland Investment Act that gave corporations a tax break if they repatriated funds held overseas, nearly a thousand US companies later repatriated more than $300bn of cash! This is one indication that the individuals named in the Panama papers are really a side issue: big corporations are the main holders of the international funds.

Ironically, Panama, at the centre of the latest revelations is a relatively small-scale offshore centre. A good measure of size is given by the volume of funds going into and out from these centres. Panama, with $106bn of funds outstanding in 2015, is less than a twentieth of the size of the largest one, the Cayman Islands, which has $2,610bn of liabilities plus claims. This stupendous sum for the Caymans is made up from roughly $1,300bn coming in as liabilities (or deposits and other lending from overseas) and $1,300bn going out as claims (or loans and other investments outside the Caymans). This reflects the fact that the money is doing more or less nothing in the Caymans itself – apart from the hotel and shopping bills and paying some fees to the government and a small proportion of the population of less than 60,000 people. As you might expect, the locals do not actually own the $800bn or so of US equities and bonds that are registered in the name of Cayman Island corporate entities.

Another interesting detail of the Cayman Islands is that this is the main offshore location to which the UK banking system sends a net volume of funds, amounting to $53bn at the end of 2015. While the UK-based banking system obtains around a net $100bn from its own local offshore islands – Jersey and Guernsey, especially – it also plays a big part in redirecting funds to other locations. A theme song of the movie Cabaret, ‘Money makes the world go around’, very much applies to the role that tax havens/offshore centres play in the global capitalist system. The UK-based banking system is at the core of this international network and, not surprisingly, the UK economy accrues big revenues from doing the in/out deals involved.

God Save the Queen

The location of the Cayman Islands in the Caribbean Sea might make one think that they have little or nothing to do with far away Britain. Nevertheless, at official occasions they sing ‘God Save the Queen’, although, as far as I am aware, it is not a widely downloaded itunes song and has never won any music awards. The reason is that the Caymans, while not technically being part of UK territory, are given a special status by the UK authorities as a British Overseas Territory. Similarly, other offshore islands are members of the British Commonwealth (the Bahamas) or are British Crown Dependencies.

UK officials do not like to talk about them very much and, at most, only propose measures that would have little effect on the tax avoidance/evasion taking place, such as calling for a ‘central register’ of who owns the more than two million companies and partnerships registered in these havens. The proposal is not expected to make much difference. The UK has been heavily involved in establishing this financial network. UK-linked havens, particularly the Cayman Islands, the Bahamas, Jersey, Guernsey and the Isle of Man, not only sing the same national anthem, if added together they would rank as the sixth largest international banking centre, just behind Germany, despite their minuscule populations. Why should the UK bother to do anything about this, when the US and many other European countries are also involved in the same kinds of deals, and when all the capitalists benefit?

All offshore centres are closely linked to the interests of the major capitalist powers. Britain has the closest links with the largest number. My experience of working for London-based banks included several business trips to Jersey, and some contact with other centres. When it comes to hanging out as a member of the rich elite, Jersey has some way to go in competing with the ‘offshore’ centres in the Caribbean and Central America. Nevertheless, like other centres, it plays an important role in allowing the capitalist class to do what it likes. Such is the exercise of their freedom. They have been free to exploit the working class worldwide. Surely they should also be free to do what they want with the proceeds?

Who are you?

Another feature of these havens is that the identity of who owns the funds is usually hidden. Interestingly, that is not necessarily to avoid tax. For example, one of the individuals cited in the Panama Papers is King Salman of Saudi Arabia. Presumably, he has no reason to avoid taxes set by the rules of the government he controls. The rationale here was instead to use the offshore accounts as a means of hiding the fact that a Saudi-owned company was doing a particular investment. So ABC Corp registered in Offshore Island X, but owned by the ruling Saudi family, would be a shareholder in a major US, European, or Asian, etc, corporation, but nobody would be any the wiser.

The publication of the Panama Papers has been amusing for the embarrassment they have caused to usurpers of wealth, in particular to those whose hypocrisy is shown by their former public pose. But little or nothing should be expected to change in society if people are critical only of individual excesses, and not of the more systematic crushing of the life chances of those oppressed by capitalism, in which tax dodging is a relatively minor issue.

Tony Norfield, 4 May 2016

* This article puts in a broader context some points made previously on this blog. A copy of this article first appeared in the New York journal, BrooklynRail, in the Fieldnotes section. Further details of the role of tax havens in the international financial system are given in my new book, The City: London and the Global Power of Finance.

'Offshore' Centres and Tax Havens

Apart from naming some interesting names, the latest Panama files on tax dodging add little to what was already widely known. However, the media furore is fuelled by the desperate hope that getting back some ill-gotten, or non-taxed, funds into the national pot will cushion the iron heel of austerity.

It is worth noting that the term 'tax haven' is not as unambiguous as it might seem. Apart from the many, often small countries, principalities or islands that have low taxes, what about the complex rules on taxation that the wealthy can use in most countries, notably the UK, to avoid any embarrassment of their riches? Wikipedia has a fairly comprehensive coverage here and here.

Meanwhile, I consider it my civic duty to inform readers that Panama is a mere pimple on the arse of capitalism when it comes to being an 'offshore centre', another designation for tax havens. The chart below sums up the outstanding stock of international claims (basically lending to or investing in another country) and liabilities (borrowing from another country) of the main offshore centres. These are the latest data available, measured in billions of US dollars, for end-September 2015. I have marked out in red the centres that have a close link to the UK, the ones designated as 'UK offshore' such as Jersey, and also those whose citizens sing 'God Save the Queen' as their national anthem, the biggest one being the Cayman Islands.

Now isn't it interesting that the UK is tied up with most of these. Hong Kong and Singapore also have close UK links. These are among the issues covered in my new new book, out next week.

Tony Norfield, 6 April 2016

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 19^th 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 20^th 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 2^nd biggest issuer of international debt securities (after the US)

-         the 4^th 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)

Country	Claims + Liabilities	Share of Total
UK	12,171	20.2%
US	7,147	11.9%
Germany	4,613	7.7%
France	4,602	7.6%
Japan	4,303	7.1%
Cayman Islands	3,089	5.1%
Netherlands	2,631	4.4%
Singapore	1,816	3.0%
Hong Kong	1,672	2.8%
Switzerland	1,583	2.6%
Italy	1,447	2.4%
Luxembourg	1,345	2.2%
Belgium	1,269	2.1%
Spain	1,237	2.1%
Bahamas	1,179	2.0%
Other	10,118	16.8%
Total	60,220	100.0%

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)

	1995	2001	2007	2010	% of 2010 Total
UK	479	542	1,483	1,854	36.7
US	266	273	745	904	17.9
Japan	168	153	250	312	6.2
Singapore	107	104	242	266	5.3
Switzerland	88	76	254	263	5.2
Hong Kong	91	68	181	238	4.7
Australia	41	54	176	192	3.8
France	62	50	127	152	3.0
Denmark	32	24	88	120	2.4
Other	300	362	735	756	14.9
Total	1,633	1,705	4,281	5,056	100.0

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)

	FRAs	Swaps	Options	Other	Total	% World Total
UK	382.0	738.6	113.9	0.3	1,234.9	46.5
US	268.4	309.3	64.1	-	641.8	24.2
France	46.4	128.2	17.7	1.0	193.3	7.3
Japan	2.0	82.3	5.7	0.0	89.9	3.4
Switzerland	20.1	58.7	0.1	-	78.8	3.0
Netherlands	0.9	60.0	0.4	-	61.3	2.3
Germany	15.1	31.6	1.8	-	48.5	1.8
Canada	6.5	34.6	0.6	-	41.7	1.6
Australia	6.7	33.6	0.3	-	40.6	1.5
Singapore	4.7	28.6	1.3	-	34.6	1.3
Spain	3.6	24.8	2.3	-	30.7	1.2
Italy	8.4	17.0	1.9	-	27.3	1.0
Hong Kong	1.3	15.8	1.3	0.0	18.5	0.7
Other	24.7	70.5	16.5	-	111.7	4.2
Total	791.0	1,633.5	227.9	1.3	2,653.7	100.0

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)

Country	Exchanges	Capitalisation1	Turnover2
US	NYSE Euronext (US) plus NASDAQ	17,503	12,588
China	Shanghai plus Shenzhen plus Hong Kong Exchanges	5,936	3,703
Japan	Tokyo Stock Exchange	3,385	1,810
UK	London Stock Exchange	3,332	1,190
Belgium, France, Netherlands, Portugal	NYSE Euronext (Europe)	2,460	853
Canada	TMX Group	1,860	672
Germany	Deutsche Börse	1,212	698

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)

	2008	2009	2010	2011
Monetary financial institutions	31.7	26.9	23.3	29.0
Fund managers	4.2	2.9	3.5	3.3
Securities dealers	9.0	7.1	4.9	5.5
Baltic Exchange	0.9	0.7	0.7	0.8
Other institutions	-6.2	-0.7	0.9	0.0
Total	39.6	37.0	33.4	38.7

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