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London: The Power to Use Other People’s Money

Continuing our series focusing on current works discussing modern-day imperialism, we take a look at Tony Norfield’s book, The City, which examines the role of London’s financial center within the broader context of global capitalism.

Esteban Mercatante

November 24, 2016
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Image: Ideas de Izquierda

Tony Norfield’s book “The City: London and the Global Power of Finance” invites us to reconsider the idea that Britain has become a second-rate actor in the distribution of global power since its fall from indisputable superpower after WWI. [1] Instead, this study demonstrates how the British Crown was able to take advantage of the relative historical, geographical and geopolitical strengths of London’s financial center and use them as the basis for a renewal of British power from the 1980s onwards.

London’s banks and money markets possess an international prominence well above the global weight of British capitalism. In worldwide importance, Britain’s financial sector is second only to the U.S. and ranks first in some areas such as currency exchange transactions. Britain has six of the world’s 50 largest financial institutions, while the United States has ten. The global prominence of Britain’s financial sector is also reflected in its weight in the national economy: bank assets held in Britain are four times the size of the country’s Gross Domestic Product (GDP), the highest ratio in the world after Switzerland and Luxembourg. Britain is also second only to the U.S. in foreign direct investment (FDI) abroad. According to the most recent list of the Fortune Global 500, 28 of the world’s 500 largest companies are of British origin, which sees Britain sharing third place with Germany behind the Unites States and China (the latter is favored by having many national “giants” which are nevertheless still in the early stages of developing their international reach).[2]

Britain’s first place ranking in assets and international bank deposits, as well as in currency exchange transactions, is even more surprising when you consider that their national currency is far from being the dominant currency for global transactions. In fact, the British pound is easily surpassed by the U.S. dollar, the euro and the Japanese yen.

You may be interested in “Uncertain Future for Europe’s Center of Finance”, an interview with Tony Norfield

Norfield notes that there are several factors that explain London’s ability to remain at the forefront of global finance. First is the time advantage that London holds over New York for dealing with Asian and European markets. Another contributing factor is Britain’s membership in the European Union since the 1970s. Even though it joined late and never became a part of the European monetary union, its membership strengthened London’s role as a financial center in the mediation of capital movements between the most powerful economies as well as between these economies and the rest of the world. This could dramatically change after Brexit.

The key to the rise in London’s fortunes after its earlier loss of hegemony lies in the development of so-called euromarkets, which came about as a means for financial flows to escape the regulations established at the end of World War II. London “had the expertise to develop a business largely on the basis of using the new world currency, the US dollar.” This put London in an advantageous position with respect to the United States, whose financial system faced much tougher regulations. Norfield states that “the euromarkets grew outside the control of individual governments, but the UK authorities fostered that growth as part of the British financial system.” Thus, while the United States easily surpassed Britain as the world’s provider of capital, “it did not overtake Britain as the world’s center for international banking.” In this field, London became a pole of attraction for the establishment of financial institutions from around the world, including those from the United States. From 1979 onwards, British financial markets were to be strengthened by a new boom, with a new leap forward taking place after the “Big Bang” reforms of 1986 that allowed for the entrance of new firms: “the volume of dealing grew dramatically and international banks flocked to the City of London.”

Imperialism and finance
Tony Norfield defines imperialism as “the present stage of capitalist development, where a few major corporations from a small number of countries dominate the world market.” This privileged access to financial resources reflects imperialist power at the same time as it acts as a means for retaining it. As Norfield explains, “while the poorer countries also have banks, and their companies can also issue bonds and equities, their ability to obtain privileges through the global financial market is equally poor.”

One point that this book demonstrates is how the financial power that Britain has managed to retain, through its adaptation to an international financial system structured after 1945 around the United States and the dollar, allowed it to continue appropriating value that has been generated in the rest of the world. This appropriated value allows Britain to alleviate its chronic trade imbalance without having to settle it entirely through indebtedness.

“The City” seeks to explain the “financial mechanism” which is an integral part of contemporary capitalism. It emphasizes the fact that production and finance are inseparable in 21st century capitalism. They are “close partners” in the exploitation of labor power. While this is hardly something new, its relationship today is, according to Norfield, much closer. The author takes aim at those who seek to make a categorical distinction between finance and production, who value the first negatively and the second positively, and who advocate measures that limit financial “hypertrophy.” This error leads to an incorrect understanding of the nature of imperialism and the role of financial centers such as London. The book’s approach is to argue that, as finance is one aspect of “the global economy, it therefore cannot be explained by starting with developments in or policies implemented by individual countries, removed from its global context.”

This marks a different starting point from that taken by one of the most ambitious Marxist works in this field, Rudolph Hilferding’s “Finance Capital.” The author not only considers Hilferding’s concept of “finance capital” to be too narrow, but also argues that it is based on a unilateral extrapolation from German development, where the big banks were closely linked to large industrial firms through the presence of leading industrialists on their boards of directors. Norfield argues that it is most useful to develop Marx’s concept of fictitious capital (referring above all to financial values such as stocks and bonds) in order to demonstrate how these are a means of exerting economic power, especially on a global scale. In Norfield’s opinion, Hilferding assumes a relationship of control that flows from the banks and other financial institutions to productive capital, a relationship which does not always take place. For Norfield, Hilferding’s emphasis on the banks “exaggerates their role and leads to a political view that the capitalist economy could be tamed if only the state controlled the banks.” This is precisely in line with the experiment of ‘organised capitalism’ that saw this very same Hilferding become the Minister of Finance in 1923 and 1928-29. This discussion around Hilferding does not in any way signify that Norfield denies one of the most important transformations noted in “Finance Capital,” and later taken up by Lenin and many other Marxists. To put it in the words of “The City,” modern capitalism acquired a “financial form” which is “not confined to financial institutions; it includes all types of capitalist companies, intertwined with the role of the state domestically and internationally.”

Norfield gives us an exhaustive treatment of the various dimensions that make up commercial banking and investment, money and exchange markets, stocks and derivatives. He says of banks creating money through their own operations, “this topic is often poorly covered by Marxist writers.” Norfield notes that it may appear that money creates more money in a way that is “completely independent of capitalist production,” but adds that what is happening is that, for periods of time, the connection between “what an economy produces and the funds available to buy things” relaxes. This allows capital to both rapidly expand and to crash more violently when this connection between capital in stocks and bonds (Marx’s fictitious capital) and the production of value can no longer continue to relax. Norfield makes an important distinction in his analysis: commercial banks and money markets are necessary for the development of capitalist production and lubricate the wheels for the movement of capital; as such, they should not be characterized as parasitic (no more than the system taken as a whole). Capital generates interest (money generated by money): this interest is a deduction from the profits of productive capital, and as such is, for the author, itself parasitic: “the capitalists advancing the money-capital in this way make up the social stratum of parasites in Marx’s sense.”

According to Norfield, however, this distinction is insufficient to understand the reality of the imperialist world economy which, to use the words of Norfield, is “based upon a hierarchy of economic power between different countries.” All manner of financial operations, not just capital which generates interest, can contribute to the transfer of surplus from one country to another and thus help to increase the power of the dominant countries. Norfield states, “this should also be seen as a form of parasitism, one which arises from a consideration of the structure of the world economy, but involves the use of the term in a different fashion to that of Marx.”

It relates more to the use that Lenin makes of this term in his “Imperialism, The Highest Stage of Capitalism.” For Lenin, a distinctive characteristic of this parasitism is the bourgeoisie of imperialist countries lives “to an ever-increasing degree” on the “proceeds of capital exports and by ‘clipping coupons.’” [3] Norfield notes that in the contemporary global economy, “there are important additional items of foreign income for rich and powerful countries.” Along with the relocation of production to the poorer countries, there is also the income derived from financial transactions.

Norfield also notes an important connection between the power of the State and the international expansion of the banks:

Being bigger can also mean being able to provide services or capital at a lower cost, or at least being in a more influential market position. The ability to secure a larger scale of operations depends not only on the national market, but also on the international market, and here the position and power of the national state is a vital factor. As capitalism expands to create a world market, the operations of financial companies expand alongside those of commerce and industry. In this too, they receive support from their national base – if only in the national currency to which they have privileged access via the home central bank.

One of the most interesting aspects of “The City” is its proposing of a series of parameters with which to evaluate the power of different nation states. These include Gross Domestic Product, military spending, direct investment that resides in other countries, bank assets and the foreign exchange market. Norfield uses this set of criteria to place Britain in second place in the world behind the United States and ahead of China, Japan, Germany and France. This second place position would be unthinkable without the primacy of banking London and the country’s stock of foreign direct investment. As debatable as the author’s selected criteria may be, this consideration of the power granted by these various factors as a whole is nevertheless relevant for the understanding of this highly complex international hierarchy. This is especially the case when we are up against those who tend to think in terms of the theorization of the unlimited capacity of the United States to shape global capitalism. [4]

Eternal interests, temporary allies
Britain was able to reinvent itself thanks to its ability to reshape, for the purpose of maintaining, the international role of London. After 1945, it went from being the world’s banker to being the world’s broker. In this way, through financial intermediation, concentration of money markets, and currency transactions, as well as by channeling capital funds from other countries, London has managed to amass a considerable amount of resources. In 2011, Britain’s export of financial services represented 2 or 3 percent of its GDP, making it 5 or 6 times higher than that in the United States even though the weight of the financial services and insurance sector in both economies is similar at about 7.5 percent of GDP.

The capacity to maintain this privileged position as the world’s broker is conditioned by the extent to which Britain can continue to occupy a central role in the circulation of global capital. And it is here that Norfield notes in the conclusion of his book some of the recent developments that present a potential challenge to the place occupied by London, and by extension the future position of British imperialism. Among these challenges are the threat of greater regulation and taxes on financial transactions, particularly at the European level; Britain’s increasing external debt, which is due to the surplus generated by the financial sector barely covering half of its current accounts deficit in recent years; as well as rising private debt. There are also several fronts of political instability. Among these Norfield highlights the threat to the British State (England, Scotland, Wales and Northern Ireland) by the demands for separation arising from Scotland, and the uncertainty that the recent ‘Leave’ vote in the referendum on European Union membership has generated. According to Norfield, “the last thing the UK’s large corporations would want to do is leave the EU, with the risk that trade and investment relationships might be affected, and with a knock-out effect for the city’s business.” London’s role in global capitalism post-Brexit remains to be seen over the next few years.

Last but not least, “The City” also considers the challenge that the rise of the BRICS economies, especially China, represents for the Anglo-American ‘system.’ Although still incipient, the Chinese State clearly intends to set up alternative financial channels to the current dollar-based system, something that has not occurred since the dollar challenged and displaced the pound. This of course poses a very serious threat to London. Given this threat, it is therefore surprising that, unlike the United States, the British government has shown itself to be much more disposed to accommodating Chinese aspirations. This was evidenced by Britain becoming the first European state to participate in the Asian Infrastructure Investment Bank (AIIB) in March 2015, which earned it a rebuke from the White House. Washington’s concern was only heightened after Germany, France and Italy followed Britain’s lead days later.

This is a demonstration of how changes in the balance of forces affect economic and political calculations, with the ‘united front’ of Western policy changing as a result of each country closely studying and moving to where its own interests lie, concludes Norfield. Not much happens in “normal” times, but when faced with a severe crisis, “all the major powers each other and around the world to assess the new opportunities.” In his opinion, this new situation is pushing towards a new relationship between British imperialism and the United States, placing a question mark on this firm alliance. The future of British power depends on the decisions it makes around these questions.

“The City” provides a theoretical framework for the understanding of contemporary finance and the role played by the big financial centers within them, something that is fundamental for an understanding of contemporary imperialism. It also provides its readers with a documented analysis of how London’s dominant role in global finance has allowed Britain to maintain its leading role within contemporary capitalism.

This article was originally published in Spanish in Ideas de Izquierda.

1. Tony Norfield, The City: London and the Global Power of Finance, London, Verso, 2016. Unless otherwise stated, all citations in the above article are from Norfield’s book.

2. Esteban Mercatante, “Capitalismo siglo XXI: un mundo menos plano que nunca” (Twenty-First Century Capitalism: a world more uneven than ever), Ideas de Izquierda (IdZ) Number 14, October 2014 [http://www.laizquierdadiario.com/ideasdeizquierda/capitalismo-siglo-xxi-un-mundo-menos-plano-que-nunca/].

3. V. I. Lenin, Imperialism, The Highest Stage of Capitalism. “Clipping coupons” refers to bondholders and others who receive interest on a regular basis. The possession of such assets was at the beginning of the 20th century much more concentrated in the richest sectors of the population than it is today.

4. See Esteban Mercatante, “Global capitalism as imperial construct), Ideas de Izquierda (IdZ) Number 27, March 2016.

Translation: Sean Robertson

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Esteban Mercatante

Esteban is an economist from Buenos Aires and a member of the PTS.


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