The Triumph of Financial Capital

Paul M Sweezy

[This article was originally a lecture presented at a conference organised by the Association of Graduates of the Faculty of Economics of the University of Istanbul, Turkey, on April 21, 1994. It was first published in Monthly Review on 1 June, 1994. Excerpts :]

Financial Capital, once cut loose from its original role as a modest helper of a real economy of production to meet human needs, inevitably becomes speculative capital geared solely to its own self-expansion. In earlier times no one ever dreamed that speculative capital, a phenomenon as old as capitalism itself, could grow to dominate a national economy, let alone the whole world. But it has.

This is the reality people face today. Its dire consequences are visible on all sides, from 35 million unemployed in the advanced industrial countries to deepening poverty and destitution in the Third World and unchecked ecological deterioration everywhere.

What is at issue here and what needs to be explained is how all this came about. Capital accumulation has always been the driving force of the capitalist system and has been treated as such by all the major schools of economic analysis—classical, Marxian, and neoclassical. It has been generally taken for granted that capital accumulation adds to wealth, income, and the standard of living of the countries in which it takes place. There has of course always been another side to the accumulation process—the periodic panics and breakdowns to which it is prone, the unequal benefits conferred on various segments of the population, etc. But on the whole it has been and still is looked upon as a necessary process the positive aspects of which far outweigh the negative.

It is not my present purpose to call this into question as a judgment on the functioning and consequences of capital accumulation seen in the perspective of its centuries-long history. Recent changes, mostly occurring since the Second World War, have so modified the modalities of capital accumulation that it has ceased to be on the whole a positive and benign force and instead has turned into a terribly destructive one.

The history of capitalism as people know it today begins with the industrial revolution in the second half of the eighteenth century. The main actors were small enterprises operating in competitive markets. Technological advances, beginning in and spreading from the textile industries, touched off what soon became a self-reproducing and self-expanding process of accumulation and economic growth. It was this process that was the empirical basis of the first real social science, classical political economy.

In the early stages of industrial capitalism markets were still largely local, a fact that not only limited their size but also acted as a restraint on the competitive behaviour of the participants. Later on with the development of the means of transportation and communication (canals, steamboats, railroads, telegraphs) markets grew enormously in size, impersonality, and the fierceness of the competition they engendered. By the second half of the nineteenth century, capital accumulation and economic growth had reached a feverish pitch.

From one point of view this was splendid. Capitalism was doing precisely what was expected of it. But from another point of view, that of the profitability of capital, things looked rather different. The trouble was that in industry after industry, capitalists trying to get the better of one another expanded their capacity and production far beyond the point of maximum profit, in many cases beyond the point of any profit at all. Weaker firms fell by the wayside in droves, and even the strongest had to struggle to survive. For the United States, already contending for a leading place in the capitalist world, one figure tells the story. The index of wholesale prices (1910-1914 = 100) stood at 185 at the end of the Civil War in 1865. By 1890 it had fallen to 82, a decline of 57 percent in twenty-five years. Both capital and labour were severely squeezed; industrial unrest and violence reached new heights; the economic literature of the period is full of pessimism and dire forebodings.

It was in these circumstances that history took a fateful turn. In all the advanced capitalist countries, the last two decades of the nineteenth century witnessed an intense process of concentration and centralisation of capital. Stronger companies gobbled up weaker ones and joined together in various forms of combinations (cartels, trusts, holding companies and giant corporations) aimed at eliminating cut-throat competition and getting control of their price and output policies. It was in this period too that the capitalists of the core countries, eagerly seeking new markets and cheaper sources of raw materials, reached out to colonise or otherwise gain control of the weaker countries of Africa, Asia, and Latin America. By the turn of the twentieth century what had been the small-scale, predominantly domestically oriented capitalism of the nineteenth century became the monopolistically controlled imperialist system of the twentieth.

It is important to understand the role of finance in this historic transformation. Up until the last quarter of the nineteenth century, banks and other dealers in money capital had two main functions: on the one hand providing the short-term credit needed to keep the wheels of industry and trade turning, and on the other hand catering to the long-term requirements of governments (especially for raising armies and waging wars), utilities whether private or public (canals, railroads, waterworks, etc.), and large insurance companies. After the Civil War (1861–1865), in the financing and provisioning of which many fortunes had been made, many capitalists turned their attention increasingly to industry and became prime movers in the whole concentration process, often winding up owning or controlling vast holdings in what would later come to be called the commanding heights of the economy. In all this the career of J.P. Morgan, America’s most famous financier, became paradigmatic in a way that rarely occurs in the case of a single individual. One could mention the extensive literature, both analytical and artistic, that was stimulated by capitalism’s historic transformation. Three outstanding examples : in the United States, Thorstein Veblen’s The Theory of Business Enterprise (1904); in Germany, Rudolf Hilferding’s Das Finanzkapital (1910); and in Russia, Lenin’s Imperialism (1917).

From the present point of view, that of new global trends at the end of the twentieth century, it is important to understand that what happened a hundred years ago set the stage for the ultimate triumph of financial capital but fell short of that outcome. During the first half of the twentieth century the capital accumulation process continued to be focused on industrial capital, as it had been from the beginning of the industrial revolution. Financiers played a greater role as partners, and frequently dominant partners, of industrial capitalists. The two groups shared the goal of maximizing the profits of productive capital (steel, oil, chemicals, utilities, paper, etc.) however much they may have fought over the division of the spoils. There were of course specialists like commercial bankers, stock brokers, and bond dealers who lived in a financial world where speculation was always a temptation and on occasion, as throughout the history of capitalism, could take on a life of its own involving wide segments of society with disastrous results for many. But on the whole finance was still subordinate to production.

In the capital accumulation process itself a significant change took place in the early years of the twentieth century following the stormy period of concentration and centralisation that had preceded. Wholesale prices which, as noted earlier, had been falling since the Civil War, turned up with the cyclical upturn of the mid-nineties and thereafter continued on a rising trend (with a big bulge in the First World War) into the 1920s. The obverse of this price movement was a slowdown in capital investment as the newly emergent oligopolistic corporations learned how to adjust their production policies to the absorptive capacity of their markets. Historians of this period have generally noted that the decade before the war was sluggish, with a rising level of unemployment and unusually long downturns and short upturns.

In retrospect it seems clear that the beginning of the twentieth century was also the beginning of a long period of stagnation like that which actually characterised the 1930s. What prevented this from happening sooner was the First World War. After that came an aftermath boom which in turn was sustained by a number of special factors, most notably the first surge of the automobile revolution with its ripple effects. But deep-seated depressive forces had been implanted in the capitalist economy during the transformation of the late nineteenth century, and it was only a matter of time before they would rise to the surface as the dominant factor in the system’s functioning. This finally came to pass as the spectacular financial crash of 1929 gradually gave way to the Great Depression of the 1930s.

The Great Depression was something new in the history of capitalism, a whole decade in which there was no growth at all: the capital accumulation process simply came to a halt. In the United States, by then the leading capitalist country, unemployment reached 25 percent of the labour force in 1933. A cyclical upturn which most economists, judging from past experience, expected would lead to full employment, stalled with the unemployment rate still at 14 percent in 1937. There followed a recession within the depression. Joblessness shot up to 19 percent in 1938, and the decade seemed destined to end with not only the economy but the whole society in a profound crisis. Roosevelt’s New Deal which had introduced long overdue reforms and saved millions from starvation through emergency relief programmes, was losing support and for the first time in U.S. history the future of capitalism itself began to be seriously questioned.

What brought this period to a close of course was the Second World War. As John Kenneth Galbraith so aptly expressed it, the Great Depression never ended, it just merged into the war economy. In the five years 1939–1944 the country’s Gross National Product increased by some 75 percent and unemployment practically disappeared. But that was not part of the internal logic of the capitalist system. That logic had been exposed in its purest form in the Great Depression: the normal condition of the mature capitalist system is stagnation. To the extent that this is not the actual state of the advanced capitalist countries, the explanation has to be sought in external, non-economic forces.

For about a quarter of a century after the Second World War, i.e., from the mid-1940s to the 1970s, these external forces were in ample supply: repairing war damage, making up for shortages caused by wartime diversion of resources from civilian production, taking advantage of technologies developed for military purposes such as electronics and jet planes, above all a new round of wars, hot and cold. During two decades, the 1950s and 1960s, the conditions for capital accumulation were extremely favourable. Capitalism entered a new golden age, reminiscent of the best years of its youth. But this could not and did not last for long. It is the nature of accumulation to eliminate the demand that stimulates it. And unless new stimuli emerge, the process subsides, and the tendency to stagnation takes over. This is what was beginning to happen as the 1960s drew to a close, culminating in the sharp recession of 1974–1975, by far the most serious since the end of the Second World War.

A new stimulus was badly needed, and it emerged in a form which, while certainly unanticipated, was nevertheless a logical outcome of well established tendencies within the global capitalist economy.

The real economy, the one that produces goods and services that enable people to live and reproduce, is owned by a tiny minority of oligopolists. It is structured to yield them large profits, far beyond what they could or would even want to consume. Being capitalists, they want to invest most of their profits. But the very same structure that yields these profits puts strict limits on the incomes of the underlying population. They can just barely buy the current level of output offered to them at prices calculated to yield the going rate of oligopoly profit. There is therefore no profit to be made from expanding the capacity to produce the goods that enter into mass consumption. To do so would be to invest in excess capacity, a patent capitalist irrationality. What, then, are they to do with their profits?

In retrospect the answer seems obvious: they should invest in financial, not real productive assets. Financial activity, mostly of a traditional kind, had been stimulated by the postwar boom of the 1950s and 1960s, suffering something of a letdown with the return of stagnation. Financiers were therefore looking for new business. Capital migrating out of the real economy was happily received in the financial sector. Thus began the process which during the next two decades resulted in the triumph of financial capital.

[Paul Marlor Sweezy (April 10, 1910 – February 27, 2004) was a Marxist economist, political activist, publisher, and founding editor of the socialist magazine Monthly Review. He is best remembered for his contributions to economic theory as one of the leading Marxian economists of the second half of the 20th century. Courtesy: Monthly Review, the famed socialist journal published from New York.]

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Vol 54, No. 35, Feb 27 - March 5, 2022