This is a chapter from the book:
II. The development of finance capital’s credit power: The accumulation of “fictitious” capital
1. From loan business to capital market
With its loan business, the banking industry achieves something remarkable. In its hands, money is capital — many times over. It makes the deposits of its cash depositors grow through interest payments. It puts money at the disposal of its loan customers, which strengthens their power to generate profits and both obligates and enables them to make interest payments. The net interest generated by the banking industry increases the capital with which it conducts its business.
This achievement presupposes and is based on the fact that the material life-process of society depends on money and serves the accumulation of money. Money, employed as an advance of capital, sets in motion the whole world of material wealth and the work necessary for its reproduction and increase; and this motion is guided by the goal, obeys the criterion of success, and brings about the result of more money. Finance capital takes the full-fledged rule of money and the power of property, measured in money, over all wealth and its sources as the starting point of its own business. It avails itself of a mode of production in which all the productive forces of society are set in motion and developed by money. In this mode of production, all capacities of material wealth — nature, science, and work — are for sale and have been made available as sources of money of the property that takes hold of them. Finance capital depends on money proving itself as its own source of accumulation: as a necessary means for this all-dominating purpose; and as sufficient means on the sole condition that it is available in sufficient quantity. The corresponding need so particular to capitalist society — the need for money-capital — is managed by the banking industry. On the one side, as universal debtor of a society operating on money, it concentrates society’s assets and business means in its hands. As manager of the societal payment system and with the interest it pays, it acquires legal power of disposal over virtually all monetary wealth. On the other side, with this power of disposal, it confronts the business world as the supplier of the one business means that all need. It procures and makes available, as universal creditor, what the world absolutely requires and, in its judgment, also can sensibly use. It makes use of this two-sided legal relation — the transfer of title as a loan — as its own source of money.
With this all-encompassing business activity, finance capital makes abstract wealth immediately productive without any productive achievement of its own; money acts as power to increase itself, turns itself directly into capital, just by coming into the hands of a financial institution that lends it out. By taking charge of others’ money, such an institution makes itself responsible for paying interest on the sums it acquires, and thus for their capital “quality.” By lending money, it makes the paying of interest on the lent sum — i.e., the effect that normally comes about only because it has been used successfully as an advance of capital for production and trade — a legal obligation that the borrower has to meet, regardless of how it does so or which means are used. And by constantly borrowing and lending, the bank “expands” its own wealth in the most direct fashion conceivable, via a double, complementary exchange of money for a right to more money. Its account balances are the proof, and its ability-to-pay the practical evidence, that this shortcut kind of legally constituted accumulation of money is economically sound. This is how the banking world formally gives the capitalistic capacity of money an independent existence in opposition to its precondition and basis, i.e., in opposition to the use of the money as capital advance and to the realization of surplus on the market. As credit, money is already capital.
This equation, which successful loan operations make valid in practice, justifies and guarantees a finance-capitalistic practice that makes going into debt anything but an emergency measure. Debts become equity, and are thus capital by their very “nature,” a commodity that the financial industry produces and sells. Finance “securitizes” the increase in money that its loan business promises, i.e., it documents that promise as a binding pledge in the form of a security and trades with it. The buyer of such a paper acquires it in order to earn something from it. His ownership of it entitles him to receive the yields the seller commits to pay. What the seller sells is the legally binding promise to put the sum of money the buyer has used to purchase the security to work as capital for the buyer. The seller uses the proceeds to cover his need for capital. So a security is a debt obligation that has become a commodity by virtue of having been turned into tradable money-capital that serves its purchaser as an investment. What the buyer achieves here through the mere act of purchase normally requires using that sum of money as an advance of capital and earning a profit on the market. The sale obligates the issuer to deliver what is otherwise generated by a successfully concluded capitalistic expansion process. A security with its legally fixed payments substitutes for what a sum of capital accomplishes with its turnover. It represents, in a legally effective way, the increase of the sum of money the buyer pays for it, as if the increase were its economic nature. As an independently existing business item, it objectifies the equation the bank executes with its lending business, i.e., the conversion of a sum of money into automatically accumulating capital merely by its being transferred to the purchaser. The financial industry throws this thing on a market where the only thing bought and sold is the power of money to increase itself, stipulated — “securitized” — in debt instruments, and which for that reason is called the capital market.
The advance that finance capital thereby makes can be seen in the economic characters that populate this market and in their special business practices.
- Borrowers are, in this case, no longer debtors who suffer from shortage of money and need money owners who have something left over for them, but are issuers of a paper that represents a self-accumulating asset, i.e., that promises a share in the indubitable power of the issuer to turn money into more money. Whereas a debtor takes on the obligation to pay interest, the issuer of a security crows with the assurance that the fulfillment of his promises-to-pay goes without saying, and is to be regarded and treated as an automatically occurring effect, virtually as the economic quality of the issuer’s IOU. In this way, banks progress from being collective debtors of the money-owning business world, entitled to disposal over its money, to being producers of instruments with which they make others’ money — not least, the credit money their banking colleagues are ready to “create” for worthwhile business — available for themselves. They act as active procurers, like producers of the sums with which they do their business and supply their borrowers. They not only offer to meet their respected customers’ need for credit, but to market it appropriately as a commodity. Instead of freeing a firm from its limited assets through a loan transaction, they provide their clients access to means to free themselves, to the instruments that allow them to sell their need for money as a commodity. Instead of interest, the bank then earns fees for its intermediation services as well as by investing in the capital investments so created. Creditworthiness is here no longer an open question that a critical bank, after careful examination, confirms or rejects until further notice, but a secured precondition. That is what a securities issuer markets.
- Lenders on the capital markets are no longer creditors who need to be concerned about the whereabouts of the sums they have lent, but investors who acquire securities in order to make money from them. That is why, while not uncritical about the yields the securities promise, subjecting them to comparative appraisal, they regard them, in principle just like the issuer does, as a reliable effect, viewing the entitlement to them as an economic attribute of the securities they acquire. The certificate of debt they buy is an investment for them, a profitable asset, self-acting money-capital, which also can be resold as such. Unlike the creditor, who wants to see his right to punctual interest payments and principal repayments served, the paying out of promised yields and the repayment of the invested sum are not the professional investor’s ultimate aim, but rather signs of the quality of his investment. He continually and comparatively examines it according to these and other criteria to assess its usefulness as a speculative capital investment. Banks act here as investors on their own account and as trustees of the financial assets of their customers, all the time searching for the best investment and trying to optimize their own security portfolios and those entrusted to their care. Complementary to their issuing activity for themselves and those they act for, they create with their own and others’ funds continual demand for capital investments.
The banking industry thus draws a far-reaching, forward-pointing conclusion from the extensive success of its lending business: it makes the results of its credit creation the starting point for a higher sort of business activity. With its power of disposal over the circulating money and deposited funds of society, it goes on the offensive and procures itself — and its elite customers — funds by giving access to others’ property the form of investments it creates itself, and putting this into circulation as a commodity. Banks know how to make use of their power over the financial needs of the business world, namely, their power to set processes of expansion in motion, to continue them or bring them to a halt, to arrange a multitude of competing business activities, and to direct them in the interest of their own accounts: they take the liberty of marketing their own debts and a good many others directly as self-expanding financial assets, i.e., offering and taking opportunities for capitalistically productive financial investments. The sole content of the objects they buy and sell on the capital market is the power of money to increase, which they take for granted and whose use they decide on in their loan business. In the securities trade, they treat and use this power as a commodity and thereby set an entirely separate world of financial capitalistic enrichment in motion.
Additional remark 1. On the relation between facts and their explanation
With its borrowing and lending, finance capital gets the power to do as it wishes with others’ money and business activities, and to make money from them. Of course, its business depends on the loyalty of its customers and the business success of its borrowers, but this dependence is based on achievements of the financial sector that establish a completely different dependence. It provides earnings for its depositors, thus unleashing the capitalistic capacity of their property; and it helps its borrowers break free of the limits of their own assets. With the creation of a capital market, finance capital makes the position it has achieved at the heart of the market economy the basis of a trading business in which debts are marketed as capital. On the capital markets, interest yields are no longer the ultimate aim of business. Instead, punctual payments are important from a higher perspective, i.e., as evidence for the traded debts having the “quality” of being capital. With the establishment of this business sphere, finance capital makes the provision of capitalistic enterprises of all kinds — and even the national budget — with financial resources dependent on the success of its securities trading. That is why it seems somewhat odd that both favorably disposed apologists and leftist critics of the banking business — even in their commentaries on the present crisis, of all things, which demonstrates the power of the banks in the most drastic way — refuse to recognize the independent methods and criteria of the financial capitalistic accumulation of money. The apologists try to elicit understanding for the useful services that they attribute to the banking industry, services they would like to make plausible by claiming that credit and capital markets are actually simply about putting money one person happens to have left over to good use by another person. This childish image is scientifically ennobled by the label, “allocation of scarce capital resources.” They justify the fact that banks end up with a bit of extra money on their hands as nothing more than a reward for ensuring an optimal “supply of money” and “allocation of resources.” Any bank activities that cannot be made to fit this complement are considered lapses that have nothing to do with the true mission of the credit business. On the other side, with reference to Marx and his “labor theory of value,” critically minded leftists regard finance as parasitic: this conception combines the same picture of sums of money being moved around, sums which are earned and needed and profitably used outside the financial sector, with the reproach that the riches finance capitalists pocket are unjustified, because they haven’t performed any work themselves. Some critics take our remarks about the superior standpoint and distinct achievements of finance capital, along with its power to expand capital entirely in its own way, as a blatant offence against the doctrine according to which value can only result from work.
At least for the latter sort of critic, it might help to point out that the power of finance capital to grow by means of its control over money and the capital requirements of the business world is not a questionable theoretical construct, but a fact demonstrated by the accounts of any bank. That fact needs to be explained. But it won’t be if the only thing one cares to note about the objects that finance capital throws on the capital markets is that they are actually mere debts, and if one only looks at the debt business of banks to see who pays interest to whom and ultimately has to make good on all outstanding accounts. Of course, such reminders can be useful in the sense that they are required to trace the whole, inflated business back to its foundation. But that is just the starting point of the explanation. After all, money-capitalists don’t stop at this foundation — they erect their business on it. They operate their business with debts, their own and others’. For them, piling up claims and liabilities is neither burden nor danger, but the way they enrich themselves. This wealth is so real that it takes a crisis of quite immense proportions for knowledgeable experts to realize that what is acting as money-capital in this case are debts. These experts are then temporarily beset by doubts as to whether and to what extent this business is legitimate and economically sound. And they arrive without fail at the proper conclusion that when in doubt, the state has to use its power to save the quality of the banks’ products of being wealth and attest their equality to money. If, therefore, there is indeed something fishy about the fact that financial institutions treat their speculation on debt as a yielder of profits — just like a secure source of earning — and then even “securitize” these debts and let them circulate like money capital with a built-in increase of value, then it is all the more worth explaining how such a business practice becomes the key activity, indispensable for the free market system, dominating all other industries and rising above them — and why it has to do so.
Our explanation can be methodologically summarized as follows (all the details can be found in the text, with a few more observations paralleling Marx in remark 2): the power of finance capital consists in utilizing the power that the capitalist exploitation of labor gives to money, such that this thing acts as its own source. Hopefully, this will obviate the fear and accusation that such an analysis of the power of finance capital calls into question the Marxist critique of the creation of value by labor: if the credit trade with all its stages of escalation is based on the regime of money over work and wealth, and makes this regime, having become independent by force of law, the instrument of its enrichment, then it annuls nothing of this regime. On the contrary!
2. The capital market and its business items: On bonds, stocks, and other “products”
On the capital market, debt is traded as self-expanding money-capital. And just like the loan transaction itself, its transformation into a yield-bearing security is also a legal matter: the capital “property” of a security is a product of property rights, that is, it consists in the legally valid definition of a debt relation as a legal entitlement to monetary benefits from others’ businesses. A security includes what otherwise results from the capitalist production and circulation process —the preservation and increase of monetary wealth — in the form of legal terms and conditions governing the preservation, any necessary repayment, as well as interest payments or other appreciation of the investment. When it comes to redefining debt relations as money-capital, finance capitalists have creatively developed and applied property rights so as to achieve a wide range of variants, which differ from each other essentially by their similarity to, or their emancipation from, a basic lending transaction. In the process, a competitive relationship between the issuer or seller and the investor takes the place of the creditor-debtor relationship and determines in practice the capital “quality” of a traded paper, in principle deciding on whether it is recognized as money-capital at all. The parties haggle over the price of the good, which in this case means that the competition between suppliers and customers decides on the size of the money-capital the security promises to expand, and hence on the yield due on it or the level of promised proceeds and therefore on the sum of money to be invested. This competition therefore determines the quality of the paper as a securitized expansion process and thus altogether the quantity of value that undergoes this process of legal expansion. This happens in different ways and with different consequences depending on the design of the investments.
- At one end of the scale, still very close to the lending business of banks, are bonds, which are issued by high-powered borrowers such as large companies, states, and banks themselves. In their most elementary form, they promise a fixed interest rate for a fixed investment amount and are redeemed on a fixed date at the nominal issue price. The distinction between bonds and ordinary debt, however, is hard to miss. It is not an amount of money that is formally sold for interest — as in the awarding of credit — but rather an entitlement to a return for a sum of money. With bonds, the object of commerce is an interest-bearing capital investment, which can be repeatedly sold up to its maturity date. In some cases, the issuer links bonds to specific business activities that already provide it with a regular stream of income or that it claims to be safe and profitable investments. This will then increase the credibility of the right to returns that it would like to sell as a piece of money-capital incarnate. With reference to their legal right to timely debt service, banks have developed techniques for giving loans they’ve made, money already given away, the form of self-expanding value and for using them as a tool for refinancing their business operations by selling the thing. In any case, when it comes to bonds, paying interest is reduced to a precondition taken for granted for a debt to be defined as a financial asset, and the creditworthiness of the issuer is turned into money. Therefore, the reputation of the tendered paper determines the level of interest the bond issuer has to offer in order to find investors. And the critical comparison of promised returns with alternative investments in terms of their size and security determines — upon issuance of the paper and then upon each further sale — its going rate, i.e., the daily updated actual size of the capital objectified in it relative to its nominal issue price and hence the real interest rate in contrast to the promised one.
- The same calculus is employed quite differently at the other end of the scale: in the trade in shares, securities that the issuer is not obligated to redeem, that represent a title of ownership to the issuing company, and promise permanent participation in its proceeds. In this case, the company aims to make others’ money its own capital irrevocably, i.e., to remove from a sum of money belonging to someone else and continuing to exist independently the character of being someone else’s property, to remove from borrowed funds the character of being a debt obligation. Shares realize this contradiction with the legal device of separating the object of a property title (the capital stock of the company) from the property title itself and its benefits (participation in the profits of the company). The money a company collects upon issuing shares is at its disposal as its capital. Conversely, the real quantity of money-capital represented by the shares is determined, not by the capital advance with which the company operates its business, but primarily by the income promised to the shareholders: their future income is speculatively anticipated and “capitalized,” i.e., credited as interest on a capital sum that is calculated with the customary rate on corporate bonds and return on capital investments serving as reference points. Speculations about economic trends in general and comparative assessments of the earnings prospects of a company in particular, speculation on changes in interest rates, and any number of additional considerations influence the calculations with which an issuer of shares and the market initially compete against each other, followed by the competition of shareholders willing to sell and interested investors. Their trading activity gives rise to the share price, which is determined on modern exchanges in two-second intervals and made public because its behavior is in turn an important, if not the most important, determinant of speculation on the future trend of the capital asset that the share objectifies, and therefore of its own performance. Thus share-capital leads its own life alongside the course of business of the company that has issued the share certificates, based on sheer speculative projections and circularly acting influential factors. It is precisely this independent motion that is the all-important economic variable, for it decides in a binding way, continuously anew, on the value and earnings prospects of the title of ownership to the company the shareholders have invested their money in; i.e., it decides on what the sums that investors have thrown into the speculation in shares are good for as invested capital, and hence on their size as well. Therefore, it also determines what the company itself, with all its capitalistic wealth and its capitalistic use — with its factory buildings and offices, its machines and warehouses, its patents and market shares, its profitable workplaces and its entire workforce — is actually worth, namely, what it is good for as means of enriching its owners. The market value — the price at which all the shares of the company could be bought, i.e., the share price multiplied by their number — with its continual ups and downs and all its erratic fluctuations, provides a figure for the service the company renders the capital market; it measures the financial power with which the company itself operates and that its owners, the shareholders, have at their disposal.
- Besides taking the rest of the capitalist business world in its hands, finance capital has seized hold of the sphere of landed property in a very special way. Bankers need not have invented the fact that the ground on which all life takes place — in the market economy as well — is subjected by the state to private power of disposal, and that its use by other interested parties yields a ground rent for the owners. What they have found appealing is the fact that monetary proceeds that can be gotten on the basis of a moneyed interest in using a plot of land can be entered in the books as interest charged on capital, and can be marketed as money-capital as easily as can debentures. With this in mind, they have added to their various capital markets a real estate market in which they and other financially strong interested parties can, by acquiring real estate, invest their money in an asset with very special speculative potential. Such investments are, on the one hand, considered particularly safe because they exploit the trivial circumstance that each and every economic activity, and human existence in general, needs a spot where it can occur, and the satisfaction of this elemental need costs money, as does everything else in the market economy. On the other hand, this market is particularly vulnerable, as experts assure us, to speculative “bubbles.” As long as the “bubble” doesn’t “burst,” that is not a disadvantage, nor is it a surprise. After all, the object of speculation is not the future of an ongoing business with reasonably predictable earnings, but the potential future interest of all potential investors in a very specific business requirement: location. The land prices produced by this speculation are therefore, firstly, extremely dependent on the general and local trends of the capitalist business world. Experts therefore consider land prices to be a very sensitive seismograph for business fluctuations. Secondly, land prices are extremely flexible. They can skyrocket when there are prospects, or possible prospects, for developing a piece of land for a high concentration of business activity. And they are just as prone to crash. Capital market pros are all the more keen to involve the whole world in the creation and accumulation of speculative money-capital from land through real estate funds or similar constructions: an opportunity for the next kind of securities business.
In these and other variants, finance capital always performs the same service. On the one hand, it turns debt obligations into money-capital by making debtors’ payment obligations — i.e., its own or those it manages for the issuer — the foundation for speculative capitalization and, as a result, marketing the creditworthiness that it attests to itself or its clientele. The offers it thereby makes are, in turn, aimed at finance capital itself. It acts on the other side, on another’s behalf or on its own account, as an investor that doesn’t just collect interest, but decides with its willingness-to-pay on the capital quality and quantity of the credit relationship put up for sale.
Additional remark 2. On Marx’ “fictitious capital” and its real power
Marx characterizes the business items of the capital market as “fictitious” capital. He thereby attests their raison d’être and power to act as a source of money — to be capital. At the same time, he distinguishes them as a kind of notional substitute, from the same power and purpose of those financial assets — he calls them in this context the capital of the “reproductive” capitalists — that are employed as power of disposal over means of production and power of command over labor in order to produce profit-bearing goods and allow their actual value, namely, exchange-value, to really come into existence through sale, to be “realized.” Such an expansion process is not “fictive” insofar as it uses the labor, means of production, and products with which society materially reproduces itself. That has earned this way of using monetary assets the peculiar honorary title of “real economy,” and earned capital in general the compliment of being the instrument through which “we all” enjoy prosperity and progress. Of course, this fiction is reality only in a cynical sense: where the capitalist mode of production prevails, the creation and use of useful goods and the reproduction of society itself are entirely dependent on their function in the process of capitalist expansion. By virtue of the power that property entails — and that a state guarantees by force of law — any prosperity all the way down to mere survival is subject to the private power of money and the purpose of making more money out of money. The regime of capital degrades work and wealth to sources of power over work and wealth: to sources of the value that exists objectively in money. But in this cynical sense, the praise of advanced money is one hundred percent correct. In the real market economy, everything needed for the social life-process can be had for money, and nothing can be had without it. And all materially useful activities in the real economy serve the increase of money. That is why, in this system, everything depends on capital alone. Production and consumption are taken up as functional elements in the economic process that starts with a sum of money as necessary and sufficient condition and ends with a larger sum of money as purpose and result, hence a process which realizes the power of money to increase itself. The success of this process is economically — i.e., according to the principles of this political economy — only a question of the sum of money invested.
This is where finance capital comes in. This banal quintessence of the capitalist mode of production — summarized by Marx in the formula M–M′ — is precisely the standpoint that banks put into practice. Finance assumes that nothing else is needed for the only economic success that counts but what it already has at its disposal as authorized holder of the financial assets of society: sufficient money — but it needs this absolutely. It operates as an agency that allocates that all-important resource in the business world, while at the same time ignoring all material conditions, needs, and concerns of the real, capitalist accumulation process. It gets to the heart of the matter — appropriately “one dimensionally” — to a quantity of needed money. Like any other capitalist enterprise, finance is interested in the amount of demand for money and the prospect of a decent return; but unlike companies in other industries, the management of these two variables is also its entire business. For a money-capitalist, the fact that between M and M′ quite a bit of production and trade must take place is a matter of course taken care of by others and lying outside his responsibility; what he is responsible for is the power of the money he has disposal over to bring about its own accumulation by being passed on. This power of money is an economic fact for the money capitalist, and his profession consists in managing that power.
It follows from the logic of this business that it does not stop at acquiring and lending disposable sums of money. Once financial firms have secured power over the accumulated monetary wealth of a market economy and function as indispensable lenders for the “real economy”; once the economic world consists of nothing but a need for capital and for money waiting to become capital; once financial companies combine this power and this need so successfully that they are able to give credit to every business with prospects of success and to attest to every sum of money the right to increase; once the power of money to increase itself has become a reliable economic fact in their balance sheets; with all this behind them, financiers see it as the most natural thing in the world to make their power over the capitalist capacity of any money itself the object of their business. Finance capitalists — literally — capitalize on their proven reliability in matters of credit, access to money and sources of money, by attaching to money — given to them, given away by or through them — the quality of a self-accumulating financial asset on the basis of associated interest obligations, and throwing securities on the market that quasi-objectively and quantifiably represent this quality. With this operation, finance capital replaces the achievement that money otherwise brings about by being used as an advance for the establishment and operation of profitable workplaces — in plain language: for profiting from exploitation. Compared with this “real economic” expansion process, the one that finance capital promises in a legally binding way is “merely” fictitious. But there is nothing fictitious about the power with which it carries it out. And the result is as real as the end product of all capitalist expansion processes: the power of access and disposal materialized in money.
After all, the power of finance capital — just to make the comparison with real, “reproductive” capital — is not exhausted in its command over a company whose workforce profitably expands advanced capital. This power is based on lawful access to the achievements of loaned money in all enterprises in all industries, and it brings about a real summary of the power of money operating in the free market system in the balance sheets of the financial sector. The overall profitability of capitalist business life is represented there as the economic achievement of money-capital. The numerical results produced by companies in the “real economy” appear as ‘use cases’ of the power of money to accumulate in the hands of financial institutions, as alternatives to the realization of this capacity associated with material prerequisites, market conditions, and the like.
3. The expansion process of finance capital on the capital market: On portfolios and their profitable management
The wealth of that part of the business world that is active in the financial sector, or that lets its assets “work” there, appears as an immense collection of securities; trading with these papers is its main source of income. After all, every single security promises interest, dividends, or similar yields. The professionals in the securities business are not content, however, to wait for this disbursement and use the sums received or invest them again. As managers of their own and other financial assets, they are constantly restructuring their investment portfolios. In order to increase their value, they continuously trade investments.
The material for these operations is continually and abundantly replenished. On the one hand, issuers of securities compete on the capital market to find buyers for their offerings. And because they all deal basically with the same product — with debt as money-capital — they seek to differentiate the conditions attached to their products to make them appear especially attractive. With this in mind, they choose the class of securities with which they intend to (re-) finance their businesses; within the selected segment, they try to impress investors with the level of promised yields, as well as with their safety, hence with the size and reliability of their financial might, and to beat competing bids. In so doing, they meet up with congenial money investors — these are of course the same companies with their financial geniuses that appear alternately on the capital market as buyers and sellers. They examine the offers from the same point of view, comparing them with each other; and when issuers, investors, and asset managers agree to terms, they fix the size and yield of traded money-capital, continually revising both pieces of data in the course of their trading.
This permanent fixing and updating of traded assets not only affects new offerings, but also any existing stock of assets. For also in this case, everything that promises less gain than a commercially available alternative counts as a loss maker; conversely, worse alternatives that still find a market increase the value of the better ones. This is how all securities take part continuously and notionally in the trade with capital investments, and are affected in practice by the continuously modified results: the prices “discovered,” i.e., produced, by trading immediately alter the value of all portfolios and confront their owners or managers with the question of whether the profits and losses to be booked — for that reason also called “book profits” or “book losses” respectively — should be “realized” through actual exchange, i.e., through sale of existing papers or purchase of new papers, or not. Financial capitalist wealth grows and shrinks with the corresponding decisions. Its “expansion” and accumulation thus takes place in and through the trading of its constituent parts. The fact that the promised returns arrive on time is one element in this expansion process. In principle, they are assumed to be a sure thing, but can be considered dispensable depending on the circumstances. In any case, they represent no more and no less than one essential consideration in actively managing the total assets at the disposal of a money-capitalist — his investment proceeds are nothing more and nothing less than portfolio material. The fact that finance capitalists credit the increase of their wealth, not to their creditors, but to their own speculative skill, is only fair. After all, that’s how growth actually takes place in this industry: through the transfer, accumulation, and restructuring of assets with whose sale the speculation refinances itself for further and increased investment. The trading by which “fictitious” capital accumulates confirms on the one side the financial might of securities issuers, and strengthens on the other side the financial might of the investor. Securities trading therefore causes the wealth of speculative suppliers to grow through speculative demand, conversely that of demanders through profitable supply. The securities trade thus enables all sides to achieve new and larger transactions. The power of money to increase itself runs riot in the increased turnover of more papers with rising prices and of growing bond issues in the roundabout between ever more, and above all ever more powerful market participants, in the generation of trading profits, fees, and growing asset values. That is capital productivity in its pure form.
4. The stock market, the “real economy,” and total social capital
The accumulation of finance capital through continual, speculative purchases and sales takes place for the most part in public venues. On the stock market, the shares of companies in a somehow delimited location for capital get their price. In addition, official bond markets provide guidelines for the daily value of papers traded there and for the conditions in terms of yield and safety that new debt securities have to meet to be accepted as money-capital. Indices, in which the prices of various papers are summarized according to ingenious calculation rules, continually represent the capital quality and, correspondingly, the value quantity of whole classes and aggregates of investments. They quantify the degree to which circulating capital investments, or the sums of money invested in them, have, in their documented ups and downs, proven themselves as means of enrichment. They therefore “indicate” the current state of accumulation of sections of “fictitious” capital, and, in so doing, provide traders with a crucial reference point for the next round of valuating them.
The expansion process of finance capital on the capital market includes the decisive valuation of all operations and expansion processes in the field of production and trade: namely, the decision about their suitability — past and future —as investments. The examination of their suitability is driven by the interest in bringing about material for securities trading, so speculative caution is in order. The systematic survey of business needs in the field of industry and commerce according to the criteria of the securities business therefore has a restrictive effect in some exceptional cases, but generally not at all. Rather, it amounts to a general mobilization that often exceeds anything that business people or companies would have thought they were capable of in sticking to the provisions of their bank credit lines. First and foremost, this concerns the growth of their capital: access to capital markets means access to investment funds of every magnitude, for streamlining that can be used to attain competitive advantages and extra profits, for conquering new markets and opening new company locations around the globe. The capital market expects such investment offensives from issuers of securities from the realm of the “real economy”; it decides critically about the past use firms have made of their business assets, and sets standards for their present and future use. Without the interest and resources of the capital market, those ventures that aim for growth without actual growth —mergers with, and acquisitions of, other companies — are all the more impossible to “leverage.” Access to these growth funds is the decisive lever for the competitiveness of firms, and as such radicalizes the first and most important virtue of capitalist growth: size is not to be had without efficiency, which is absolutely required. Speculation provides the standard according to which the business use of means of production and labor must prove itself: the “performance” of the business has to justify the creation and the creative accumulation of “fictitious,” speculative money-capital. For joint stock companies, the relevant catchword is “shareholder value”; this typically English direct and uncompromising term makes clear that the interest of financial investors in enrichment modifies traditional calculations with “real economy” markets; it can readily come into conflict with the success strategies of a management clinging to traditional products and markets, and occasionally with the state’s industrial policy. That being the case, modern companies in all industries organize their “real economy” activities with the aim of making themselves attractive to speculative investors; the highest criterion of success is a positive valuation of the securities they issue; they respond to the attacks of non-industry buyers — “locusts” who discern unexploited speculative potential in the firm and force management to unlock it — with a business strategy that copies their methods preemptively. In demand and on offer are generally innovation and mobility: the capital market offers established companies the opportunity to break free of their traditional industries and capture new fields of business; for instance, that is how a German pipe manufacturer turned itself into a modern telecommunications company. On the capital market, start-ups with new business ideas find speculators who in turn are constantly on the lookout for crazy but lucrative ventures in which to invest their money, preferably others’ money, until — ideally — a software tinkerer becomes a global conglomerate. The securities trade is in constant need of such investments to grow. For that reason, the list of finance capital’s demands includes the privatization of services, which traditionally include government-regulated “public services”: an investor doesn’t have to know anything about medicine or water lines, rail transport or education to discover the same thing in all pertinent sectors, namely, an insatiable need for capital, and to turn universities, nursing homes, or highways into profitable investment opportunities.
With their solid judgment that a country needs nothing more than capital to flourish, but quite a lot of it, capital market actors don’t just go after companies whose ability to issue paper money-capital they see as not yet exhausted, but after entire nations whose economy, according to their expert opinion, suffers from a lack of capital. They know, demand, and offer the necessary treatment: the establishment of a capital market on which money — from outside, but also all that can be made available locally with their expertise — can flow into freely tradable promises of returns. Of course, for a flourishing securities market, these returns, depending on the situation, have to turn out particularly high, especially when the earning power of the country is in a bad way. And they must be guaranteed by the local government, especially if it only has few and poor financial resources at its disposal. In this manner, finance capital turns whole nations into objects of speculation. And it either establishes a base for itself in this way — a comprehensive, fully functioning, profitable command of money over societal labor — because the targeted nation manages to turn itself and its people into a site for “real economy” business profitable for finance capital, or it reduces the object of its speculative interest to exploitable ruins. In some cases, such as in the former members of the Eastern Bloc, the results of its development work are then called “transition economies.” In other cases, they are called “developing countries”; and if the financial world retains its optimism, it speaks of entire states as “emerging markets,” whereby “market” means nothing more than their business of turning debt into money-capital.
So it is not surprising that for managers of financial capital, the whole world ultimately represents an ensemble of investments, better or worse, actual or potential. Unfortunately, that is not just the narrow-minded view of people whose profession after all consists in creating loans of all types and trading with them profitably. Throughout the business world, the capital markets, where credit institutions accumulate asset values, hit upon a need that turns all social endeavors relating to the production, distribution, and consumption of any useful stuff into use cases for applying the techniques of finance capital.
This need aims at the disposal over additional money of others with which the result of capitalistically used private property — its increase — can be improved. And it does not limit itself in any way to the use of commercial credit and loan capital, but discovers in every invention of the money economy an instrument that provides access to others’ money and helps them succeed in competition for profits. The familiar achievements of a “competitive enterprise” always come about through the use of these indispensable instruments; it achieves its success as both object (target) and subject (initiator) of the speculation that resourceful bankers devise. In both roles — that of object and subject of finance-capitalist calculations — industry and commerce are steadfast in their “confession” that they have no purpose other than to increase the power of their capital, and attest to the exact same purpose pursued by food or car manufacturers as by banks.
The extensive involvement of all significant “real economy” companies on the capital market, where they act as both suppliers and buyers, makes convincingly clear what is meant by the “procurement of others’ money” in these spheres of economic activity: by taking advantage of the equation, “credit = capital,” in all its established variants, private companies take part in the business success of all other capital; their own capital accumulation is the means to enrich themselves on the growth of competitors, and the capital market provides access to all the profitable ways to use money. With their command over trade in investments, banks and stock exchanges serve as trustees of the capital of society; and they occupy this position in the form of a separate business, whose size enables them to join “on their own account” in the competition they organize for shares in the overall growth of the “economy.” This is how they face the competition in which their colleagues from the “real economy” offer the most significant evidence of their competitiveness: they seek the favor of all who trade in capital.
Conversely, this function confirms the task of the houses of finance to conscientiously maintain and extend their fostering of “fictitious” capital.
5. Speculation on speculation: the derivatives business
For companies that operate in the financial sector, the capital market is the perfect means for their growth. Here they refinance their business activities; here they accumulate assets; here they create capital on their own by marketing debt as money-capital. This advantage of the capital market has its price: for financial companies, the trade they pursue there is the condition for their growth. And they have no control over this condition. When they invest money, they are speculating on future returns from others’ businesses; what they post as self-accumulating assets — which, for the most part, their working capital is composed of — rises and falls and alters its value with the competitive success and failure of the issuers of their investments. In addition, other investors speculate along with them; through their investment decisions, the value of a portfolio is constantly altered, either increased or weakened accordingly. The same effect is produced by new and by changed basic conditions that make accumulated investments look better or worse, without the business and the creditworthiness of the issuer of the affected securities having changed at all. Conversely, financial firms expose the bonds and stocks that they market themselves on their own or others’ account to critical scrutiny, one that takes into account anything that affects the value of a security; they create investments and leave it to “the market” to determine how much they are worth, if anything. With their offers and demands, they exercise their power as agents authorized to command the capitalistic capacity of money; however, the success of their activity as competing individual enterprises, the increased value of their portfolios, depends on the accuracy of their speculative decisions and on their profiting from trade in “fictitious” capital, which they participate in by issuing and investing in securities. They act as if they have their business perfectly under control, all on their own, and yet are neither more nor less than part of the general course of business.
Hence the risk of ‘nonperforming’ loans and the devaluation of “fictitious” capital are part and parcel of the lending business in general and the trade in debt, juridically redefined as money-capital, in particular. Financial companies have to take precautions against the constant threat of falling victim to the markets’ judgments on their assets. To that end, they supplement the management of their portfolios — their speculative dealings with the supply of, and demand for, investments — with measures that avoid or compensate for ‘excessive’ losses. The risk-happy community expands its business practices with the need for insurance.
For the demand side, suitable offers are made by specialized firms in the same industry. Of central importance in practice — and an example of the transitions the speculation business brings about here — are forward or futures contracts, which have expanded into a complete, enormously high-volume branch of business. The practice of concluding contracts for the supply of a commodity at a later date, but at a currently agreed-on price due on delivery, in order as buyer or seller of a commodity with a volatile price to create certainty for one’s own calculations, did not first arise with securities speculation. Contracts of this kind are commonplace in the trade with raw materials, whose market price has little to do with the cost of production, but rather is heavily influenced by the ups and downs in supply and demand. Financial companies, which hold nothing but risk in their portfolios and constantly take on new risk in managing their portfolios, resort to this business technique. They, too, buy and sell assets with fluctuating prices on a forward basis in order to secure their responsibly managed financial assets against losses or to lock in a desired increase in value in advance. Of course, insuring the accumulation of “fictitious” capital in this way costs a portion of capital gains if these turn out higher than stipulated in the hedging transaction, or if the feared depreciation turns out in fact smaller than expected. Or, in the case of an “option” — a hedging transaction in which the “insured party” gains a potential advantage by not being obligated to make the transaction as agreed if the price moves in a favorable direction — there is a fixed premium to pay, the option price. In any case, security comes at the expense of the growth for which security is sought.
This contradiction finds its suitable, forward-pointing resolution in that futures contracts — already, by the way, in the case where real goods such as oil and coffee are traded on a forward basis — have long since become the stuff for a speculation of a special kind. On the one side, from the simple, commercial point of view, the “volatility” of the market price of a commodity to be bought or sold in the foreseeable future represents a threat to orderly transactions calculated down to the last detail; on the other side, a futures contract that is binding for both suppliers and buyers of a commodity acts to remedy the situation. This volatility and its remedy contain an interesting risk to a counterparty who doesn’t want to have the commodity itself, but the difference between the agreed purchase or selling price — the “futures” price — and the actual market price on the date of fulfillment of the contract. For he makes a profit when the then actually prevailing price is greater that the futures price in the case of a committed purchase, or is lower in the case of a committed sale. Otherwise, of course, a corresponding loss is incurred, but apparently that hardly bothers finance capitalists. They have, in any event, always made risk their business, indeed on all the markets where they find a commodity with price risk, so also of course on their own market for their own highly speculative commodity, capital. As a rule, what is stipulated is no longer the “physical” fulfillment of the futures contract, but a right to the amount by which the stipulated and the prevailing market price on the closing date differ; and so a transaction will in the majority of cases no longer be concluded with a merchant who wants to eliminate the price risk for a good he handles, nor with a security holder or manager who wants to safeguard his asset against rate fluctuations, but between speculators who speculate equally, but in opposite directions on a difference between the futures price and the market price on the agreed date. From the outset, this eliminates the costs for delivering or receiving the goods, whether it be shares or coffee beans, that constitute the basis of futures trading. The commodity, with its characteristics and in its designated quantity, ranks only as a standard of comparison for the futures price, agreed upon now, and the market price on the closing date, if the parties to the contract buy or sell at all. For this reason, the number and scale of the contracts have nothing more to do with the amount of specified goods actually for sale or even existing; they are limited solely by the willingness of the community of speculators to enter into such transactions with each other. In practice, of course, this willingness requires an institution in which interested parties can find each other. This exists in the form of futures exchanges — each one specializing in particular “underlyings.” Their crucial achievement consists in operating in a very broad sense as a mediating body — for which they, of course, charge a reasonable fee. They bring together contrary, speculative assessments of a price or rate trend in a kind of permanent auction that establishes a “futures” price according to the rules of stock exchange transactions. In this case, one cannot really speak of supply and demand determining price, but rather of a price at which speculators betting on rising numbers agree to do business with those betting on falling numbers. The exchange does not establish a business relationship between the various counterparties, but acts toward both sides as a party to the contract and ensures all the conditions necessary for a steady course of business: it defines the characteristics of the commodity that serves as standard of comparison, the units of quantity that can be contracted over, the amounts of money that can be staked, the dates on which contracts will be regularly payable; for underlying assets that are themselves not a commodity, that have a rate but no price, and are of particular importance for forward transactions with financial risk, namely, for stock market and other indices, they set monetary values per index point. The transactions, so perfectly standardized and structured, then proceed according to a fixed pattern: an affiliated clearing house maintains for each client a clearing account into which an amount is paid for each transaction as security and proof of the seriousness and solvency of the speculator; the amount constitutes a portion of the futures price that, depending on the financial standing of the businessman or the size and solvency of the financial institution involved, lies between 5 and 15 percent; this ratio between the futures price and the amount actually deposited is called “leverage” in the jargon of the industry, and will yet prove to be a very critical parameter. Posted daily in these clearing accounts are the gains and losses that, for each concluded contract, result from the fact that the speculative transactions of each following day produce a new — higher or lower — futures price:[] when this price rises, the increase is credited to the speculators who bet by purchasing at a lower price, and deducted from the sellers as a loss; when this price falls, it’s the other way around; when posted losses become greater, the account may have to be remargined with an additional security deposit. Otherwise, the contracts will continue as if they were concluded at the currently prevailing futures price, and participate on this basis in the price movement of the next trading day, and so on. At the same time, the exchange provides its clients with the further, important advantage of being able to get out of their contracts unilaterally at any time by entering into a complementary “offsetting transaction” at the currently prevailing futures price on the same underlying product with the same terminal date; the first contract is thereby “closed out,” meaning liquidated. The deposit remains on the settlement account plus gain or minus loss, reduced by various fees. A gain — and this finally makes the matter economically important — arises from a change of the futures price, i.e., the ideally agreed-on purchase price for the object of value that functions as a standard of comparison. For a speculator, however, the gain — thanks to the “leverage” effect — is measured in relation to that 5 to 15 percent of this sum, which he had to invest in his “financial bet” by depositing into his settlement account; hence for the counterparty, each percent change in the futures price, calculated as interest on his investment, gives a gain of between approximately 7 and 20 percent. The better the financial standing of the customer, the larger the gain, resulting on an annualized basis in yields of 100 percent or even multiples thereof.
With that, the course of business is complete for the time being: appropriately standardized and organized down to the last detail; and whoever speaks in a professionally competent way about it never tires of informatively — tending toward warningly — pointing out that in all this speculation, every gain is matched by a complementary loss of exactly the same size, i.e., no value is created; rather, a “zero sum game” takes place. This undoubtedly accurate statement, however, raises a question that never finds a satisfactory answer in all the critically advising accounts of the situation: how can a mere “zero-sum game,” whose implementation causes a lot of business expenses to boot, make it to being a large and respectable component of the honorable financial industry? After all, the info pack includes the fact that the insurance interests of traders and securities portfolio managers makes only the slightest contribution to the magnitude of this line of business, rather it’s the speculative interest that has here created a field of activity for itself. Then come well-meaning, functionalist presumptions, expressed from a higher, national-economic, overall view, about the higher value of this industry, about the wonderful contributions of the futures markets to the transparency of the spot and cash markets and to the correspondingly “fair” pricing of the underlying securities. Central banks investigate hot issues such as whether the derivatives market rushes ahead of, or lags behind, the market for bonds and shares. But nobody would really maintain that a huge, lively, and — because it’s perfectly and completely organized — quite expensive financial speculation business takes place in order to provide speculators with clarity about the parameters of their speculation. And anyway, the truth about such suggestions is entirely different, going more in the opposite direction: the futures markets are a playground for the constant efforts of experts to profitably exploit the lack of clarity in market operations, insider knowledge, and differences of opinion — their own appraisals held to be true, those of others’ always held to be false — about the course, direction, speed, and effects of speculative operations at various venues. In this case, volatility is good, indeed indispensable, while transparency is dangerous for business. What is important for making this completely organized, speculative uncertainty a source of income, on balance, are the funding and personnel needed to ensure a permanent presence on the market, in order to get in and back out of transactions at any time, to profit from every price variation however small and short-lived, also to realize losses and liquidate bad contracts before anything worse happens. Secondly, sufficient financial wealth is required in order to be able to withstand even greater losses and therefore not have to give up speculating right away.
These actual business conditions make it a bit more clear as to why speculation in futures contracts is a considerable branch of business for finance capital, that is, for whom something like this pays off at all as a permanent field of activity. Of course it pays off for its organizers, the exchanges and financial companies that back it; but their interest in income from fees does not explain the transaction for which fees are charged. Of course, the futures exchanges are, in principle, open to everyone; but the retail investor who tries his luck with a “financial bet” is not the character to whom this industry owes its size and stability. Of course, all traders and asset managers who actually use futures transactions for hedging purposes are represented there; but that allegedly makes up just three percent of sales. Perhaps the pros “on the spot” do carry greater weight, the agents and brokers who, for their own account and for the very short term, enter and then exit from the very developments they keep in play on others’ orders and with others’ money; but this also illustrates how limited their role is. The real players of the industry are the financial companies that have the people and the means to turn futures into one of their regular sources of income, those who maintain permanently large settlement accounts at the clearing houses and only have to deposit a low percentage of the futures price. The fact that the profits they generate are balanced by equally high losses for some other party, that in this respect investment bets are “merely” redistributed here and no “value” gets “created,” leaves these market kingpins quite cold: they do everything possible to be the ones to whom the “merely redistributed” funds flow and, in any case, who accumulate more gains than losses. For them, this is no breach of the rules of financial value creation, but its essence, the quintessence of all their efforts at accumulation: here they very directly and frankly turn their speculative judgment on the price movements of objects of speculation into a source of money. That is also exactly what they do otherwise when they make loans, market securities, manage accumulated “fictitious” capital, all in order that it becomes more. But in these cases, their speculative responsibility is still always attached to given assets whose trend they have to be concerned about because they belong to them or represent wealth entrusted to them; and what they accomplish with these successful, speculative decisions is not more than to share in a gain that comes about through the trading of securities. With their futures speculation, by contrast, financial firms generate income entirely on their own — when it comes to the gains they realize for themselves, it is completely immaterial whether the underlying securities on whose rates they place their “financial bets” rise or fall; the only crucial thing is that they bet on the correct side with the deposit on their settlement account; their income depends on that alone and of course on the size of their investment. For the pros of speculative moneymaking, this is true freedom.
And for these financial firms, that opens up an entire realm of liberty, since their activity goes far beyond managing to get a positive balance out of pluses and minuses with the use of lots of money and personnel on the futures exchanges. Thanks to the “leveraged” effect of the speculative use of money, which turns out to be especially high for companies with good financial standing and assured liquidity, considerable or even huge returns result from the relation between the “advance” and the gains; and for financial companies, these are anything but mere accounting values. Even the prospect of such returns all but cries out for the professional business use of others’ money, since debts are easily serviced with the best interest rates out of the “interest payments” that can be achieved with an even halfway successful use of assembled funds in futures transactions; conversely, the revenue streams capitalized for investors in an attractive interest rate easily give a “fictitious” money-capital that adds up to an amount of money many times what a powerful company has to pay for its involvement in the futures market. The sale of these assets — in the form of bonds, fund shares, or stocks — enables the issuer to make large-scale, speculative investments, while at the same time promising financial investors such high profit margins that not only gullible retail customers but also sharply calculating financial firms readily accept a higher loss exposure; a modern and efficiently managed portfolio can’t be imagined without such securities. As far as successful hedge funds and banking institutions are concerned, which operate such special purpose entities, it makes a positive difference that with every gain in financial power, the financial standing of the company improves, which increases the “leverage” effect of investing in futures contracts, and thus also the power of the company to draw further financial means through the issuance of fund shares and the like. Of course the same also applies the other way round: should a financial firm lose credit on its futures exchange and thus have to pay an additional deposit into its settlement account, then its return automatically decreases, even if its “financial bets” for the most part still work out. That puts the “fictitious” capital that it managed to sell to investors in danger; it might be handed back to it, thus worsening the financial standing of the issuer all the more. But that’s the price to be paid for the freedom that finance capital creates for itself and amply exploits; and each company does its best to ensure that others are the ones to pay it.
In this manner, through pure speculation, solely with their highly differentiated and lightning fast discretionary judgments about price movements on commodities and capital markets and also on foreign exchange and other markets, entirely beyond all payment flows between debtors and creditors and all enrichment by growth of financial asset values, the community of powerful speculators autonomously and on their own initiative create returns on financial investments and, from that, new “fictitious” capital that swells the turnover of the financial sector and its stock of assets. And what it accomplishes in futures trading, the industry produces just as well with speculation on all the uncertainties — on interest rate trends, on risk premiums on different types of bonds, on the servicing of loans in general… — that it creates itself: solely from its own need for accumulation and using its credit independently of the speculative hedging interests on its part that underlie the prevailing business model and are serviced on the side along with them, it generates whole branches of a business for which the jargon has invented the label “risk transfer market,” and whole species of “derived” capital assets.
These multifarious derivatives produced by a modern financial industry make the various spot and cash markets from which they are “derived” the object of a new, overriding interest. Precisely because the aim of speculation that is materialized in derivative products and that generates monetary assets is not to share in the appreciation in value that comes about in the trading of underlying securities, but instead is solely to gain from the value changes themselves, the whole operation depends on a correct outcome. The financial institutions that, as key players, run the futures business and related enterprises, therefore do not content themselves with their continual, ready-for-action observation of events in the markets of the first kind, but do everything they can so that by — at the latest — the specified maturity date of their contracts, the prices move in the desired direction. In this way, the derivatives business becomes an additional, and, at least in some phases, dominant factor on the exchanges upon whose trends the derivatives business speculates. Special techniques, like the “short sales” that have, for the time being, come into disrepute, produce the desired link; and the fact that all hell breaks loose in stock and bond trading as the expiration dates of futures approaches, because rivals are trying to manipulate prices to their advantage, is not only well known but recognized as a business custom in the term, “witching day.” In this way, speculation in derivatives gains power over the speculation to which the derivatives refer.
On the other hand, financial firms exploit their freedom to create ever new branches of their “risk transfer market” — sometimes quite deliberately — in such a way that the newly created risks, in all their diversity and “complexity,” are no longer easy to manage and virtually impossible to oversee; at any rate, they cannot be controlled; this is the permanent basis of the business. For the financial firms that lead in organizing the entire lunacy, this is, in turn, an opportunity and challenge for a new business that is quite extraordinary. They run rating agencies, which professionally — and of course for a fee — examine and assess the risks that are the objects of these various “derived” speculative operations, and that underlie the “fictitious” capital that has won its place in the portfolios of the business world and even in the deposit accounts of ordinary savings bank customers in the form of fund shares, certificates, or similar stuff. At the same time, the way these companies classify investments of all kinds is not merely relevant as a tool to help investors make decisions. Its significance is more tangible and highly practical: it decides on the financial standing of the issuer and consequently on its power to promote its debts as money-capital, as well as on the quality of the portfolio of investors and thus on their financial power and the good reputation they market in the financial business. This becomes relevant as soon as ratings get changed: higher classifications empower both the supplier and the owner of such papers to demonstrate improved balance sheets and ease their access to others’ money; downgrades not only make new loans and interest payments on new bonds more costly for those affected, but also jeopardize and devalue already issued “fictitious” capital assets, possibly forcing a company to make additional money deposits on its margin accounts, while at the same time harming the owners of issued securities, forcing them under certain circumstances to reallocate their portfolios, etc. This is how rating agencies prove to be a rather central authority in the realm of financial economic freedom. And ever since the crisis in this sphere of finance at the very latest, every expert commentator has always known that it is difficult to separate the agencies’ helpful advice — useful contributions to the regulation of the derived speculation market — from their self-serving, manipulative interference in market developments.
As a consequence of the liberties taken in the derivatives business and the initiatives to regulate them, there is — on the one hand — a growing need for neutral supervision. And the state also sees itself immediately challenged to act, out of concern for the sheer amount of money invested and exposed to risk in precarious products, and for the property handed over to others; so it takes charge of oversight and tinkers around with the right amount. The financial industry, on the other hand, which appreciates a certain degree of regulation for its course of business, refuses to allow its freedom to be excessive to be ruined. Whenever it is bothered by rules and regulations for solid speculation, which it basically ordered up and created itself, it supplements its “regulated” activity with trading outside all restrictions: “OTC (over the counter)” as the experts like to express it with the help of Anglo-Saxon idiom. The sums that are recorded there have virtually exploded ever since the imperialist world of states let its financiers free to trade there. The size of these sums shows that the industry has definitely arrived in the realm of true freedom.
6. On the susceptibility of finance capital to crisis
No one is more aware and more familiar with the fact that they are pursuing a risky business than the pros of the financial market themselves. After all, risks are their business and they accumulate their financial assets by speculating on the future. They are definitely the most competent when it comes to identifying risks, the factors involved in evaluating them, and reasons to reassess them, since they themselves are constantly comparing the future profitability and security of all traded and accumulated asset titles and the reliability of their issuers. They take critical note of every success and every failure of any significance, every major insolvency including foreboding rumors, any change in relevant business conditions, thus also any emerging shift in the political balance of power within and between the major states, etc. And they react to all these developments as well as to the reactions of their competitors. With their pertinent, speculative calculations, they themselves, as issuers and investors, move the markets and, together, effect the changes in the price of the items they speculate on. They assess the entirety of world affairs — composed of business, power, and false consciousness — as a collection of factors that their calculations have to accord with, and this is precisely how they make these calculations commercially effective in such an incalculable manner.
The everyday, calculating dealings of capital managers with this world of risks, and their efforts to identify the opportunities lying therein, and seize them quicker than the competition, also includes, however, a complete lack of interest in the reason for the risks they deal with so constructively. After all, the reason is identical with the basis of their business: they enrich themselves and their clients with others’ money in others’ business by treating their lawful power of disposal over their own and others’ debt as if the success of their dispositions were already under their control. They turn debt obligations into “fictitious” money-capital, confirming the capital character of traded debt just by buying and selling their concoctions. The accumulation of money-capital they bring about depends on nothing but market developments — on their products being recognized as capital in securities trading, and on the success of the investments they make themselves; but then it depends entirely on these developments. And the activists of finance capital have developed this speculative system to the point where everything that can be done in the market economy with money and capital can be done with their creations. At the same time, virtually everything at the disposal of the business world and their human appendages in the way of means of business and purchasing is based on nothing but debts that speculative trading gives the quality of capital.
When taking on lucrative “risks,” the pros of the financial sector assume this precarious success and basic durability of their wonderful achievement, the transformation of debt into money-capital, as if it were a given, solid fact. They simply take the opportunity to steadily increase the financial power of their business through favorable deals. If business nevertheless goes sour — if issuers fail, investments prove to be flops, and unanticipated rate trends and derivatives that fall through drive the portfolio into the red — they treat the matter as a misfortune whose effects have to be contained and ironed out as soon as possible. In no case may losses affect their balance sheets or even their liquidity. For if that happens — and here is where the precarious nature of the business basis of their trade becomes inescapably apparent — their ability to vouch for the capital quality of their business article stands at risk. Illiquidity means the threat of insolvency and the worthlessness of securities that bear the stamp of the bankrupt. And financial companies all depend on each other through their lending and especially their capital market activities — on the recognition of their own products by their competitors, but also on the soundness, confirmed in trading, of securities they have issued; all of them function as parts of the total social capital, and therefore function only when “the system” functions; because of all this, such an insolvency, depending on the size and importance of the institution in question, easily threatens the expansion and thus the value of the stock of “fictitious” capital altogether. So, just as in the course of the accumulation of financial assets, when the commercial success of one capital market participant not only strains but also improves the balance sheets of many others by causing their investments, too, to appreciate in value and generate new sales of securities, so does the collapse of a major issuer set off a chain of devaluation and cancellation, creating a loss that is not compensated by the elimination of a competitor. Virtually every risk managed by the industry can serve as the occasion that triggers such a downward spiral — the reason for the spiral lies in the power of finance capital, which has become so big and strong precisely through the interlocking of the participating banks with their speculative investments, despite the fact that they compete against and harm each other.
When such a wave of devaluation degenerates into a crisis, no one, of course, ever gets any insight into the political-economic nature of the transactions that successively go bust. When a declaration of insolvency is due, i.e., when the suitability of debt securities as money-capital is no longer tenable on a broad front, and all the fine assets turn back into debts that cannot be repaid because there is not only a lack of interest earnings, but of credit and speculative investors as well, finance capitalists are all the more eager to limit the damage and rescue as great a part of the remaining stock of “fictitious” capital as possible. Inevitably, finance first sets its sights on all the legal provisions that determine the prerequisites for the legally valid definition of debt as money-capital and the terms for trading in such commodities. After all, in a crisis, the rules they contain for the valuation of assets appear as the formal compulsion to write off securities already devalued in reality. In fact, although the rules give only a juridical form to the dwindling financial power of the banks, bankers are the last ones willing and able to distinguish between the legal form and the content of their troubles. They insist, and have little problem reaching agreement with the responsible state authorities, that the chain of devaluation has to be stopped by changing accounting rules — in the worst case by re-labeling “toxic” papers “assets” of a “bad bank.” And before the capitalist market economy, including government finances, comes to a complete standstill along with the loan business and the practiced equating of debt with capitalist wealth, the state has to reinforce the license to create money-capital from debt with a guarantee, and must vouch for the continued existence of this debt economy, and its authors capacity to act, by creating money itself.
The public power does not fulfill this obligation without also demanding that the financial industry kindly conduct the speculative management of capitalized debt and its associated risks on a sound basis. That is a legitimate request, given the susceptibility of this indispensable financial business to crisis, which represents one part of the “general risks of life” that the market economy imposes on its inhabitants.
Additional remark 3. On capitalist crises in general and in particular
Boom and crisis alternate with each other, a well-known empirical fact about the free market system. After a multi-year upturn in the capitalist business world, a phase follows in which the overall balance of sales of “goods and services” records a minus instead of a plus over several months or quarters: a downturn, which causes large numbers of companies to collapse, drastically enlarges the army of unemployed, and gnaws at the living standard the wage-earning population managed to build up in the meantime. This doesn’t happen because shortages have occurred in free-market manufacturing plants and commercial buildings due to supplies running out, or that work is stopped for lack of personnel. On the contrary: in a crisis, there are more than enough of them — means of production, finished goods, workforce. It is just sales that repeatedly come to a halt: there are simply too many goods on offer to allow for sales at profitable or even cost-covering prices. And in this most humane of all production systems, this doesn’t amount to any happy surplus, but to a problem for the main actors and a disaster for the rank and file: nothing goes ahead anymore because the market — which this economic system likes to be named after — denies the service for which the business world enlists it and on which everything hangs, namely, the transformation of their “goods and services” into an abstract type of tallied-up wealth: money.
It is astonishing that things come to this point, since companies in a market economy do nothing other than produce and trade for the market; they undertake everything to succeed there; and if their course of business falls into crisis, then they have obviously managed to achieve that success in the previous boom years. Certainly, not all active market participants were successful even then; competition, which companies wage against each other, always produces losers, too. But that means, on the other hand, that the recession impacts the successful ones that have survived the selection on, and through, the market and have had their way with their competitors. Somehow, it seems, there must be a catch in the success strategies brought to bear in free-market wheeling and dealing.
The administrators, actors, and beneficiaries of this economic system have, of course, no sense of such a contradiction; neither do its managed and exploited inhabitants. Nor do they have time for questions about an intrinsic, systemic reason for the regular derailment of market activity. It is much more important to them that the crisis gets over with quickly and the next boom starts up again. For that reason, the experts focus on identifying those business conditions that need to be improved to help all-round profit-making get back on its feet, while the business world and economic policymakers strenuously call for renewed success. At the same time, proposals for “boosting demand,” insofar as they require government “stimulus,” possibly through debt-financed spending programs, are suspected of igniting no more than a “flash in the pan.” And while the unions’ notorious demand that “consumer spending” be strengthened by wage increases — which they never really take seriously — does conform to the system, insofar as it implies that the true meaning and economic purpose of the livelihood of the wage-earning majority consists in its function of serving the success of the business world, even so, it inevitably ends up on the dung heap of unsuitable remedies, because it runs counter to the generally accepted chief and universal remedy for overcoming the crisis. That remedy recommends interventions in internal company processes: modesty in wages, even in the form of longer working hours than agreed upon for the same pay; generosity in capital investment, supported by cheapened credit, for “rationalization,” i.e. in order to “get back in the profit zone” by using the latest production techniques and cutting personnel. These are indeed precisely the competitive methods that firms affected by the downturn have always employed anyway, and until recently with success. Nevertheless, the theorizing and practicing experts entertain no doubts about whether these methods will lead out of the recession. In any case, they know of no other path to success; it is inconceivable to them that this is precisely how capital repeatedly sets limits on its own growth.
And yet no occult science is needed to arrive at this insight.
Firms compete by using their capital in line with the irrefutable empirical fact that more money ensures more profit, and not merely in the banal sense that more turnover causes a corresponding growth in profit. Heads of companies know that sufficiently large investments are suitable for increasing their returns: technical advances, new machines and processes, can all be purchased — like everything in a market economy; to the extent that this lowers the cost-price of their goods, at an unchanged market price, their profit share increases; and in competition with other market suppliers, reducing the market price, i.e., waiving any profit increase per unit, increases the power of the company to win market shares and generate even more profits. Moreover, every management knows why they require a healthy amount of money to invest in a continual reduction of the unit costs of their goods, crucial for competing, and in a sustained increase in the productivity of employed capital in comparison with other competitors: the production process must be optimized both technically and organizationally, the productivity of employed labor must be raised. Paid labor thereby becomes dispensable over the long term; unit labor costs sink. If, in addition, maximal use can be made of expensively renewed production facilities without additional expense for labor, so that the investment is quickly amortized, then the success is complete.
However, this only lasts until competitors have followed suit, matching the cost advantages of the successful company and providing a new general price level, by which nothing remains of the extra profits from the first phase — an effect that all participants firmly count on; therefore, the corresponding competitive efforts never let up. What then remains is, on the one side, the reduction of labor cost per salable commodity, on the other side, the lowering of its selling price — and on the third side, an increased capital expenditure for the workplaces that provide for the output of the cheapened commodity. The alteration in the ratio between capital advance and permanently realizable profit ruins the increase in yield, even reverses it; increasing the productivity of labor to produce higher returns and accelerated growth counteracts both intended effects.
The proximate cause for this paradoxical result is therefore the market — namely, the competition for ability-to-pay, which is by no means boosted by efforts to cheapen production and products. First of all, “labor saving technology” decreases the number of wageworkers — due to rationalization in the successful firms, by plant closure in the unsuccessful ones — while rising unemployment places downward pressure on wages, both combining to reduce the public’s disposable income. Furthermore, when competitors go bust and disappear, their ability to pay for capital goods also disappears from that market; and even if they survive, the generally elevated standards of production make existing facilities unfit for competitive profit production, i.e., worthless, and thereby destroy the financial wealth invested in these plants and now no longer flowing back from successful sales. What the vanguard of capitalist progress earns, at least initially, above and beyond their customary growth rate — i.e., what it accumulates in terms of additional ability-to-pay — seeks and finds its way into spheres of investment with disproportionately high earnings, contributing to the reduction of profit and growth rates to their normal market levels. In any event, the firms’ profit-increasing investments have a negative effect overall upon the market conditions under which returns are to be realized. And the so readily ignored necessity of the free market system asserts itself, namely, that the distribution of the monetary wealth that capital creates is determined by the nature of its production. The market itself confronts its activists with the political-economic truth about their mode of production and about the source of the profits around whose increase everything revolves.
After all, companies increase their rate of profit by saving on labor as a cost factor, sustained mainly by not shying away from any costs that make the labor they need more productive as a production factor, so that they pay out less wages in relation to expected proceeds. For corporate accounting, labor as a cost factor and labor as a production factor are thus absolutely commensurable quantities, which is not surprising: the product they want to get from paid labor is just the return measured in money, or rather the surplus above what the labor cost them. In order to increase that, they make labor technically more productive in the sense that every quantum of paid labor produces more marketable products — and then not to realize correspondingly more money, but to undercut competitors by reducing prices, and ultimately, when the price has stabilized at a new, lower level, to find that the increased quantity of products doesn’t give rise to a corresponding increase of the monetary yield per quantity of labor. In the final analysis, their “rationalizations” do not merely minimize labor as a cost factor, but at the same time reduce the source of the commodity-value that can be realized in the sale of goods. Businessmen act on the principle that the actual source of their profits is their capital, and that, with their investments, they increase its productivity, its effectiveness as a source of profit; for all the technical and organizational aids they employ are also their property, part of their capital. But in fact, they are using their capital to raise the productivity of labor: and the result shows that the productivity of their property is based on the contradictory use of labor as both a cost and production factor, which the science of the political economy of capital has termed exploitation.
The whole thing functions through the interaction of the “real economy” with the financial industry, i.e., on the basis of credit; and only through this interplay does the contradiction in the methods of success of capitalist enterprises unfold as a — euphemistically named — “business cycle.” With their banks and on the capital markets, firms that produce “goods and services” acquire the financial means they need to invest in their competitiveness and growth prospects. Here is where they meet lenders and investors whose business is based on the equation that money arises out of money and entrepreneurial savvy, and that the effectiveness of this source of money depends on its size. Thus credit intensifies the competition for profit. And above all, credit helps to overcome the paradoxical effect produced by competing companies in the course of their business, namely, that a growing capital expenditure is faced with the tendency of a declining rate of return: in the indestructible certainty that a capital advance only has to be big enough to yield absolutely and relatively higher returns at some time, borrowers and lenders, businesses and investors constantly expand the self-produced limits of accelerating capital growth. It is true that as indebtedness grows, so do the demands on the earning power of businesses: lenders want interest, speculators want good performance and growing shareholder value. But especially with their disposal over others’ money, companies acquire the ability to increase their returns, and cover every drop in profits with investments in a brighter future.
In this way, the contradiction between the purpose and result of these efforts to increase growth without end becomes, in an all-the-more contradictory manner, “sublated” — relativized and at the same time intensified — through the efforts of finance capital. The suitability of companies for their capitalist purpose is not decided directly in their performance on the market, with the returns either attained or not achieved there, but in the financial world’s judgment on their creditworthiness or, as the case may be, in the trade with the securities the companies issue and their use as material for the accumulation of speculative money-capital. Negative findings on individual firms as well as positive decisions on many others are part of the everyday business of finance; in debt-restructuring negotiations and on the stock market, successes and defeats in the competition for profit are not so much realized as decreed. One company may be one too many and is withdrawn from the market, as banks and financial investors no longer wish to bet on its future rate of profit. In general, however, financial firms assume that success in competition is a matter of properly applying and, above all, having disposal over a sufficiently large mass of capital, and that the accumulation of profit can and should really go on indefinitely; if market barriers emerge, single-minded investing is the appropriate answer from the start. The logical outcome is a growth of claims and securities, until at some point — with such regularity in the recent history of the capitalist mode of production that the “business cycle” is part of its repertoire — the financial world loses faith in its own speculation. It not only stops lending to the usual percentage of losers, but mistrusts its own widely and successfully practiced standpoint that the mass of loans they have granted and “fictitious” capital their speculation has ballooned up forms a good basis, and offers a guarantee, for further growth in the magnitude and speed speculatively anticipated. Banks then restrict their lending; the actors on the capital markets are reluctant to market new investments, and reduce their demand for capital investments; the trade in capital comes to a halt. That diminishes the value of circulating securities as well as those accumulated in portfolios, and jeopardizes the capital quality of debts traded as commodities and acting as financial assets. The collapse in interest in speculation leads to a loss in financial power, which in turn has negative consequences for lending and securities trading.
And that also starts a “recession” for the companies that have made the material reproduction process of society their source of profit. As lenders and investors no longer count on the future of accumulating profit in business with “goods and services” — or at least not to the extent firmly planned in all respects up till now — they uncover what they have brought about there as well: an enormous amount of capital that can no longer be justified by sufficiently profitable businesses as a good credit risk or as an interesting investment. The speculation industry turns extensively funded and correspondingly thriving growth into over-accumulation, an unholy excess of capital, simply by withdrawing its approval for its own financial products, and therefore also denying needed financial resources to all other industries. For too long, the business world has postponed the contradiction contained in their efforts to raise profits from the business of exploitation by straining their credit power, shifted the “tendency towards a falling rate of profit” onto losers in competition by cutting off credit, and invested and accumulated debt as capital in anticipation of further flourishing business. In a crisis, with the cancellation and write-off of loans and the devaluation of its “fictitious” money-capital, this same business world converts the profits still being posted only yesterday into a fiction that was only in force thanks to the active employment of the power of loan capital. It “confesses” to having brought too much credit of all kinds into circulation, and thereby to have kept too much capital in operation, and cuts down on both, which free market expertise calls “negative growth.” As a secondary effect of the destruction of assets, material sources of wealth are scrapped, consumer goods rot, and society’s no longer needed wage-earning masses experience a bit of impoverishment — but all for a good cause. For according to the absurd logic of this system, a crisis, with all its devastating effects, is not only an oath of disclosure about the intrinsic contradiction between capital accumulation and the unconditional development of productive forces as its means; it is also the remedy, the temporary resolution of this contradiction: once enough capitalist wealth has been destroyed, the physical damage wrought on the human material of the system can certainly no longer be made good; but for business life, conditions for success are restored on a reduced level. Competition and speculation can start again.
When and how, in which phase of capital accumulation, and on what occasion the banking industry comes to doubt its own services and products to such an extent that a widespread, perhaps worldwide setback for all of business ensues: such an occurrence is, for all its regularity, different in each “cycle”; it presents itself as such a specific chain of circumstances and coincidences that, each time it happens, the downturn itself seems accidental to those in charge and to the anxious interpreters of the event, despite all their worldly economic wisdom, and in retrospect it seems avoidable. But once it gets going, a crisis doesn’t proceed randomly, but rather stereotypically. The current crisis events constitute an example for both.
What makes the crisis that is currently afflicting worldwide capitalism novel is — as always — the trigger. The business done with asset-backed securities (ABS) — a type of bond for refinancing “fictitious” capital purchased with securitized loans from special purpose entities, mostly risky loans with new, risky securities derived from them — came to a halt because the underlying loans to poor American homeowners in fact turned out to be bad loans in greater numbers, the speculation on steadily rising real estate prices didn’t work out, and the solvency of bond issuers appeared questionable. This never occurred before simply because it was only in the five years before the great disruption in the summer of 2007 that this particular stuff for speculative transactions was invented and became a mass-produced article on the derivatives market. Also without real precedent was the fact that the financial sector, piece by piece and over a period of one and a half years revealed the untenability of major parts of its derivatives business: a market for “derivative” securities of such monstrous proportions and with so many intricate linkages and implicit obligations also hasn’t been in existence for very long; what is being unraveled piece by piece and going bust is an achievement of the new, capitalist century. These particularities make free-market expertise, in hindsight, quite certain that this sort of capital growth was bound to go wrong in the long run, but that the crisis would have been entirely avoidable had the financial industry simply adhered to its publicly beneficent mission, done everything right, and respected the limits of its self-enrichment. The gigantic numbers from the world of finance verify that these limits were clearly exceeded, numbers that nobody up till then had found fault with other than what they could criticize with the label “turbo.” Of course, no expert has ventured to quantify up to what amount the accumulated bank assets could be regarded as solid. Only leftist crisis theorists offer some kind of bound violated by the financial industry in its boundlessness: they refer to an absurd disproportion between the sums moved by speculators and the limited amount of profit produced in the “real economy” through value-adding labor. However, there is no explanation on their part as to how this industry comes to such a lively trade with, and such an accumulation of, financial assets based on debt, that it eclipses by far the world’s total trade turnover; nor do they explain the power possessed by this “fictitious” capital over the rest of the market economy; and there is no defensible information provided on how and at which point the limited quantity of profits — or even what is also sometimes alluded to, the self-created limit of the accumulation of profit that is reflected in the falling tendency of the rate of profit — would have asserted itself in the collapse of the derivatives business.
In reality, for nearly two years now, the financial industry has been passing a crushing judgment on ever larger parts of the money-capital it created and speculatively used: too tricky, too much for its interest in speculation, so until further notice without value. The industry attests to its massive overaccumulation of financial titles and leaves no doubt as to the criterion that it applies here: demand falls off and brings one submarket of finance after the other to a standstill, because those who have created these markets and the commodities traded there distrust in turn their ability to guarantee the capital “quality” of their products. For the speculative community, the chain of conclusions drawn from this is entirely logical: on the basis of liquidity problems that first showed up in the special purpose entities to which banks transferred their new asset-backed securities, financial managers concluded that this entire area of business had become unsound. This negative judgment follows the same parameters they previously looked to in creating and marketing such “vehicles” and their corresponding products: the relationship between risk and return. Due to the nature of the matter, even a marginal event — a few critical reports from the underlying mortgage business with inexperienced private clients —sufficed to turn a positive assessment into caution and restraint; the refinancing difficulties the ABS issuers then ran into confirmed and reaffirmed their resolve to get out of the business. This had consequences that led the current crisis to differ from the course of previous capitalist recessions only in terms of magnitude. Credit and derivatives traders revised their assessments of the safety of certain securities as capital investments; they reduced or partially terminated the trading of various products; the nonrecognition of these products in practice made them worthless as capital, or at least diminished their value and therefore the power of financial companies to act as issuers and guarantors of debt-based money-capital. They plunged each other into illiquidity. Hence, they forced each other to liquidate their stocks of securities, which further reduced their value or even destroyed it. This destructive circle drew in the rest of the economy: the financial world lost its willingness and ability to speculate on the future accumulation of capital in commodity production and in commerce, too, and to use credit and “fictitious” capital to the extent necessary for companies to continue and appropriately intensify their competition for profit. It wasn’t that finance capital failed because its demands exceeded the limited capacity of the capitalist exploitation business, or because of the tendency of the rate of profit to fall. On the contrary, the representatives of “fictitious” money-capital passed a devastating, practical judgment on the reproductive process of society as a whole: not worth it as an investment — what had functioned as capital was now long since useless, i.e., there was too much of it, and it thus deserved to be brought to a halt. The accumulation process of “reproductive” capital was — temporarily — brought to a standstill because finance financial capitalists themselves no longer wanted or were able to finance its continuation; so they declared the attained business volume to be excessive — and liberated the capitalist business world from the burden of this excess so it could start anew on a “lean” basis.
As with any crisis, the current one ultimately presents a few particularities. The nature and extent of the devastation in the financial sector have been extravagant this time around — a consequence of the scale this sector has attained and the nature of its operations. The depth and global reach of the recession, in which production and trade in goods plunged, are extraordinary — a result of how completely all other industries have been subsumed under the financial industry’s interests in, and techniques of, accumulation. Finally, the intervention of states into crisis events is a story all to itself: its extent, its contradictions, and above all, its imperialist objectives.
 Up to here, the reflections on the productivity of bank capital summarize the corresponding findings of the first chapter of Finance Capital in issue 3-08 of this journal: I. The basis of the credit system: On the art of lending money.
 In the sense elucidated below in additional remark 2, we are reserving the expression, “fictitious capital,” which we’ve taken from Marx, for the world of “investments” calculated from promised yields and marketed as a commodity. Thus the following distinction: with its loan business, the financial industry establishes the equation — across the board and as the economically decisively important relation — that money becomes money-capital by the legal act of lending, i.e., it produces a yield to the lender through the sale — and for the duration of the sale — of power of disposal over the lent sum.
The financial industry takes the validity of this equation for granted and makes it the implicit contractual basis of a new kind of business activity when it issues securities: it defines future cash payments as interest paid on a sum of capital, as the product of a source of income that begins to flow just by someone buying it, i.e., forking out the corresponding money for it; by successful marketing, this fiction becomes real. With this transition, the financial industry opens up a whole world of new business.
This second chapter about finance capital deals with this.
 This becomes especially clear once this precondition no longer holds: then financial assets, whose expansion their owners had faithfully assumed, lose their value.
 We will have to examine these efforts in more detail below: they are the achievement of “expansion” that finance capital performs on the capital market.
 Our comment that the wealth created by finance capital testifies to the power of this trade has caused particular difficulties for our readers, some of whom have objected that power is not an economic concept. Now, it may be that for some critical minds, the only connection between power and the credit trade is the political-moral reproach that the excessive influence of financial barons undermines the nation’s democratic decision-making process, and that honest small and middle-size businesses suffer under arrogant bankers. While it is true that this reproach has nothing to do with political economy, our analysis is not at all intended in this manner. Instead, it addresses the use that finance capital makes of its capacity, enabled and enforced by political rule, to avail itself of the power of money in its credit- and capital-market operations according to its own needs and calculations: to appropriate it, to have it at its disposal, to apportion it to the rest of the business world, and thereby to utilize it itself. And when we talk about the power of money, we are not complaining about the injustice that “money rules the world.” Rather, we are referring to the private power of command that, owing to the state, belongs to tallied-up and objectified value in the political economy of bourgeois society. The term “value” itself expresses nothing other than the subsumption of labor, wealth, nature, and science under the dominion of property in a legal form, i.e., by force. The capitalist mode of production, which is dedicated to increasing value, is therefore nothing other than the political economy of the power of property.
 By the way, the objection that our arguments can’t be found in Marx’s works leaves us cold. There are some achievements of finance capital — for example, those that are doing so much damage in the current financial crisis — that he couldn’t possibly have known about. And with regard to those he did know about, he remarked at the beginning of the 25th chapter on “Credit and fictitious capital” in the 3rd volume of Capital: “An exhaustive analysis of the credit system and of the instruments which it creates for its own use (credit-money, etc.) lies beyond our plan.” (Capital Volume III, International Publishers, p. 400.) Even if we did come to different conclusions in our analysis than did Marx and Engels and found faulty or wrong explanations in their work, it would bother us neither theoretically nor morally. With regard to the issue at hand, in any case, we are in agreement with the author of Capital. The 32nd chapter of the 3rd volume, on “Money-capital and Real Capital. III” says, for example: “Thus, the accumulation of loanable money-capital expresses in part only the fact that all money into which industrial capital is transformed in the course of its circuit assumes the form not of money advanced by the reproductive capitalists, but of money borrowed by them; so that indeed the advance of money that must take place in the reproduction process appears as an advance of borrowed money. In fact, on the basis of commercial credit, one person lends to another the money required for the reproduction process. But this now assumes the following form: the banker, who receives the money as a loan from one group of the reproductive capitalists, lends it to another group of reproductive capitalists, so that the banker appears in the role of a supreme benefactor; and at the same time, the control over this capital falls completely into the hands of the banker in his capacity as middleman.” (ibid., p. 506) In the same chapter, Marx tries to explain how “real” capital, the expansion process of “reproductive capitalists,” acts as a source of loan capital. In the present article, we analyze the “form” in which the process of reproduction of capital “appears” on the basis of the credit system. The fact that this form is not an incidental illusion, but a part of the political-economic nature of the crazy world of capital in which absolutely everything “appears inverted,” is a matter of course for the Hegel-schooled critic of capital.
 The peculiarities of government bonds will be covered in chapter III of this article — coming soon in this journal.
 Everyday owners of savings accounts who have been sold bonds by their investment advisors are indifferent to the mostly marginal changes in the current value of their property. If its value falls below the issue price, they can console themselves with the fact that they have been promised one-hundred percent repayment of their investment at final maturity, just as long as the issuer does not go bankrupt. But bonds are not really intended for saving in its true sense. For the bond market pros at least, minimal price fluctuations, as well as slightest interest rate differentials between alternative “products,” are of interest from a business point of view; they even form the basis for an entire superstructure of derivatives — more about that in section 5.
 The issue price of a share is usually determined today with a “book building” process: the company publicly presents its prospects for success in a “road show” and invites major market participants to post bids as at an auction, after which the subscription price is set — and all eagerly await what will happen on the first day of exchange.
 The numerous hybrid mixtures of bonds and stock shares with which finance capitalist ingenuity has equipped capital markets hold the greatest of interest for professional investors, but are of the most limited interest theoretically and for that reason are not discussed here.
 The use of mortgage loans as a basis for the sort of derivatives trading whose collapse the current financial crisis has triggered is a story in its own right.
 In volume 3 of Capital, Marx deals extensively with the arguments with which the British financial lobby at the time sought to demonstrate the identity of their business interests with the needs of productive and commercial capital for loan capital and means of payment, and influence legislation in their favor. In this context, he argues that financial assets existing in the form of securities are sheer creations of the banking industry that add nothing to the productive wealth of society, and whose increase or decrease reflects neither the accumulation of industrial capital nor the needs of producing and trading firms for means of payment or for corresponding loan capital. Accordingly, this sort of wealth is a necessary product of the financial sector: “The form of interest-bearing capital is responsible for the fact that every definite and regular money revenue appears as interest on some capital, whether it arises from some capital or not. The money income is first converted into interest, and from the interest one can determine the capital from which it arises. In like manner, in the case of interest-bearing capital, every sum of value appears as capital as long as it is not expended as revenue; that is, it appears as principal in contrast to possible or actual interest which it may yield.” (ibid., p. 464). This wealth is produced, not through any economic effort, but by a calculation with effects on ownership rights: “The formation of a fictitious capital is called capitalisation. Every periodic income is capitalised by calculating it on the basis of the average rate of interest, as an income which would be realised by a capital loaned at this rate of interest.” (p. 466) Though it is based on real expansion processes, both its form and size leave them well behind: “All connection with the actual expansion process of capital is thus completely lost, and the conception of capital as something with automatic self-expansion properties is thereby strengthened.” (p. 466) “The independent movement of the value of these titles of ownership … adds weight to the illusion that they constitute real capital alongside of the capital or claim to which they may have title. For they become commodities, whose price has its own characteristic movements and is established in its own way. Their market-value is determined differently from their nominal value, without any change in the value (even though the expansion may change) of the actual capital.” (p. 467) This value, based on calculations and legal title, makes no contribution to the real wealth used in the reproduction of society. Instead, it represents a mere claim on this wealth: “All this paper actually represents nothing more than accumulated claims, or legal titles, to future production whose money or capital value represents either no capital at all, as in the case of state debts, or is regulated independently of the value of real capital which it represents.” (p. 468) These same titles, whose value is a matter of a speculative calculation, are, nevertheless, the crucial part of society’s financial assets accumulated by the banks: “In all countries based on capitalist production, there exists in this form an enormous quantity of so-called interest-bearing capital, or moneyed capital. And by accumulation of money-capital nothing more, in the main, is connoted than an accumulation of these claims on production, an accumulation of the market-price, the illusory capital-value of these claims.” (p. 468) “The greater portion of banker’s capital is, therefore, purely fictitious and consists of claims (bills of exchange), government securities (which represent spent capital), and stocks (drafts on future revenue). And it should not be forgotten that the money-value of the capital represented by this paper in the safes of the banker is itself fictitious, in so far as the paper consists of drafts on guaranteed revenue (e.g., government securities), or titles of ownership to real capital (e.g., stocks), and that this value is regulated differently from that of the real capital, which the paper represents at least in part; or, when it represents mere claims on revenue and no capital, the claim on the same revenue is expressed in continually changing fictitious money-capital.” (p. 469 ) Concerning stocks — “titles of ownership to [joint-stock companies] — Marx attaches importance to the fact that, though they indeed refer to materially existing capital like “paper duplicates,” their own capital character is of quite a different kind — “illusory” by comparison — than the expansion process that the capital concentrated in the firm passes through, and their value is determined completely differently: “They assume the form of interest-bearing capital, not only because they guarantee a certain income, but also because, through their sale, their repayment as capital-values can be obtained. To the extent that the accumulation of this paper expresses the accumulation of railways, mines, steamships, etc., to that extent does it express the extension of the actual reproduction process … But as duplicates which are themselves objects of transactions as commodities, and thus able to circulate as capital-values, they are illusory, and their value may fall or rise quite independently of the movement of value of the real capital for which they are titles.” (p. 477)
 This absurd consequence of the relations of production — the productive power of money — is familiar in the “real economy” as a crucial criterion for success: as an economic magnitude, be it a “profit rate” or simply the “profitability” of capital, it measures the return on the money spent and advanced for any given business activity — and decides whether and to what extent a productive activity makes “economic sense.” Newly created wealth appears to issue forth from the advanced sum of money; whatever a company or an entire “economy” brings about in the form of consumable wealth and growth is attributed to the productivity of capital itself. The calculation by which increased capital expenditures lead to an increase in the rate of profit works out indeed only temporarily and to the extent that a company secures competitive advantages for itself by lowering the prices of its goods. Over the long term and on the whole, the opposite effect appears — Marx calls this the “tendency towards a falling rate of profit” — and discredits the idea that the productive power of capital actually and ultimately lies in the amount of money spent (and not, it should be noted, in property’s power of command, objectified and quantified in money, over social labor organized as the source of property). But in the world of capital, the illusion that money possesses productive power on its own asserts its validity. After all, work only takes place under the command and for the accumulation of property. And in the completely insane world of finance capital, returns are really nothing more than a legally grounded quantity of financial power of disposal measured in terms of the size of the invested sum and the agreed upon rate of return.
 Powerful capital-market players like to help along their speculative far-sightedness with “insider knowledge” and “market intervention.” They do so by buying and selling securities based on insider information about business developments concerning securities issuers, or by engaging in transactions that move their price in the desired direction. After realizing the paper profits resulting from such maneuvers, the “free play of market forces” is allowed to resume its course. The interest in such methods and their use — chastised by competitors and nonpartisan overseers as “unfair” and sometimes even forbidden by law — increases considerably with futures, dealt with in section 5 of this chapter.
 The growth of financial transactions is not restricted by society’s ability to pay. The interest in the production and acquisition of financial capital out of debts is in principal never saturated, still less when it critically goes to work and demands carefully designed products that combine the opposing “properties” of high yield and reliable security. And because financial institutions act as both suppliers and demanders, there is no shortage of money on financial markets: after all, they have the money of society to put to profitable use. And in keeping with their public mission to provide the business world with funds, they “create” ability-to-pay whenever profitable businesses require it and justify its creation. How much of such “deposit money” is needed to achieve the turnover of growing amounts of “fictitious” capital is a matter of the turnover rate of these funds, which is extremely high in this sector.
The accumulation of fictitious capital remains unaffected by the “tendency of the rate of profit to fall.” This refers to the paradoxical effect that the capitalist use of ever larger sums of money aims to increase the rate of capital expansion, but at the same time counteracts the increasing rate of profit because money in fact does not produce its rate of profit — in terms of the basic equation of the system in which money is its own source — on its own, but rather through the profitable use of others’ labor, which it consistently reduces for the very same reason (this paradox is explained in more detail in Additional Remark 3 about the general concept of capitalist crisis). Naturally, this contradiction doesn’t apply to the business of exchanging money for a vested right to more money, the creation of capital out of debt. In the chapter on “Money-Capital and Real Capital I.” in Volume III of Capital, Marx mentions the case where the accumulation of fictitious capital can even be spurred on through an effect of the tendency of a declining rate of profit: “Their value” — referring to “Titles of ownership to [joint-stock companies] — “that is, their quotation on the Stock Exchange, necessarily has a tendency to rise with a fall in the rate of interest — in so far as this fall, independent of the characteristic movements of money-capital, is due merely to the tendency for the rate of profit to fall; therefore, this imaginary wealth expands, if for this reason alone, in the course of capitalist production in accordance with the expressed value for each of its aliquot parts of specific original nominal value.” (ibid., p. 477 f.)
 This business of mergers and acquisitions is dealt with in an untranslated article, ‘Mega-Mergers’ — Kapitalkonzentration im globalen Maßstab, in volume 4-98.
 The method of “private equity” firms follows this pattern: they buy companies on credit in order — burdened with the credit taken on and, if necessary, expertly dismembered — to go public with them, to pocket the proceeds from the sale of securities, and to turn in the same way to the next business.
 For that reason, the practice of resourceful business people — commented on by Marx and Engels in the 3rd volume of Capital — to feign “real” ventures to get at the money and credit of speculative investors hasn’t died out.
 That would not be worth mentioning in a world overflowing with avowed free-market enthusiasts who know one thing for sure: the beneficial production of goods of all kinds and the associated employment has to pay off in order to take place. On the occasion of a crisis, however, these smart people resort to discerning, as object and victim of financial “greed,” a “real economy” whose achievements, in contrast to the naked enrichment of the banking world, ought to be valued as a singular good deed. In this case, they deny that industry and finance pursue the same purpose, and draw a picture of the dealings between the two branches of business life that denies them both their capitalist character.
 It is worthwhile to read what Marx has to say about this in chapter 27 of the 3rd volume of Capital on The role of credit in capitalist production.
Incidentally, it is not true that this achievement of finance capital — the socialization of capital as means of competition — is not noticed in the modern market economy with its pluralism of opinion.
- When a crisis-torn public continually draws an unrealistic picture of the relationship between the branches of the capitalist business world, a picture that varies in a politically correct way the idea of an antagonism between “rapacious and productive capital,” that doesn’t deny the good reputation of the banking industry as a service to the “real economy” with its investment needs, but supplements it with an accusation that represents a constructive contribution to the affirmative overall picture: it contributes a formulation for the dependence of even the remotest low-wage job on the “performance” of the financial sector.
- The sad truth that the performance of the banking industry has rather more to do with the exercise of power over work and life than with faithful service has also become an established idea among experts and laymen alike. After all, the whole world measures the health of “the economy” with the indices of the state of speculation in securities — a view that is guaranteed not to be suspected as an objection to this sort of common good, and certainly not to the market economy with its employers and employees, who form its legal and economic basis.
- When, finally, seasoned supporters of a free society feel compelled to demand some justice from the free market, they gladly resort to a kind of criticism that emphasizes the aspect of private property in the banking business and the “mobility” of capital which it organizes. Graphs of the shares of equity ownership, which for others only document the “interdependence of the economy,” then rather quickly justify complaints about unequal distribution, at times also about undermining competition — also a way of taking note of the contradiction of the “abolition of capital as private property within the framework of capitalist production itself.” (ibid., p. 436)
 So as not to leave unanswered the question of how it is done, we avail ourselves of the July, 2006 Monthly Report of the Deutsche Bundesbank. It says: “Through a futures position, the buyer secures the price at which he can later obtain the underlying asset, and the seller secures the price at which he will later deliver the underlying asset.” (p. 57) This “instrument” is not only applied when buying new securities or selling old ones; it also serves to preserve the value of a stock market asset: in order “for example, to secure a broadly diversified portfolio of stocks” against loss of value, one sells a “futures contract on a stock index that mirrors the shares in the portfolio. The resulting risk of equities is reduced by the sale of futures, since stock gains are offset by losses from the futures sold, and stock losses are offset by gains on the futures position.” (p. 58)
 “Typically, however, futures contracts are not fulfilled by physical delivery of the underlying, but rather the difference between the agreed futures price and the market value of the underlying instrument is balanced by cash payment.” (ibid., p. 57) The exchangeability of insurance and profit interests in these transactions is explained in the July, 2006 Monthly Report with an ‘on the one hand — on the other hand’ acting in a somewhat naive manner: “A stimulus to trade in derivatives can, on the one hand, consist in disproportionately participating in price trends of the underlying instrument with a relatively small capital investment or profiting from price declines. But on the other hand, derivatives also find use as hedges against price fluctuations of the underlying instrument” (ibid., p. 56)
 The July, 2006 Monthly Report puts this succinctly: “Once the fulfillment of a derivative contract is not tied to the delivery of the underlying instrument,” (and of course one has already learned that that is the rule) “the volume of trade can be expanded virtually without limit.” (p. 57 )
 In principle, it goes on like this up until the due date. Then the future is future no more, and its price would coincide with the market price of the underlying.
 The wonderful absurdities of this business also include participants with poor financial standing having to pay a multiple in deposits for the same futures price as do companies with excellent ratings, thus having to post a lower profit rate for the same profit, but also a correspondingly lower loss rate for the same loss. So while they cannot issue as much “fictitious” capital as their more powerful colleagues, they can’t destroy as much either. This certainly does not alter the fact that gains and losses, in absolute terms, correspond to each other — not counting the portion the exchange itself collects from winners and losers alike. Nevertheless, capitalist investors calculate, not in absolute terms, but in yield per expenditure, or percent interest. In the practice of this business, this rather considerably moderates the significance of both the “symmetry” of risks and the “zero sum” considered so theoretically important, which doesn’t impress the professionals of the business anyway.
 We are not going to go into the design of swaps, CDOs (collateralized debt obligations) and other achievements of the speculative business mind here; the presentation of the futures business is enough for us; we have already expressed ourselves in enough detail in issue 4-07 (“Die sogenannte US-Hypothekenkrise. Ein Nachtrag,” untranslated) about the ill-fated asset-backed securities that triggered the escalating financial crisis two years ago as investors saw no more good investment in them. We content ourselves with the general remarks of the Deutsche Bundesbank, first of all from the Monthly Report of July, 2006: “The trading of financial derivatives has increased greatly over the past two decades. After it initially drew heavily on stock and commodity markets, the concepts proven there were later applied to interest rate risk and exchange rates. A relatively young segment consists of loan derivatives, with which the credit risk of the underlying loans can be detached and made separately tradable, or newly created.” (ibid., p. 56) In an article on “Recent developments in the international financial system” in its Monthly Report of July, 2008, the German Bundesbank continues to uninhibitedly praise this sort of wheeling and dealing: “The palette of traditional banking services and financial products has been supplemented by innovative and sometimes complex financing and risk transfer techniques. … These developments are not least the expression of an enhanced search for more profitable portfolio diversification …” (p. 16) About the organizers of this business, it notes: “Innovative financing and risk transfer techniques are becoming intensively used by particularly large, complex, internationally active financial institutions. These financial conglomerates cover a broad supply of financial services. As part of their proprietary trading, they appear both as suppliers and as demanders of credit-risk transfer products.” (p. 24)
 In its already cited July, 2008 Monthly Report, the German Bundesbank proclaims quite without prejudice: “The strong expansion of financial markets in industrial countries is above all an expression of an intense use of innovative risk transfer instruments and techniques. The focus is on derivatives that are traded on exchanges in a standardized form, or are individually developed as customer-specific contracts (over-the-counter: OTC). According to reports of the BIS [Bank for International Settlements] the nominal value of outstanding exchange-traded derivatives in late 2007 ran to over 80 trillion U.S. dollars; it has multiplied ten-fold since 1993. The nominal value of outstanding OTC derivatives alone in the G10 countries, for which data are regularly collected, increased about eight times since 1998 and stood at 525 trillion U.S. dollars at the end of 2007. Interest rate contracts dominate the market for derivatives by far, followed by foreign exchange contracts and loan derivatives. The chief component of the market for loan derivatives in the G10 countries consists in so-called credit default swaps (CDS), whose nominal value at the end of 2007 came to 58 trillion U.S. dollars, after it had stood at 1 trillion U.S. dollars in 2001.” (ibid., p. 22) With all due caution, the Bundesbank adds: “Some observers see in this dynamic development signs of a certain independence of the financial sector.” (p. 17)
 In the words of this science: “The rate of profit does not fall because labour becomes less productive, but because it becomes more productive. Both the rise in the rate of surplus-value and the fall in the rate of profit are but specific forms through which growing productivity of labour is expressed under capitalism.” In their efforts to continually increase the yield from the use of paid labor, capitalist companies practice the “contradiction … that the capitalist mode of production involves a tendency towards absolute development of the productive forces, regardless of the value and surplus-value it contains, and regardless of the social conditions under which capitalist production takes place; while, on the other hand, its aim is to preserve the value of the existing capital and promote its self-expansion to the highest limit (i.e., to promote an ever more rapid growth of this value). … The means — unconditional development of the productive forces of society — comes continually into conflict with the limited purpose, the self-expansion of the existing capital.” (Marx, Capital, 3rd volume, chapter 14, p. 240; chapter 15, pp. 249–250)
In a crisis, free-market expertise is interested above all in finding mistakes that the worst affected companies have made — mistakes in the spectrum of products, in marketing, in pricing, in dealing with personnel…. Insofar as it notices the general effect of competition on maximal exploitation of paid labor, it interprets the crisis as a problem of the right balance, which, in the heat of competition, in itself a blessing, was “somehow” violated: everything could have gone well if those in the boardrooms had not overdone things and built up excess capacity. Marx made a different claim about competition and its effect, and because we consider this to be correct and important, let it be stressed one more time: over-accumulation is not a matter of violating a proper balance, but a contradiction of capitalist accumulation itself, namely, that the methods for increasing the growth of capital restrict it at the same time. Through the beneficent workings of loanable capital, as shown below, this contradiction takes the form of an alternation between boom and bust.
 The automotive industry — currently rather especially affected — exemplifies this point. For years, experts have calculated a considerable “excess capacity” in the industry by comparing the worldwide, technically possible output of automobile factories with average sales figures. But in the first instance, that only means that for years, companies always have had plenty of produced goods on hand that they use on suitable occasions for competitive maneuvers such as promotional discounts, or even at times for getting rid of at a loss in order to secure or conquer market positions — the transformation of produced commodity capital into money, the “realization” of its value, is after all a competitive affair. That becomes a sales crisis when the firms of the financial world — and that definitely can also include the finance department of an auto company itself — withdraw further financing from a company, thus putting their critique of its course of business into practice. That is what turns a stockpile of goods into a “pile” of goods that no longer represent a capital value — Marx denotes it C¢ — but the company debt, which it expended for production and which is now no longer prolonged, but called in. To service the debt, the company needs liquidity. Such a situation requires distress sales, which, even if they succeed after a fashion, merely document the fact that the company’s products, just as its debt, have ceased to be capital. They can get their commodity-value back only when an investor is willing and able to place the financing of the business on a new basis, i.e., to inject credit; otherwise that is the end of its “objectified value,” and the company goes bankrupt. In a genuine crisis — of the industry or of the capitalist reproduction process as a whole — finance capital’s critique of its investments goes so far that lenders and investors lose confidence, not just in one or the other company, but in their own business and their daily practiced financing tricks. Once that happens, the calculated excess capacity of the automotive industry takes on a whole new significance.
 For the sustainable functioning of the free-market system, the destruction of wealth in a recession is not only repeatedly necessary, but expedient; Marx characterizes it once as virtually a means: “The periodical depreciation of existing capital — one of the means immanent in capitalist production to check the fall of the rate of profit and hasten accumulation of capital — value through formation of new capital — disturbs the given conditions, within which the process of circulation and reproduction of capital takes place, and is therefore accompanied by sudden stoppages and crises in the production process.” (ibid., p. 249) Crises are needed from time to time to relieve capital of the business-damaging consequences of its accumulation, and to restore, through widespread impoverishment, the suitability of the social life-process as a business condition for decent profit-making.
 In some explanatory approaches, American homebuilders — whose insolvency was involved in triggering the crisis two years ago — stand for the “real economy” or for the “limits of the market” that caused accumulation in the “real economy” to “fail.” But this interpretation corresponds to the wrong question as to the proper bounds of lending that were violated in this case — why and by whomever — and to the answer bourgeois theorists give as to who was guilty, the question into which they like to convert this problem of degree: “America” has “lived beyond its means”. At any rate, this interpretation does not address the connection with which the critique of the political economy of the whole business is concerned: the connection between, on the one hand, the reason for the recurring antagonism between the production and the realization of commodity-value, i.e., the contradiction in the techniques of capital accumulation through profitable work, and, on the other hand, the relation between finance capital and “reproductive” capitalists that takes such a hostile turn in a crisis.
A detailed critique of crisis theories circulating among the Left is offered in the essay, “The German Left sees itself confirmed: Neoliberal turbo-capitalism is a failure! Let’s do better!” in volume 1-09.