(VII) Financial growth

The clandestine hierarchies of the Mafia undoubtedly parallel the hierarchies built by the financial empires that have grown up since the 19th century. Of all the institutions of 20th/21st century capitalism, the banks are the most omnipresent. It is fitting that the institutions that more than any other control society’s buying power have become its most powerful bastions. Financial power is also an expression of the immiseration of humanity, i.e. the growing polarization of wealth and income between rich and poor. Among the great merger movement of the 1990s, which the Wall Street Journal likened to the mergers of the late 19th century (_Corporations’ Dreams Converge in One Idea: It’s Time to do a Deal_, by Steven Lipin, Wall Street Journal, February 26, 1997), the banks have been among the star performers. The growth of banking power has paralleled the growing polarization of society, starting with U.S. society.

29. “During 1948-1965 the assets of financial institutions continued their long-term rise relative to national wealth, reaching 47% of national wealth in 1965, compared to 42% in 1948 and 30% in 1929.” (From Raymond Goldsmith, Financial Institutions, NY, 1968; taken from David M. Kotz: Bank Control of Large Corporations in the United States, University of California Press, 1980)

“We live in a global economy once again dominated, as in the 1920s, by international finance capital. According to one estimate, before 1970, 90% of all international transactions were accounted for by trade, and only 10% by capital flows. Today, despite a vast increase in global trade, that ratio has been reversed, with 90% of transactions accounted for by financial flows not directly related to trade in goods and services. Most of these flows take the form of highly volatile stocks and bonds, investment and short-term loans…Changes to the global economy, the shift from the dominance of industrial capital to finance capital did not come about naturally or spontaneously. The 30-year changes, as Eric Helleiner has shown, are the result of deliberate policy-making, driven first, by the City of London and Mrs. Thatcher’s government, and later by Wall St. and US governments. Both actively promoted exchange rate and price stabilization policies whose ultimate purpose is to protect the value of creditor assets. Today, in one of the most skilful spin-doctoring achievements of the last century, these policies are dressed up by the IMF and World Bank as ‘poverty reduction strategies’. In the 1920’s, similar deflationary economic policies were applied to justify the dismissal of public servants, to suppress wages and maintain unemployment, and guarantee the value of creditor assets. The result was disastrous for the global economy.” (Undated commentary: The urgent need for economic transformation – subordinating the interests of finance capital to human rights, by Ann Pettifor, New Economics Foundation)

According to Jerry Harris: “Financial assets have been growing at 2.5 times the rate of GDP since 1980. US$ 35 trillion (i.e. million million) in financial assets were traded globally in 1992 (twice the GDP of the 23 richest industrial countries). The biggest financial market is exchange of currency: 60 times world trade in manufactured goods, $1.3 trillion a day, so volatile that 66% hold money less than seven days, and only 1% as long as a year. International capital discipline is not just about buying politicians, but withdrawing money from countries when they adopt unfriendly policies. 1994: investors decided Mexico was unstable and withdrew billions, destroyed the peso, in less than three days. A few transnational money managers make the decisions. More typically, bondholders can dump holdings, drive up interest rates, and slow economic growth.” (_Globalization and the technological transformation of capital_, Race and Class 40, 1999)

The Concentration of Wealth

(VIII) But the growing concentration of wealth in few hands clearly carries with it serious dangers. It is interesting merely to note here that while governments around the world since the 1970s have successfully worked to push inflation down (especially in the industrialized countries), stock prices have soared. Thanks to growing polarization since the 1960s, people in the highest income brackets have added to their wealth, much of it multiplying itself on paper by piling up in financial markets and boosting stock prices, rather than being spent in goods and services markets

30. “The most vivid example of exponentially expanding financial capital is the trend of US stock market index, the Dow-Jones Industrial Average, over the past ten years. It is now around 10,000 points, up five times from 2000 points ten years ago… [i.e., up] 500% over the ten years. In contrast, the real economy of the US has grown in terms of GDP only by 3 percent annually, ...[i.e., up] cumulatively 30% over the same period….
“Why are such deep discrepancies observable between the financial economy and the real economy? There are two fundamental reasons for the inexplicable expansion of the financial economy… I believe the income disparity between the rich and the poor is the primary driver. According to the world renowned economist, Paul Krugman of MIT, the increase in households income in the US over the past 30 years has been extremely skewedly distributed. It’s been concentrated for the benefit of the privileged. Around 70 percent of the increase went into the top one percent households, while the remaining 30 percent has been shared by 99 percent of the whole households.
“What’s the relationship between income disparity and over-expansion of the financial economy?... Income disparity is a matter of deep concern. It gives rise to the lack of effective demand… poor people cannot buy cars, for example, because they don’t have purchasing power, whereas rich people don’t want to buy as many cars as they can afford because they don’t need many cars. The result is simply the lack of effective demand. Because of this, most of big companies in the world hesitate to make investments on facilities and equipment. They are now at a loss for what to do with their surplus capital. They have money, but they don’t have the right things to invest in. As a result, huge surplus capital is drawn into the financial market, creating financial bubbles in the developed economies. You may have heard that many big transnational companies like GE and GM make around half of their earnings from their financial operations.” (From: Professor Chan Keun Lee, University of Inchon, Korea, How to Reconfigure the Financial Sector in a Growth-Friendly Way Crisis-Engendering Mechanism and Counter Solution Approaches -Korean Perspectives)

U.S. monetary authorities have striven to prevent their own financial markets from spilling over. This was evident in 1998, with the hedge-fund crisis and with Long-term Capital Management (LTCM) in particular, a billionaire speculative concern that made its money by exploiting interest rate and exchange rate differentials in the international markets. LTCM’s troubles began in August when it bought Russian bonds, expecting them to gain in price against U.S. Treasury Bills, but the Ruble was devalued on August 17 and they fell in price. LTCM, with a large capital of US$ 4 billion supporting an absurdly high level of loans (estimated to have exceeded US$ 1 trillion, equivalent to China’s GDP), thought it could gamble on short-term volatility, until the volatility moved against it. But beyond the United States things have been even worse since the early 1990s, financial speculation of this kind has contributed to the collapse of whole economies, from Turkey to Mexico, Argentina, Indonesia, Russia and Japan. In 1998, it was estimated that in a space of about two months (Mid-July to mid-September) US$4.3 trillion was erased from world financial markets.

N.B. A different version of events is given by Nicholas Dunbar: Inventing Money, 2000

Crisis in Argentina, 2002

U.S. fiscal and monetary policy can no longer be seen as a text-book exercise. Up to the early 1990s, it was a hallmark of U.S. stability that its financial markets were generally far less volatile than the “emerging markets”, e.g. basically in Latin America, Asia, Oceania and Africa. But by the mid-1990s, U.S. financial markets had gradually become much more volatile, and volatility (on the New York Stock Exchange and the NASDAQ, for example) quite commonly exceeded the volatility seen in Mexico, Argentina or Indonesia. Towards the end of the 1990s it had become increasingly difficult for the U.S. monetary authorities (at the Federal Reserve) to predict the effect of monetary policy. Raising/reducing Federal Reserve interest rates in the past was supposed to unquestionably raise/reduce the dollar vs. other currencies, but with the globalization of financial markets and the massive amounts of money rushing around the world (*see note 29*) in search of speculative profits, a fall in interest rates might very well cause the dollar to appreciate, if global speculators saw this as an opportunity to get into the U.S. stock markets. Global financial funds and the complexity of the markets make it increasingly difficult to predict the effects of monetary policy moves. Also, financial markets in countries that seem totally unconnected geographically, economically, or culturally will suddenly move in tandem. One of the reasons for this is that financial markets that are perceived as high-risk (and hence high-return) markets are invested in by the same groups of international speculators. When one collapses, those who have committed themselves to it seek funds to cover their losses from other similar high-risk markets. This indeterminacy and uncertainty is seen in other parts of the system (see section XIII).

(IX) Nonetheless, banks keep growing, and the internationally dominant banks are buying up larger chunks of the market outside their home countries. Latin AmericaÕs largest banks are now foreign-owned. Mexico, for instance, is now dominated by Spain’s two largest banks and one of the biggest U.S. banks. It is now a much-discussed “secret”, too, that the commercial banks, including the largest, far from being above money-laundering, are profoundly involved in it.

31 There are now many books on this subject, a few of which are as follows:
Adams, James Ring and Frantz, Douglas: A Full Service Bank: How BCCI Stole Billions Around the World. New York: Pocket Books, 1992. Using a system of shell corporations and off-shore branches, BCCI built a huge Ponzi scheme with money from depositors, many from Third World countries. They also laundered money for drug cartels and arms merchants, and performed banking services for the CIA and terrorist Abu Nidal. Jimmy Carter was also involved with BCCI.
Clarke, Thurston and Tigue, John J. Jr.: Dirty Money: Swiss Banks, the Mafia, Money Laundering, and White Collar Crime. New York: Simon and Schuster, 1975. Swiss banking laws, offshore banks competing with them, Mafia couriers who move cash across borders, and dummy shell corporations in Liechtenstein and Panama that are used to further disguise the money trail.
Ehrenfeld, Rachel. Evil Money: Encounters Along the Money Trail, New York: HarperCollins, 1992. “All too often it is the privileged and the well heeled who promote, distribute, and launder the profits from this illegal trade…. Adam Smith’s `invisible hand,’ a metaphor for enlightened self-interest in a free market society, is now stabbing itself in the back.”

“Credit Lyonnais is saddled with US$ 25 billion in bad debts, but it hopes to recover some of its money through the sale of assets, including MGM. The US$ 14 billion here refers to the sum the French government has infused to save Credit Lyonnais from collapse. Even that lesser figure dwarfs estimates of other spectacular banking losses of recent history.” (From Fortune magazine, July 8, 1996. The article mentions BCCI (losses of US$ 7 billion), Continental Illinois Bank (US$ 4.5 billion, and Franklin National Bank (US$ 1.8 billion), among others.
The article notes how MGM was acquired by one Giancarlo Parretti, in 1990 for US$ 1.3 billion. His working life began in the 1970s, working as a waiter (and a petty thief) on the Queen Elizabeth, where he met tycoon Graziano Verzotto, later exposed as being connected to Mafia banker Michele Sindona. When Verzotto fled Italy, Parretti took over his business operations. Loans from Credit Lyonnais boosted Parretti’s personal fortunes, and he and his henchmen relied on top people in the Italian government to give themselves “respectability”, for example, Prime Minister Bettino Craxi and Foreign Minister Gianni DeMichelis.

A recent report (Grupo de Accion Financiera Internacional, La Jornada, Mexico City, August 8, 2001) stated that in 2001 money laundering will total some US$1.5 trillion (i.e. million million), equivalent to between 2% and 5% of world GDP. It seems clear that drug trafficking, with its high risks and therefore high rates of return provides an essential element in the fast-moving “futuristic” financial system of the 20th/21st century; once addicted, though, it is impossible to eradicate it from the vaults, i.e. financial addiction to drugs is as hard (if not harder) to eradicate as bodily addiction. This is not to say that this is anything new, but the drugs-banking nexus seems especially to characterize the way capitalism has developed since about the 1960s.

Bank of America Pyramid,
San Francisco

(X) Mainly for Services Rendered

Looking at official U.S. statistics [see 32 below], we see that workers in the service sector now clearly outnumber those in the industrial sector.

US Labor Bureau statistics point to a diminishing percentage of workers in the industrial, farm and extractive sectors in the United States. For instance, out of the total work force, they could not have numbered more than 16% in the year 2000, the rest being made up of managerial, service and other employees in the “non-material” sector.

32.”The United States had a predominately agricultural economy two centuries ago, with 92 percent of Americans working on farms. At the start of the 1900s, agriculture was still the primary occupation, employing 40.4 percent of Americans, and services, including government jobs, made up 31.4 percent of U.S. employment. By 1930, the goods-producing industries (manufacturing, mining and construction) had eclipsed agriculture as a source of employment. Yet services, largely ignored in the fanfare over the Industrial Age, already had grown to more than half the work force. By the end of the 1960s, the service sector employed two-thirds of U.S. workers… The proportion of jobs in goods-producing industries had already reached its peak in the early 1950s…Factory employment has fallen to 18 million, down from a peak of 21 million in 1979. As a portion of employment, manufacturing has slipped from 35 percent in 1953 to less than 16 percent today… (Yet) output in manufacturing, for example, continues to rise, year after year… In 1992, the nation’s factories churned out $1.06 trillion in goods, up an inflation-adjusted 256 percent from 1947 and more than 27 percent from 1980… As a proportion of GDP, manufacturing slipped to roughly 19 percent in 1992, which is more a tribute to services’ phenomenal expansion than to a loss of manufacturing output. The country is not manufacturing less. Quite the contrary, it’s manufacturing more, just with fewer people…” ( From: Federal Reserve Bank of Dallas, 1994 Annual Report: The Service Sector: Give It Some Respect.)

Early Ford assembly line workers….....

........Factory robotics circa 1997

America, and much of the rest of the world has become a “service society”; the industrial proletariat is now a minority group. The Industrial Revolution made this possible, but industrial workers are no longer needed in the huge numbers they were in the 19th century and much of the 20th century, as machines have made them redundant. This movement has also paralleled the increased polarization of society and the growth of financial power. Large numbers have been freed from factory work, but not freed from poverty and wage slavery. Meanwhile, the “service sector” is as riddled with hierarchy as the industrial sector. Again, this points to the high productivity which has displaced the human workforce, making a large amount of employment more and more artificial, imposed (via the wages system) as a means of social control.

(XI) Social Polarization

Spare a penny guv

It is very important to realize that social polarization has neither remained static nor declined, but grown dynamically with Capitalism. In a recent study, Richard Jolly shows that income and wealth between the richest and poorest nations have become increasingly polarized since the Industrial Revolution.

33. At the OECD’s Forum for the Future (Expo 2000), December 1999, Richard Jolly stated that the ratio of per capita income in constant prices for the richest country in 1820 (then, the United Kingdom) and the poorest (then, India and China) stood at 3:1. By 1913, this ratio had grown to 11:1. By 1950, it stood at 35:1, by 1973 at 44:1 and in December 1999 at 74:1. (R. Jolly: 21st Century Social Dynamism: Towards the Creative Society)

Meanwhile, Barry Bluestone was among the first to show how U.S. incomes and wealth grew more polarized from the end of the 1960s.

34. “Since 1973, real average weekly earnings for more than 80% of the workforce who are counted as production or non-supervisory workers have fallen by 19%, median family income is no higher 20 years ago, and the share of total marketable net worth accruing to the top 1% of households has increased from about 20% to nearly 39%. Income gains have gone primarily to the already well off, while those at the bottom of the income distribution have sustained real losses.” Barry Bluestone: The Polarization of American Society, New York Twentieth Century Fund Press, 1995.

Perhaps there are exceptions, but growing social polarization appears to be universal in today’s world, including in Mexico. As in India, poverty appears to have grown particularly fast in the mid-1990s.

35. “...Population grew by 3.2 million between 1994 and 1996… That part of the population that lives in homes where household income per capita is below the poverty line totaled 61.7 million in 1994 and 72.2 million in 1996, up by 10.6 million in absolute terms, 3.3 times total population growth…The [poor as a] percentage of total population grew from 69% to 78%...i.e., a combination of [President] Salinas de Gortari’s Neoliberal policies which delivered an economy in a state of collapse to [President] Zedillo, and the policies the latter adopted, flung another 10.6 million Mexicans into poverty in just two years. But the worst of all is that the extreme poor (whose household incomes per capita are below the extreme poverty line, which represents just 66% of the poverty line), whose numbers stood at 36.2 million in 1994, grew to 50.9 million in 1996, an increase of 14.7 million extremely poor people in two years! This increase is greater than that for the total number of poor people, due to the fact that the absolute number of moderately poor people declined by 4.2 million. The largest part of the increase in extreme poverty, 10.3 million out of the 14.7 million, took place among the indigenous people, i.e., those whose per capita income is 50% below the poverty line, who live in misery degrading for any human being. Finally, and the other side of the coin to the increase in poverty, the numbers of the non-poor fell by 7.3 million. Not only relatively…but also absolutely, this led to a radical immiseration in the country’s social structure. In 1994, in rounded millions, the social structure expressed as extremely poor, moderately poor and non-poor was: 36-25-28, which was transformed [in 1996] into 51-21-22. The first was a structure in which there was still a certain equilibrium between the three groups (even after 12 years of increasing poverty under Neoliberal regimes). The second gives a portrait of a society that is now totally polarized and pauperized in which the extreme poor constitute an absolute majority, having grown, as we have noted, from 36 million to 51 million, while the moderate poor and the non-poor, whose number stood at 53 million in 1994, have fallen to 43 million in 1996. (Julio Boltvinik, La Jornada, Mexico City, Friday, October 16, 1998)

Pancho Villa and Emiliano Zapata, 1914

(XII) Profits

While incomes for the majority have been falling throughout the world since the end of the 1960s, profits have been climbing. For the United States, corporate profits for domestic industries to 1998 (before tax with inventory valuation adjustment) are as follows:

Year	Total	Growth in 5 years
1970	US$ 62.4 billion
1975	US$ 107.6 billion	72%
1980	US$ 161.9 billion	50%
1985	US$ 190.8 billion	18%
1990	US$ 236.4 billion	24%
1995	US$ 511.7 billion	116%
1996	US$ 578.2 billion
1997	US$ 636.7 billion
19981	US$ 651.0 billion	27%

(1995 to first quarter of 1998)
1. Second quarter (seasonally adjusted at annual rates)
(From: U.S. Bureau of Economic Analysis)

As can be seen, corporate profit growth increased rapidly during the 1970s, then slowed until the early 1990s; then, in the first half of the 1990s it soared massively. Although the non-financial sector makes up the bulk of U.S. corporate profits (approximately 80% in 1970, 89% in 1975, 83% in 1980, 89% in 1985 and 92% in 1990), during the 1990s, financial profits really took off, growing by more than 5 times between 1990 and 1995, while non-financial profits hardly doubled. Since then profits have grown less rapidly. More recently, the slowdown in profit growth has turned into negative profit growth:

Year and quarter	Amounts adjusted at annual rates	% change from preceding period
2Q/2000	US$ 892.8 billion	+ 2.6%
3Q/2000	US$ 895.0 billion	+ 0.3%
4Q/2000	US$ 847.6 billion	- 5.3%
1Q/2001	US$ 789.8 billion	- 6.8%

(From: U.S. Bureau of Economic Analysis)

But profits have not changed evenly, of course. The worst hit sector is manufacturing, whose profits moved as follows:

Year and quarter	Amounts adjusted at annual rates
2Q/2000	US$ 175.0 billion
3Q/2000	US$ 159 4 billion
4Q/2000	US$ 119.4 billion
1Q/2001	US$ 90.4 billion

(From: U.S. Bureau of Economic Analysis)

Between the second quarter of 2000 and the first quarter of 2001, manufacturing profits have nearly halved. At this stage it is impossible to say what will happen next –whether this is evidence of another “great depression” in the making (in which case it would be bigger and more devastating than what happened in the 1930s) or another short-term crisis in what is already a crisis system.

But the picture for the financial sector is different. There, profits have remained pretty well unchanged over the past year:

Year and quarter	Amounts adjusted at annual rates
2Q/2000	US$ 200.3 billion
3Q/2000	US$ 203.1 billion
4Q/2000	US$ 204.4 billion
1Q/2001	US$ 202.2 billion

(From: U.S. Bureau of Economic Analysis)

This is further evidence of the increasing importance of the financial sector in the U.S. (and world economy). However, “services” (including business services, health services, and legal services among others, but not finance, transportation, communications or public utilities) is the sector of the U.S. economy whose contribution to gross domestic product has grown most since the end of the 1980s –in 1987 services contributed 16.7% of U.S. GDP, while by 1997 the sector contributed 20.3%).

As for the rate of profit, Marx’s famous _ / C (profit as a proportion of the capital advanced), as he predicted, it may well have been falling for some time, but there are so many mitigating factors it is very difficult to be sure. Productivity (thanks to the application of science to production) has certainly helped to keep absolute profits growing, for instance –moreover, if plant size and costs have fallen even though the number of workers per enterprise has also dropped significantly it is not intuitively obvious that Marx’s “organic composition of capital” (i.e. value of material to human capital) has been rising; indeed, if the organic composition of capital were falling, this may, in fact, also be a problem for big capital, and another raison d’être for the growth of the financial sector. If small capital is able to prosper as a result, banks will try to see to it that small capital ties itself to their loans, for example. Clearly, with real wages falling since the 1970s (see above, Section XI), any fall in the rate of profits may have been offset, i.e. through the deliberate impoverishment of the vast majority of the population. In addition, as we have seen, the systematic distortion of the legal framework, implied by alliances between organized crime, the State and big business, must also have helped to boost profit rates, especially for the financial sector. Another matter of relevance are the very high salaries paid to the professional elite in various areas of the economy (especially in the financial and hi-tech sectors), the bulk of which is invested and could therefore be said to form a part of profits, though under another name. Moreover, as noted (see section XIV below), “informality” cannot be understood as something separate from the “formal” sector. Under-reporting of profits, over-reporting of costs, etc., by registered companies that pay their taxes all play their part in boosting real rates of return –after tax. For the capitalist system of today, words appear to have stopped embracing the phenomena they used to describe (“declared profits” cannot tell us the whole story), as the legal framework becomes an instrument for manipulation by the powerful (see section XIV).