The relationship between the Financial and industrial sector in the U. K. economy

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The relationship between the Financial and industrialsector in the U. K. economyGrahame Thompson

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To cite this article: Grahame Thompson (1977): The relationship between the Financial and industrial sector in the U. K.economy, Economy and Society, 6:3, 235-283

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The relationship between the financial and industrial sector in the United Kingdom economy

Grahame Thompson

Abstract

The article attempts t o specify the relationship between industrial and commercial activity and the financial system within the UK economy. It does this in two ways. In the first place through a discussion of the different forms and circuits of capital which designate the important relationships and categories integrating the financial and the industrial sectors. Secondly it assesses the specific form of the circuit of finance capital within the UK economic formation and points to some of the implications of this for the proposals to take into public ownership the Commercial Banks and Insurance Companies.

l ntroduction

With the recent serious deterioration in the international position of British capital, important questions have begun to be asked about the practices of the British economy.' In particular there has grown up a considerable body of literature which is critical (more or less) of the traditional relationship between the financial and the industrial sectors of the economy.' This has focused upon the lack of investment in productive activity in the economy and the role of the financial institutions and markets in relation to this. Whether intended or not this body of literature has given rise to a political expression through the recently published Labour Party proposal to nationalize the major clearing banks and insurance c ~ m p a n i e s . ~ These proposals rely heavily upon the analyses provided in the various publications mentioned above.

It is perhaps because these proposals have arisen from within the context of an essentially social democratic framework that they have not received the attention they deserve from Marxism. This is also a reflection of a more fundamental problem, however, and that is the lack of any adequate scientific investigations of

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236 Grahame Thompson

modern capitalism and particularly of its financial a p p a r a t ~ s e s . ~ Marxists still tend to rely heavily upon the analyses provided by Lenin and Hilferding when discussing modern capitalism. While i t is recognised that such analyses are still important and useful, a more extensive elaboration of 'finance capitalism' than they provide is necessary before the pertinence or otherwise of the current nationalization proposals can be judged.

When discussing the relationship between the financial sector and the industrial sector the problem of the different 'forms of capital' is immediately posed. I t would be easy to simply identify 'banking capital' directly with the former sector and 'industrial capital' with the latter. But, as will be shown below, such direct identification is incorrect. At its most abstract it is sufficient t o point out that such differential forms of capital represent relationships for Marxist theory and that these relationships d o not simply 'appear' directly in a transformed form. Hence any attempt at a direct empirical identification of the two levels of analysis would only confuse any such analysis. The purpose of the following three sections is to identify the different forms of capital and their combination. Later sections will discuss these relationships in their transformed forms.

2. The 'forms' of capital

Within the total productive circuit of capital: 1 I

M - C 1 L P . . P . . . . C -M , ( MP

capital takes three basic forms. These are money capital, commodity capital and productive capital. Marx also draws a distinction between, on the one hand, money capital and 'moneyed-capital' (the latter being another name for what is elsewhere termed 'interest-bearing capital') and on the other hand, between commodity capita: and merchant capital (which is also called commercial capital).

The relationship Setween the merchant (commercial) capital and the commodity capital and money capital is designated by thc circuit of merchant or commercial capital: M - c - M'. Merchanting involves the transformation of money capital into commodity capital and then back into money capital within the sphere of circulation, i.e. the distribution of commodities within the process of reproduction of capital and with it the expropriation of a certain amount of the surplus-value (in Marx's terms, 'appearing' as commercial profit).

The circuit of interest-bearing capital on the other hand, which

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Financial and industrial sector in the U.K. economy 237

is normally referred to as the circuit of bank capital or finance capital5 takes the form of M - M', i.e. the commitment of a certain amount of money capital which is thrown into circulation purely for the purpose of returning a larger amount of money capital. In this sense it is either lent or borrowed in the anticipation of earning a return or interest to the lender and providing money capital to begin the circuit of industrial capital or commercial capital for the borrower. The fact that it is lent or borrowed gives rise to two features, (a) the actuality of credit and (b) the problem over the 'price' of money capital.

With regard to this latter feature, it is clear that money capital as such cannot have a price other than its own expression in money, so that interest is not the price of the form of capital, 'money capital'. If interest were such a price then money capital would have two 'prices', one its own expression in terms of money and another, a different price, expressed in terms of the interest rate.

What the interest rate is then, according to Marx, is the price of 'money-capital-as-commodity', i.e. it is the price paid for the use- value of money as capital - the ability to earn profit, to produce use-value and surplus value. Thus it is only the price of 'money in movement as capital', as a relationship as it were; i.e. when it is thrown onto the market as potential productive capital.

What then determines this price or interest rate? Marx argues that this determination can only be at the level of the maximum and minimum possible interest levels, these limits being set by the levels of surplus value 'earned' within the cycle of productive activity. He suggests that there is no fundamental law which determines the split of profits between 'profit of enterprise' (that destined as compensation for the function performed by industrial capital as such) and interest, i.e. there is no natural rate of interest around which market rates would fluctuate. What can be found is an 'average rate of interest' which is determined empirically and is arbitrary in as much as it is fixed by custom, juristic tradition as well as by the vagaries of competition (supply and demand): Marx's arguments for this are as follows:-

If we inquire further as to why the limits of a mean rate of interest cannot be deduced from general laws, we find the answer lies simply in the nature of interest. It is merely a part of the average profit. The same capital appears in two roles - as loanable capital in the lender's hands and as industrial, or commercial, capital in the hands of the functioning capitalist. But it functions just once, and produces profits just once. In the production process itself the nature of capital as loanable capital

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plays no role. How the two parties who have claim to it divide the profit is in itself just as purely empirical a matter belonging to the realm of accident as the distribution of percentage shares of a common profit in a business partnership. Two entirely different elements - labour-power and capital - act as determinants in the division between surplus value and wages, which division essentially determines the rate of profit; these are functions of two independent variables, which limit one another; and it is their qualitative difference that is the source of the quantitative division of the produced value. We shall see later that the same occurs in the splitting of surplus-value into rent and profit. Nothing of the kind occurs in the case of interest. Here the qualitative differeentiation . . . proceeds rather from the purely quantitative division of the same sum of surplus value. (Capital Volume 111, 1962 edition, p.3 56-7).

Although there is no law determining the average rate of interest (in distinction t o the average rate of profit), the average rate of interest and also the particular market rates always appear as tangible and uniformly determined rates (whereas the average rate of profit never appears in this manner, but only as a tendency around which the particular rates fluctuate).

The fact that it is supply and demand among other things that fixes the actual rate of interest and hence the division of the surplus between 'profits of enterprise' and interest payments t o the money-lending capitalist, implies that it is competition between the latter and the industrial capital which effects this division.

The second feature of the 'money as capital' conception associated with interest-bearing capital referred to above is the notion of credit as such. How is it possible to speak of a price for something that is not really bought or sold but which is only lent or borrowed? This question concerns the real economic significance of credit as distinct from the legal form in which it is couched. Credit implies the real transfer of economic resources in that the act of lending transfers money capital from the financier to the productive capitalist, money which in the latter's hands can be employed t o purchase commodities comprising means of production and labour power. When these are combined, value is produced. It is the value-producing potential of money which is transferred in the process of borrowing and lending; this is what is actually bought and sold in such a transaction. Given commodity exchange, he who 'possesses' money can appropriate part of the social product (purchase commodities in this case). What the transfer of 'money-as-capital' does then is to turn money from its

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existence as a form of capital into a commodity that can be exchanged for other commodities and hence has a price. According to Marx, a commodity is something with use-value and exchange- value. The use-value of 'money-as-capital' is its potential t o produce use-value and surplus value or profit, and its exchange-value is the 'price' paid to gain the extra means of appropriating part of the social product. This manifests itself in the form of interest. It is this value-producing potential that is 'sold' and 'bought' when credit is given. Thus interest is neither the 'price of money' nor the 'price of capital' as such, but the price of 'capital as commodity with use-value'.

The banking capital always lends money in the form of money (a) for a given period of time and (b) with the condition that it will return with an enhanced money element. But when it is out of the hands of that bank capital it is no longer 'possessed' by it. It is completely out of its control and it is up to the borrower what is done with it. It serves for the borrower as capital only when it is combined with labour power in the productive process. In the transfer of money as interest-bearing capital then, it is also transformed from idle money-capital into productive-capital. By alienating money and turning it into interest-bearing capital the right to determine the form of its employment for the period of the loan is 'sold', although it is still legally owned as money, plus a claim on the profits so p r ~ d u c e d . ~

3. The separate circuits of capital and their development

It is perfectly clear that credit has existed and still exists between individual industrial capitals and between merchant capitals and industrial capitals (so called 'trade credit'). In addition, merchanting has been, and still is, carried on by industrial capital itself. What then distinguishes the separated circuits of industrial capital, commercial capital and banking capital from other forms of credit creation and merchanting? In other words, how can we talk of separated forms of capital - industrial, merchant and banking - when the functions embodied in these were, and still are to some extent, functions which can be articulated within the most general form of the transformation of social capital through its money- capital, commodity-capital and productive-capital cycle? This raises the issue of the conditions of existence of the circuits of industrial, commercial and banking capital and the differentiation of the forms of merchanting and lending and borrowing in the development of the capitalist mode of production ( C M P ) .

To some extent Marx sees these developments as manifestations of the increasing division of labour in capitalist society. Particular

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functions become separated off and the prerogative of special groups of capitalists given the growth in complexity of capitalist society and with it the growth in the division of labour. What is important for Marx however, is the non-evolutionist manner in which this division of labour is thought. He stresses the successive transformation associated with the establishment of capitalist forms of merchanting and credit as distinct from those forms typical of the feudal mode of production or those current in the period of transition from feudalism to capitalism.

Take initially the differentiation of the circulation of commodities associated with industrial capital and with merchant capital. Marx argues that commodity capital becomes commercial capital by the fact of the division of labour which establishes a part of what was initially commodity capital as capital on the market in the form of money. On the market it is always in a process of transition, being converted into commodities and then from the form of commodities back into money.

From the point of view of the industrial capital the circulation of commodities takes the form c' - M I - C , i.e. the sale of commodities to realize money to buy different commodities (labour power and means of production) so that production can re- commence. In this circuit money changes hands twice t o effect the transformation and metamorphosis of the commodity capital. From the point of view of the commercial capital, however, the circulation of commodities takes the form M-C-M', where it is the same commodity which changes hands twice.

The interaction of the merchant capital and the industrial capital and the different form of their circuits, both operating in the sphere of circulation, can be seen more clearly from figure 1. The diagonal arrows indicate exchanges of commodities or money between the different capitals.

Merchant capital mediates in the circulation of commodities amongst the different industrial capitals, but its activity is confined to circulation only as distinct to that of the productive industrial capital. It is clear that the process of circulation from the point of view of the industrial capital is c-M-c, whereas for the merchant capital it is M-C-M.

Marx argues that there are two conditions which establish commercial capital as an independent form of capital. One concerns the fact that commodity capital is finally converted into money by agents solely involved in the operations of buying and selling and not by the direct producer. Such merchant capital is confined. to the sphere of circulation only. It assumes the appearance of a separated operation distinct from the other functions of industrial capital. The merchant 'takes over' that

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Financial and industrial sector in the U.K. economy

Figure 1

p .....

p.....

sphere of circulation

part of the circuit of industrial capital associated with circulation and gives it a separate and distinct character.

The second condition which helps distinguish merchant capitals' operations from those aspects of industrial capitals' activities in circulation (involving commercial travellers, salesmen and other agents), is that merchant capital advances a specific money-capital in an independent form. What is c-M' for the industrial capital is M - C - M ' for the merchant capital. The money-capital so advanced and the functions i t performs become a separate sphere for the self expansion of capital.

The object of merchant capital exchange is always M ' - this is only mediated by the M-c and the c-M parts - the independent form of exchange-value, money, is the object of the circuit of merchant capital. This is different from the object of the industrial capital in the sphere of circulation. The circuit c-M-c , or trade in commodities directly between producers, has as its object the exchange of use values and not money.

We are now in a position t o point t o the conditions of existence of merchant capital. These are none other than that products be produced to be thrown onto the market as commodities. Merchant

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24 2 Grahame Thompson

capital can exist wherever circulation takes the form of the exchange of commodities on a market mediated by monetary relations.

. . . whether the basis of the primitive community, of the slave production, of small peasant and petty bourgeois, or.the capitalist basis, the character of products as commodities is not altered, and as commodities they must pass through the processes of exchange and its attendant changes in form (Vol I11 p.320).

The fact that merchant capital can exist wherever there is production of commodities means that it is a feature of many different modes of production. Nor need it connect and mediate between direct producers but it can act on behalf of the State, the feudal nobility and the slave-owner, etc.

Marx argues that merchant capital is one of the historical premises for thedevelopment of the capitalist mode of production - the development of merchant capital and trade stimulates and encourages the production of commodities as well as it being conditioned by the production of such commodities. Merchant capital is also one of the premises for the concentration of money wealth and also introduces non-personalized forms of exchange - effecting the separation of producers and consumers and the concentration of buying and selling of commodities among disparate producers and consumers.

What is different, however, about merchant capitals' operation in social formations dominated by pre-capitalist modes of production and its operation under the dominance of the C M P concerns the independent form of its existence in the former not so much its separated form of existence. Under capitalism, where capital establishes its peculiar sway over the production of commodities, merchant capital appears merely as a capital with a specific function. 'In all other modes of production it appears to perform the function par-excellence of capital' (Vol. I11 p.321). In these other modes it is capital, it is the independent form of capital, though capital penned into the sphere of the circulation of commodities only. Here it can accumulate as capital however, i.e. as self expanding value. Within capitalism this independence is lost. Merchant capital is transformed into a phase in the production and reproduction of capital, a specialized function for the investment of capital, one which shares in the surplus value produced by the industrial capital via the establishment of an average rate of profit levelling profits over all capitals.

In fact, Marx argues that the relative independent existence of merchant capital under capitalism is a sign of the relative under-

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development of capitalism itself. It can act as a fetter on the development of ~ap i ta l i sm.~

A further point to note with regard to merchant capital is that it breaks into two forms according to Marx. These are commercial capital proper as discussed so far and 'money-dealing capital'.

This latter activity concerns the labour associated with the technical functions of money in circulation. If these functions (accounting, book-keeping, etc.), which have to be performed in the circulation process of industrial and commercial capital, become the specialized prerogative of a specific capital, per- forming only these kinds of functions, then money-dealing capital is established.

Under this heading of the technical operations associated with money as a means of payment is included the commerce in the money commodity itself, i.e. trading in money, the buying and selling of money, exchanging money of different currencies etc. It must be remembered, however, that money-dealing capital is different to the operations of lending and borrowing as such - accepting deposits and giving credit - this being the mechanism associated with the circuit of banking capital. Where the buying and selling of the commodity money is subsidiary to the operations of credit creation, i.e. where this is merely an aspect of the circuit of interest-bearing capital, no money-dealing capital as such is established. Moneydealing capital as part of merchant capital only exists as a separated form when it is concerned purely and simply with trading in the money commodity (or with the technical operations of keeping balances, accounts, etc).'

One final point t o note in relation to merchant capital is that Marx insists that in the process of circulation, capital only serves as commodity-capital and money-capital, but in neither form does capital become a 'commodity as capital'. As commodity-capital it exists as commodities on the market which are 'latent' with value and surplus-value, 'waiting' t o be realized. Similarly, money-capital is not capital as a commodity in the process of circulation. It acts purely as money, as the medium of exchange - the means of buying commodities. In neither instance is capital about to expand as value.

The question that this raises.is 'How, then, can we talk of merchant capital, which earns a return on the capital thrown into circulation?' The answer to this is that 'merchant capital' becomes a sphere of accumulation in its own right, in as much as its accumulation is based upon a transfer of part of the surplus-value from the productive capital. There is no self-expanding value within circulation as such. I t is only in the moment of return that capital appears as capital in the process of circulation, i.e.

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MIM' - at this point of return capital exists as realized capital, as expanded value. However, in the moment of the return this form disappears and what is left is simply M', i.e. money-capital. This is the form in which merchant capital re-enters the circulation process.

With the circuit M-M', however, capital does take the form of a commodity. The owner of money throws it into circulation as interest-bearing capital, to enhance its money value. But it is turned over to a third person - lent t o him as use-value for productive activity. This gives it the specific character referred to above, i.e. that of credit with a 'price'. But at the same time it means that it is only the use made of such capital which creates the surplus value out of which its 'price' can be paid.

We can now deal with the circuit of interest-bearing capital in its own right, in its separated form within capitalism and also with the forms of existence of interest-bearing capital in formations dominated by pre-capitalist modes of production.

Within the circuit M - C f L P . . . . . P . . . . . Cr-M'

M P

there are loans and advances between industrial capitals and merchants and also between different industrial capitals. This can be in the form of commodity credit or in terms of deferred payment which is called commercial or trade credit. In the absence of any discounting of bills of exchange, which form the notes of deferred payment, no banking capital as a separated form of capital is established.

The development of this commercial credit fundamentally depends upon the development of industrial capital itself. It is conditioned by the fact that the wealth of the industrial or merchant capital puts a limit on the development of such commercial credit and the solvency of one depends crucially upon the solvency of the other. The extent of the credit can also be broken by temporal and spatial interruptions of the process of production and circulation. This makes it necessary for cash payments at some stage. The chain of credit is not perpetual (in the absence of discounting).

With this kind of credit, loan capital and industrial capital are identical. It is capital that is existing in some definite phase of the reproduction process, either to promote the successive stages in the production of commodities or promoting the transfer of the article from one merchant to the next in the sphere of circulation.

A different form of credit is money-credit associated with the discounting of bills of exchange. This is one of the transitional forms of credit, representing advances by bankers or money

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lenders, though initially within the circulation process only. Here bankers begin the centralization and concentration of credit - acting as middlemen between industrial and commercial capitals, and i t represents a prelude t o the generalization of credit provision for all aspects of the productive process. Bankers, initially amalgamating commercial-credit with money-credit, begin the specialization in money-credit and the subordination of commercial-credit to this. Money-credit fulfilling these circulation and commercial functions is still essentially dependent upon the industrial capital. It is subordinated to the development of productive capital even though it takes a directly money form. Its independence is 'limited' because it is not yet fully subordinated to the requirements of capitalist production.

Money credit takes the form of interest-bearing capital in its antiquated form as usurer's capital. This is the second antecedent form of the development of genuine capitalist credit. This develops through the operations of the professional hoarder who, Marx adds, necessarily appears along with money. He is transformed into usurer through the accumulation of money-wealth. This centralization of money-wealth is closely tied up with the development of merchant capital since merchant capital also effects the centralization of money wealth within the pre-capitalist relations.

The characteristic forms of usurer's capital in pre-capitalist times are lending for consumption and also lending to small producers who possess their own conditions of labour, like peasants and artisans. What is borrowed from the usurer is not 'capital', but money as such - as a means of buying everything and as means of payment of debts. Money appears as actual wealth as such, as wealth in general. Although it is not borrowed as capital it becomes transformed into capital by being lent.

Marx argues that the credit system develops as a reaction against usury, but it signifies the latter's transformation since the credit system signifies nothing else than the subordination of interest- bearing capital to the conditions and requirements of the capitalist mode of production. Under these circumstances, interest-bearing capital can still retain the form of usurer's capital in relation to the transactions of persons or classes who's borrowing cannot take place in the sense corresponding to the capitalist mode of production proper, i.e. as a result of individual personal need, the 'spendthrift' or the non-capitalist producer, etc. These forms do not cease to exist under capitalism, indeed they may even be encouraged, but they cease to be the distinctive or dominant forms. They are no longer the forms which determine the character of interest-bearing capital.

We are now in a position to specify the conditions of existence

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of interest-bearing capital. These are twofold:- on the one hand the existence of money and its existence in the form of autonomous money-wealth, and on the other hand the existence of a distinct set of borrowers who cannot meet all their consumption and productive requirements from personal production.

These conditions correspond to the functions of lending and borrowing. In addition, the conditions of existence of the 'credit- system' requires that interest-bearing capital be subordinated to the requirements of capitalist production as a whole. This is discussed further below.

This section has established the peculiar nature of the 'banking- capital' and 'merchant-capital' and their circuits, as distinct from that of productive 'industrial capital' under their capitalist forms. In conclusion these can be summarized as follows:

M-c { M p . . . . . P . . . . . cl-M' the circuit of industrial capital (1 L P

general requirements:- the general conditions for capitalist production as a whole; wage-labour as a commodity divorced from the possession of the means of production; means of production as commodities; propertylappropriation connections to effect the combination of means of production and labour power; capital as self-expanding value. turnover:- repeated renovations of the entire productive process,

M - C - M I the circuit of commercial capital (2

general requirement:- the existence of commodities mediated by monetary relations on a market. turnover:- repeated buying and selling.

M - M I the circuit of banking capital (interest- ( 3 bearing capital).

general requirement:- (a) money and autonomous wealth in the form of money, (b) a category of borrowers not able to self-finance all their personal or productive requirements. turnover: - repeated borrowing and lending.

4. 'Finance capital'

We are now in a position t o give a preliminary definition of the concept 'finance ~ a p i t a l ' . ~ It is suggested that this concept designates the articulation of the three primary forms of capital

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established in the previous section. Hence finance capital represents an articulated combination of commercial capital, industrial capital and banking capital, and furthermore, within this articulation (following Lenin and Hilferding) it is banking capital which dominates the other forms of capital. However, although banking capital is dominant, it is not determinant within this articulation. In other words, that aspect of the circulation of social capital concerning the provision of funds for finance dominates the other aspects, but the determinant moment in the combination is occupied by the place of productive capital within the 'industrial' circuit. It is within this latter sphere that Value is produced, commercial and banking capital sharing in this surplus depending upon the precise form of the articulation between these forms and the industrial capital. Thus, through its lending practices, banking capital can determine 'where' accumulation might take place (in terms of under which organizational form and entity), but not that it will actually take place. It can determine the 'site' of the appropriation of nature (the place of the combination of means of production and labour power) but cannot guarantee that any appropriation will actually take place. This is developed more fully below.

At this stage two points should be noted with regard to this definition. In the first place, here finance capital is not simply another more modern term for banking capital, but a specific articulation of banking capital with industrial capital and commercial capital. Secondly, this definition is more than one defining finance capital simply as an 'envelope' within which the circuits of commercial, industrial and banking capital are merely juxtaposed. It is a specific articulated combination of these forms and circuits of capital the character of which is determined by the forms of that combination and existing only through the 'effects' of the means of representation of that combination.

It now becomes necessary to begin a more systematic exploration of this definition.'' Designating the circuit of banking capital with the subscript 'B' and that of industrial capital with the subscript 'I,, the relationships between banking and industrial capital can be characterized as follows: -

Banking capital now provides the finance at the beginning of the cycle and reaps its reward (interest/dividend) at the end. How big a reward depends upon the precise relationship with industrial capital - this can vary a great deal and is at the crux of the matter as will be demonstrated below.

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Clearly, for any accumulation to take place a t all, the condition M ' ~ > M B must be fulfilled (or, what amounts to the same thing, M > M I) otherwise no surplus value would have been produced. Given this condition is fulfilled, the financial relationship between industrial and banking capital will depend upon the relationship between M and M ' ~ , and between M B and M !, .

1 If M B = M ' ~ a11 the surplus will be appropriated by banking capital as interestldividend and, depending upon banking capitals re-investment policy, some accumulation could take place. 2 If M B = M IB all the surplus will be appropriated by productive, industrial capital and again, depending upon the industrial capitals re-investment policy, accumulation could take place. 3 For both capitals to share in the surplus value the conditions M ' ~ - M > M'B- M must be fulfilled. The greater is M'I- M

than is M'B- M B , the less is the banking capitals involvement in the appropriation of the surplus and the more of the surplus is at the direct disposal of (or 'under the direct control of') the industrial capital. Hence it is in banking capitals interest to extend the relation M'B-MB. We can now leave this for a moment and introduce commercial

capital into the analysis. As banking capital is typified by the circuit M ~ - M ' ~ , SO commercial capital is typified by the circuit M ~ - C ~ - M I ~ . These two circuits plus the circuit of industrial capital can be illustrated and combined as in Figure 2. This represents, in the most abstract fashion, the total circuit of 'finance capital', being a combination of the three primary circuits of capital. It should be added, however, that the circulation of this combination in a non-formal sense depends upon particular characteristics and features which must be individually thought and developed. It is these that give the specific content to the circuit of finance capital.

We can work through this circuit in the normal fashion from left to right, noting that diagonally arrowed lines represent 'exchanges' of money or commodities between the constituent circuits. Hence, money capital is lent to the industrial capitalist ( M ~ + M ~ ) which, after passing through the cycle of production appears in the form of commodities with an enhanced value (crI). Given that commercial capital (as well as banking capital) exists as a separated circuit, taking the form of a specialized trading activity, commodities ctI are purchased by the commercial capital with M C money. This M C money 'realizes' the circuit of industrial capital (c'~-M'~). The merchant capital's capital now takes the form of commodities, which it sells to realize its capital in the form of M ' ~ . Commodities now drop out of the immediate circuit

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Figure 2 : The formal circuit of finance capital

M B M'B circuit of 'banking'

\ \ capital

Mc-Cc- Mk circuit of 'commercial'

as money (M), enters it. These commodities could either now enter another productive cycle in the form of means of production (exchanges from Department I ) or they could enter a consumption cycle, thus dropping completely out of the circuits, as commodities (exchanges from Department II).''

For the most part further developments of the commercial capital's articulation into the circuit of finance capital is not pursued, other than to deal with the function of accounting as part of the mode of control of banking capital which is signalled in section 5 below.

Clearly, banking capital could (and does) lend to commercial capital as well as t o industrial capital, so that the circuits could be extended to include M B - ~ C - ~ C - ~ ' C - ~ ' B Historically, this was obviously one of the first articulations but it is not necessary to pursue this in detail here. What is said about industrial capital with regard to banking capital is equally true of this latter relationship to commercial capital. Concentration is focussed upon the relationship between industrial and banking capital and in particular upon the practices associated with the latter. Within the capitalist mode of production any money capital that is thrown onto the market demands a share in the average rate of profit and it is precisely the function of banking capital to establish (in a tendential fashion) this average rate. This is executed by 'switching' funds or money

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capital from one 'place' of accumulation to the next, whether this be on an international or a national level. This constant movement of credit provision, the withdrawal of credit from one capital which consistently fails to reach the 'average' rate and the provision of additional credit to another which happens to be temporarily earning a rate above the 'average', helps to establish just that average rate itself and is the rationale of the banking capital as such. It is towards the practices of the financial system - the kinds of calculation and scrutiny embodied in these practices - that the latter part of this paper is directed.

In fact, Hussain has already signalled the pertinence of these practices in designating the conditions of existence of the domination of the circuit of interest-bearing capital over the other forms of capital.' He suggests that this requires the existence of spectrum credit comprehensive enough such that every item of the means of production can be financed on credit. For this the minimum is as follows:- (a) a market for financial assets; (b) centralization of finance capital and the existence of specialized financial organiza- tion; and (c) fiduciary and credit money.

These conditions give rise t o the two features which typify the period of the dominance of finance capital - the lack of any general limit on the period of credit and the generalization of the application of credit to all means of production.'

Before moving on, one further point is worth making. Normally the circuit of surplus value can be characterized as the C-m-c part of the following extended schema:-

Given the three major 'calls' on surplus value within the circuit of finance capital, the circuit of surplus value here is better characterized as follows:-

Here rn,, m i and m b represent that proportion of m 'claimed' by commercial capital, industrial capital and banking capital respectively. Depending upon the proportion of these divisions that are re-invested in productive activity (%), expanded reproduction can take place. This thus focusses the forms that the surplus takes within the combination (dividends, interest, retained earnings, etc.), the particular type of capital involved and, further, its particular relation t o productive activity. For instance a certain proportion of the banking capitals interest and dividends, say 8b, will drop

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Financial and industrial sector in the U.K economy 251

out of the circuits by (a) being invested in non-productive activity and (b) serving as consumption for the agents of banking capital.

It might be argued that the above discussion has missed the point about 'financing industry' because it deals with the 'distribution' of the surplus produced rather than with the raising of the finance at the point of the inception of the cycle. However, it is obvious that the relationships established between industrial and banking capital at the inception of the cycle determines the distribution of the surplus at its close. Hence by focussing on the 'end' of one cycle we are also analysing the conditions for the 'beginning' of another.

An important additional element which must be introduced here is something that has only been raised in passing so far. This concerns what is termed the 'household sector' in the literature. In other words the bank deposits, and the share and bond holdings and purchase of those agents not directly involved in the organiza- tion of the productive process, the dividend policies of enterprises and the general consumption and saving habits of all agents in the social process. These impinge on the conditions and character of the cycle and are also determined by it. Forms of saving, in particular, are important, but as Hussain has pointed out in an unpublished paper,14 these are not determined by some psychologistic 'preference' for liquidity or otherwise (the so called 'demand for money') but are prefaced by the fact of the separation of sales from purchases (both temporal and spatial separation) under monetary exchange. Here there is no identity between purchaser and seller in an exchange reIationship and money balances exist and are held because of (primarily) this temporal separation of exchanges. In addition the proportion of these balances that are 'saved' in various forms is very much dependent upon the concrete possibilities available for individual lending. It is the material opportunities created by the financial sector for accepting deposits and the terms under which they are accepted that fundamentally determines the 'savings propensity', not some subjective desire for liquidity or security. This is discussed in a more concrete setting later.

Finally, a number of points can be made about the subsequent analysis. This represents an attempt to specify the pertinent features of the circuit of finance capital within the UK context. It cannot try to identify the actual nature of the circuits so far elaborated. These are submerged under the collective content of the circuit; within the unity of its combination.

In addition this analysis takes place within what might be called the 'price-space' and not the 'value-space' so far emplo$ed in the previous sections. This raises a number of problems.

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Marxists have traditionally tackled the problem of the movement from values to prices through agency of the 'transformation' of values into prices, the latter being the phenomenal form of the former (the so called 'transformation problem'). This has given rise to a considerable body of literature and debate. It is now becoming clear that the terms of that debate are themselves problematic and that this is not unrelated to Marx's own conception of the primacy of the 'law of value' and its effects. The ambiguity in this position is demonstrated within the previous analysis by the fact that the value categories there are already largely expressed in a money form. The following analysis attempts to employ what has been previously established in terms of the general forms of the circuits of capital and their conditions of existence in the manner of a conceptual raw-material to focus the pertinence of certain categories for the construction of the specific relationship between the industrial and financial sector. The price categories explicitly employed here are not meant to be the 'phenomenal forms' of the value categories; the empirical expressions of a now 'absent' (theoretical) value-space, but simply the effects of another theoretical and conceptual space which is itself partly informed (and transformed) by the features of that prior analysis. Hence the actual form of the relationship between the industrial and financial sectors is also a theoretically specified one where the 'empirical' features are marshalled by the argument in the form of evidence. In this way the value aspects of the previous analysis are largely 'bracketed' in what follows. The analysis focusses upon what can be broadly termed the 'capital markets' and within these, upon those markets most closely associated with the raising of long-term and short-term investment finance for industry. This focus is required by the nature of the critical literature already cited which is almost exclusively concerned with these markets. However, it should soon become apparent that this exclusive focus is the major weakness of these critiques, and that this results from the absence in their problematic of any generalized concept of finance capital. I t must be stressed that this is a universalistic concept. The dominance of banking capital is a dominance of the lendinglborrowing relationship as such and the creation of credit so involved in that function. This does not simply involve the 'financing of industrial activity' but also the 'financing of State activity' (the Gilt and Treasury Bill markets) and with it the creation of the payments mechanism (involving the money markets). In addition, there is an international dimension. The activities of international banking capital mediate and are articulated into the national financial markets.

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5. The funds for commercial investment

The lack of investment in productive activity in the UK is well known. I t is not necessary t o document this once again as it has been discussed at length in the press and in many of the authorities cited in an earlier footnote t o this paper (see in particular N E D 0 1975 Chapter 2). We can initially describe the financing of what- ever investment has actually been undertaken in the UK.

'To begin with, what is the structure of the financial sector in the UK? This is illustrated by Figure 3 showing the flows of money through the financial system and the various 'financial instruments' which typify this system. Of course, not all money for investment purposes is raised via the capital market. Industry self-financing has traditionally been the most important source of investment funds, particularly in the UK and the USA. For the UK this is shown in Table 1 which gives the breakdobn of sources of funds for large quoted companies in manufacturing, distribution and other s e r ~ i c e s . ' ~

Internally generated funds have typically contributed just over 75% of total supply of funds. In most years also, retained earnings made a greater contribution t o this than did allowances for depreciation (44% and 34% contribution on average respectively). It is interesting t o note that retained earnings have maintained their share of the generation of funds even with the well documented collapse of the absolute levels of these over the last few years.16

Of the remaining 24% of externally generated funds, on average, about 18% was raised via the issue of shares and bonds. (7% and 11% respectively) and 6% via bank borrowings. Note that the share and bond issue that is reported in this table is for cash only. The actual amounts of issue that have been made is much greater than this, but significant proportions were issued for purposes of acquisition of companies during take-over procedings. On average over the period 1964-71 two-thirds of the actual total issue of shares and one-third of the issue of debentures and other long term loans was for acquisition of subsidiaries (see Meeks and 'dhittington 1976).

Ilealing first with the externally generated funds, these fall into three main forms; shares, loan capital (bondsldebentures) and bank loans. The first two forms represent funds that are raised through the stock-exchange and the latter is provided by the banks. Over the period 1950-1972 these contributed E3577m and £3 152m respectively and it is interesting t o note that these are near enough of equal importance. Thus despite the supposed greater reliance on 'direct' rather than 'indirect' external finance in the UK system, this has not been the case over this period.

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Table 1 Sources of funds for larger quoted companies in manufacturing, distribution and other services 1950-60

E million

1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960

Number of companies 2,766 2,865 2,909 2,879 2,892 2,913 2,931 2,879 2,815 2,714 2,241

Net trading income Other income Depreciation

Gross income Other capital receipts Taxation payments Dividend payments and interest on long term loans Other expenditure on capital account

Total internal funds

Bank borrowing Ordinary shares issued for cash Preference and long term loans issued for cash

Total external funds

Total sources of funds Dow

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Sources of funds for larger quoted companies in manufacturing, distribution and other services 1960-72

E million

Number of companies 2,241 2,173 2,095 2,004 2,283 2,198 2,109 1,993 1,829 1,701 1,308 1,239 1,168

Net trading income 1,899 1,772 1,718 1,965 2,345 2,366 2,234 2,267 2,661 2,656 2,568 3,013 3,937

Other income 121 134 138 140 136 164 141 152 189 230 260 268 343

Depreciation 516 572 628 690 770 861 927 942 1,050 1,112 1,171 1,294 1,427

Gross income 2,537 2,478 2,485 2,795 3,252 3,391 3,302 3,361 3,900 3,990 3,999 4,575 5,707 Other capital receipts 8 6 5 7 48 50 39 317 292 276 307 241 232 Taxation payments' -725 8 3 2 -891 -829 8 6 6 -982 -957 -786 -893 - 9 9 2 1 , 1 2 5 1 , 0 1 2 -950 Dividend payments' -585 6 5 1 -607 -913 9 5 2 9 5 7 -953 9 9 9 8 0 2

-485 5 3 7 -557 5 9 2 1 Interest on long term loans -121 1 4 2 -178 -206 -247 -282 -306 3 5 5 -395

V] o Other expenditure on capital 0 account -66 7 3 8 0 -65 -64 -54 -73 -67 -91 -108 -94 -113 1 4 0 <

Total internal funds 1,270 1,050 979 1,319 1,664 1,613 1,526 1,705 2,008 1,936 1,828 2,336 3,652 31

$ Bank borrowing 149 175 78 120 187 339 210 65 225 492 503 -110 315

Ordinary shares issued for cash 241 281 102 107 120 5 1 6 6 66 229 172 56 107 173 0 2 Preference and long term

loans issued for cash 4 0 100 299 152 195 325 415 453 192 170 219 397 268

2 Total external funds 430 555 480 380 501 715 692 584 647 834 777 394 755

Total sources of funds 1,699 1,597 1,442 1,696 2,165 2,328 2,217 2,289 2,655 2,770 2,604 2,729 4,407 w

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Grahame Thompson

Notes on Table 1

Net trading income:

Trading income net of depreciation and short term interest, before deduction of tax, dividend and long term interest payments.

Issues of shares for cash: Increase net of redemptions; excludes shares and loans issued in exchange for subsidiaries acquired.

Other expenditure on capital account: Consists of expenses on share or loan issue, amounts written off current assets and liabilities not separately distinguished, expenditure charged against reserves, and decreases in minority interests.

Debtors less creditors: Short term loans are included in creditors, and short term credit advanced and received by UK subsidiaries of overseas companies are included in debtors and creditors respectively.

Depreciation: Depreciation at book values as charged in companies' accounts.

Intangible assets: Covers expenditure on research and development which has not been written off against profits, patents, trade marks, licences, royalty agree- ments, and any goodwill not arising out of acquisitions of subsidiaries.

Sources: Income From Companies and Its Distribution. 2nd Report from the Royal Commission on the Distribution of Income and Wealth. (Diamond Commission), HMSO. London. 1975. (Cmnd 6172. Table P 3 . )

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Financial and industrial sector i n the U.K. economy 257

Figure 3 : The complex structure of the UK financial markets

From: Gower Economic Publications: Financial Services Review 1972-73, Gower Press, London 1972.

When dealing with shares and loan capital it is important to differentiate the legal form of these financial instruments from their real economic character. When a share is purchased this does not mean that the shareholder 'owns' the physical capital of a company - shareholders have no direct proprietary rights in the assets of a company.17 What a share entitles its owners to is a share in the distribution (positive or negative) of any surpluses

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generated from within the company when such assets are put to work. Under normal circumstances the amount of share capital cannot be reduced by the company (companies are legally forbidden t o purchase their own shares). A share is thus a non- redeemable loan made t o the company and hence it falls within the definition of 'banking-capital' as discussed above. The only way individual shareholders can realize their money capital is by selling this right to a benefit stream to a third party. Hence the 'secondary market' and its importance, In fact, the existence of the secondary market is one of the conditions of existence of the share form itself since it enables individuals to redeem their own debt whilst 2.t the same time maintaining the existence of that debt as a whole.

The effective investment of the capital of a company in itself is a consequence of the modern legal form of the capitalist organizational unit - the joint stock company with limited liability. Within bourgeois law this takes on the characteristics of legal subject. It is the company which is sued in the event of malpractice not the shareholders, directors or employees, and the company itself can sue other legal subjects. The directors of a company (or 'managers') are legally bound to act in the interests of the company as such and not directly that of the shareholders. (This is not to suggest that these may not coincide but this is not necessarily so in a legal sense.) The shareholders are (at least formally) legally entitled t o elect the Boards of Directors who take on the responsibility of managing the company's affairs, but these directors are obliged to serve the interests of that company first and foremost.18 These contractual relationships and the obligations they impart upon the various parties are set out in a standard form in the Articles and Memorandum of Association of the company.

In addition, under normal circumstances neither the shareholders, the directors, nor the employees are personally liable for the debts of the company (except to the extent to which they have subscribed to its capital but have not fully paid up their shares). It is the company as such which is so liable. Thus, in a legal sense the shareholders and debtors of the company are in exactly the same position vis-h-vis the activity of the company as legal subject. What is pertinent here is the difference between the two forms of debt in an economic sense not a legal sense.19 Two kinds of debt are held under different economic terms and conditions. The shareholder purchases a right to a variable stream of benefits depending upon the profitability of the company and with no direct obligation of redemption on the part of the company. The bond holder on the other hand purchases a fixed

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interest security and the company has the obligation of redeeming this debt at par-value sometime in the future whilst in the mean- time meeting the (known) interest on that debt.

What this means is that economic control is exercised fundamentally through the conditions of lending and borrowing, i.e. the conditions under which these kinds of financial transactions can take place. It is important to note that these relate both to the internal conditions within the commercial enterprise itself - it is these which mark the firm's 'financial status' and hence its borrowingllending requirements and possibilities - and the practices and procedures adopred by banking capital itself in determining 'where' such lending will take place, i.e. what banking capital considers to be the 'prudent' and 'acceptable' financial position of firms. This latter is itself predicated upon the current practices of the financial system as embodied in the forms of banking capitals financial scrutiny. To take this slightly further at this stage we can say that, given there are two principle forms of lending (ignoring the complication of trade credit) which are predicated upon a different kind of economic relationship, the two forms of credit are dependent upon a different kind of financial scrutiny. The objects of their investigation relate to two different aspects of the firm's overall financial situation and status. This is taken up below, where the importance of the 'balance sheet' and 'income statement' produced by the accounting practices are discussed. What this forces, however, is an investigation of the complex combination of legal, accounting and economic characteristics which structure the relationships between the different forms of capital.

The relative importance of share as opposed to loan capital finance in different econon~ies varies quite interestingly with the relative mix of externally and internally generated funds. The average self-financing ratios defined in slightly differing ways for a number of economies are given in the first column of Table 2. 'These- characteristics are reinforced by calculating the average externally generated funds as a percentage of total funds over recent years and these are given in column 2 of the table. Within this 'external finance' category, for those economies with a lower percentage of funds generated from this category, a higher proportion was raised via the issue of securities than was raised by direct borrowing from the banks or by the issue of loan capital. On average, over the periods already specified, the proportions of funds raised via securities and via loans is given in column 3 . However, this relative importance of securities for Britain in particular needs t o be put into perspective. For instance, columns 4 and 5 of Table 2 measure the importance of securities in a different manner. If the

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Table 2 : External finance and sources of funds in a number of advanced industrialized economies

(1) (2) (3) (4) (5) Average self-financing % of Funds External Funds Issue of Shares Issue of Securities

Ratio (1964-68) Externally Generated as % of GNP (Shares and Bonds) as loans % Securities% (1970) % of Gross Investment

(a) (b) (c) (1970)

UK 125 109 80 24 (1950-72) 6 18 0.15 8 USA 101 118 103 32 (1960-71) 8 1 4 0.87 4 2 Germany 90 95 86 38 (1960-73) 2 2 5 0.53 1 0 Prance 8 4 93 67 51 (1959-70) 3 4 9 1.06 9 Japan 87 67 59 56 (1959-70) 44 9 1.48 1 4

Notes: Average self-financing ratios defined as follows (a) Gross Savings (b) Self-Financing Gross Capital Formation Fixed Investments

(c) Self-Financing Fixed Investments and other assets.

Sources: Column (1): Samuels, e t a1 'Company Finance in Europe'adapted from Table 2.9 page 27. (2): U.K. ' Income from Companies and its Distribution' second report from Diamond Commission Cmd.

6712 H.M.S.O. July 1975. U.S.A. R.I. Robinson and W. Wrightson 'Financial Markets': ?'he Acczrn?ulatior? and Allocation of Wealth' McGraw Hill, 1974, page 308 Table 17.1. 2

3

Germany: OECD 'Capital Markets S t u d y ' Paris 1967 and, Samuels et al. op.cit . w

France: as for Germany. 2 2

Japan: L. S. Pressnell (ed.) 'Money and Banking in Japan' Macmillan 1973 (Table 51 p.63). (3): Diamond Commission Report op.cit .

5 P

(4): Readman et al. 'The Europearr Money Puzzle' Michael Joseph, 1973. From Table 6 p.43. 2

(5): As for (4). From Table 10, p.5 3.

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Financial and industrial sector i n the U.K. economy 26 1

issue of shares is expressed as a percentage of GNP, then the UK is lowest in the group of five countries and equally, measuring the issue of both bonds and shares as a percentage of gross investment reverses the UK's position for 1970 (and this is not untypical for other years since the mid 1 9 6 0 ' ~ ) . ~ ~

What these figures serve t o highlight is the low absolute levels of security issue and investment uncicrtaken in the UK compared with othcr economies. Thus, although proportions from differcnt sources havc tcnded to remain fairly stable, the at)solutc levels have fallen rclatively t o other economies. 'l'liis has produced the situation alreadv pointed out above: thc more or less equal importance of the banks and the securities market in raising additional investn~ent funds.

'I'his absolute iniportance of the securities market as opposed to its relative importance in thc major European economies is con- firmed by the data given in 'I'able 3 . 'l'liis shows the amounts of share and bond issues madc in Germany, France and the UK, registcred in US$ equivalents, over the period 1963---73. Aggrc- gating shares and bonds, Germany has consistently shown a greater absolute issue than both France and the UK, which, again sur- prisinglv, have shown an average issue of approximatelv the same magnitude over the period.

'l'hc importance of the stock exchange in the UK context is better understood by refcrcnce t o market capitalization and turnover of stock. In 1972 there were some 3,700 companies quoted on the London Stock Exchange with a capitalization of some £90,00Om compared to 5 0 5 companies quoted on the C ~ e r m a n Stock Exchanges with capitalization of some £1 6,000rn and l , 1 8 5 companies on the Paris Stock Exchange (Bourse) u,ith E26,000m capitalization. Hence in Germany and France fewer companies have been making more issues on the exchanges in recent years. What is more interesting, however, is the turnover of this capitalization. On an average day in 1972 (31.12.72) turnover of debt and equity was 37.5% of capitalization in London, compared with 17.8% in Paris and only 12.4% in G e r r n a n ~ . ~ ' Thus the 'secondary market ' is much more active in the UK than on the Continent; more activity going into the buying and selling of already existing securities than into floating new loans. Further, it is the large financial institutions which seem to be most active in this 'over- active' secondary market. In 1975 for instance, the turnover of the Pension Funds, Insurance Companies, Investment Trusts and Unit Trusts was some 51%, 24%, 53% and 121% respectively of their equity portfolios.22 They tend t o trade these with each other, though they have also been net buyers of securities from the public a t large (see Section 6 below).

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Table 3: New security issues in Germany, France and the UK 1963-1973 (US $ millions)

Shares 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 Average per year

Germany 330 561 990 678 477 786 711 981 1,372 1,293 1,341 865 France 855 910 930 690 640 735 155 1,565 1,465 1,837 2,363 1,232 UK 546 630 246 448 215 898 494 185 633 1,715 341 577

Bonds and Debt Certificates (net)

Average per year to 1971

Germany 3,359 3,797 2,620 1,903 4,290 5,400 4,690 5,303 7,874 NA NA 4,470 France 1,450 1,280 1,445 1,770 1,675 1,150 1,405 1,880 3,025 4,185 NA 1,676 UK 512 963 4,530 2,027 2,774 -139 185 1,469 9,932 1,270 4,572 2,470

Source: OECD Financial Statistics quoted in Samuels et al. page 12.

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In fact the Stock Exchange is really only important as far as the raising of new loans is concerned, for a relatively limited group of 'blue chip' companies. In terms of raising new finance, its real importance is in relation to the Government. Some 70% of its business is in Government securities. The high turnover of this stock and also that of private company securities on the secondary market is largely an effect of the financial instititutions need to adjust their asset structure to meet the changes in their liabilities. They buy and sell securities in order to meet the claims made upon them by the transfer of deposits between economic agents. Money capital is 'realized' or 'invested' through the mechanism of selling and buying those financial instruments which are held as their financial assets.

Let us now turn our attention to bank loans as such. It is well known that the banks tend to operate differently in different capital markets. The role of the commercial banks, in particular would seem to be very different in Germany and Japan say than in the UK (and to a lesser extent the USA, see below). In the former economies they are more directly involved in providing finance for industry, as has already been signalled with reference to the sources of funds tables discussed above. In addition, they also tend to become more involved in the day to day monitoring and management of the industrial enterprises to whom they lend.

Table 4 indicates a particularly noteworthy feature of the differing terms of borrowings in a number of European countries.

Table 4: Proportions of borrowing by non-financial enterprises that are short-term and long-term loans.

Germany Italy France UK

1972 1972 1971 1972

Short-term 3 0 47 49 73

Long-term 70 5 3 5 1 27 - - - - 100 100 100 100

Source: Economists Advisory Group Banking Systems and Monetary Policy

in the EEC 1974. Adapted from Table 7 page 109.

In the UK loans are of a markedly short-term nature, the provision of the 'overdraft' facility being the predominant form. Two features of this form are worth noting.

In the first place, within the practices of the British system, overdrafts have traditionally only been given when solidly backed

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264 Grahame Thom~son

by a security of some form or another.23 This means that the 'credit-worthiness' criteria associated with this kind of debt turns on the more short-run security as measured by a company's cash and near cash assets (liquid assets) as a proportion of its current liabilities. Hence the provision of such lending tends to be very conservatively controlled. The 'risk factor' is low. I t is 'liquidity' which represents collateral and the gearing position of the borrowing enterprise must be kept within such acceptable bounds as will facilitate the continued provision of such overdraft loans (their 'roll-on').

The second major feature of the overdraft form is that once the backing is secured it tends to be given for non-specific purposes. It is up t o the firm's management to decide to what purpose any such lending is put and by and large the provider of such loans is little involved with monitoring either the exante or the exposte use of such funds. This is in distinction to the way the banks act in other economies where a close and continuing monitoring of the use of loans is common. This is even true of America though here a lot more medium-term and long-term lending is common. With the absence of branch banking in America close liaison has developed between local banking and local industrial customers such that banking capital has gained detailed expertise in the ways of industrial capital and its requirements. As yet this has not happened to any large extent in Britain and this is partly the result of the branch banking system itself as practiced in this country.24 It should be pointed out however, that recently the banks have begun to provide medium term lending on a much larger scale in Britain and this signals an important change in British practice. It is interesting to note that this was forced upon the commercial banks by competition from American banks which established themselves in London. American banks now have higher deposits in London than do the London Clearing banks t h e m s e l ~ e s . ~ ~ The arguments in favour of medium term lending are that, even though it appears more risky, it might in fact be less risky than overdraft finance. This is because it is closely associated with specific projects where lenders can establish a clear cash flow profile and consequently can organize a clear repayment profile. In this way lenders can more directly control activities of borrowers. What this goes to show is the relative nature of what is considered 'risky', this depending upon the precise practices typifying the financial system. As it stands at the moment, however, short-term overdraft finance, backed by solid security, is still considered to be 'less risky' and continues to characterize the predominant form of relationship between the commercial banks and their customers in this country.

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The growth of the importance of interest on long-term loans as opposed to dividend payments (which does not necessarily bear any direct relationship to the growth of bank lending as opposed to security issue, for obvious reasons) is shown in Table 5 for the period 1964-1 972.

Clearly there is a growth in importance of the category 'interest' and a decline in importance of the category 'dividends' (relatively) over this period. However over the longer period from 1950-1972 the aggregated categories of dividends and interest on long-term loans has become an increasingly large drain on 'net trading income' of the companies, indicating a growing burden of distribution of surplus to rentiers and to banking capital generally. These payments increased from just over 16% of net trading income in 1950 t o over 30% in 1972, with a peak being reached in the late '60's of nearly 50%. Hence, overall, it is likely that, within an increasing tendency of 'external' payments, the category 'dividend' (related to 'profits') is declining relatively t o that of 'interest'.

Having specified the nature of the 'external' financial relationships between the financial and industrial sectors it remains t o treat the question of 'internal' funds more systematically. This has already been hinted at above but it obviously deserves more serious consideration in as much that some 75% of funds directly employed for investment have traditionally been internally generated. At first glance this might suggest that the domination of banking capital within the UK circuit of finance capital is rather weakly represented. If 75% of funds are not subject to 'external' scrutiny then can not industrial capital determine what it does with such funds without any 'interference' from banking capital? To argue in this manner, however, would be to profoundly misunderstand the nature of the articulation between the different forms of capital. Neither the level of funds that can be retained internally, nor the use to which these can be put is independent of the external constraints under which the units or production work. The fact that the joint-stock form of enterprise with limited liability typifies modern capitalism means that the 'internal' financial management of companies is always subjected to criteria of scrutiny from the 'external' providers of credit. The precise form of such control may well be differentially articulated in different social formations but it is a common feature of the present period of capitalism as a whole. Wjthin formations like Japan and Germany a more obvious form of domination can be discerned in which the 'centralized' provision of funds through the banks involves a much closer 'direct' articulation between the borrowing and lending function and the commodity producing function. In formations like the UK, 'decentralized' mechanisms

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Table 5: Paymrnts of dividends and interest by large quoted companies in manufacturing, distribution and other services 1964-1972 (L million)

Source: As for Table 1, 'Uses of Funds Table'.

Year 1964 % 1965 % 1966 % 1967 % 1968 % 1969 % 1970 %

Dividends

Interest on L.T. Loans

Total

585

121

706

651

142

793

83

17

100

82

18

100

607

178

785

77

23

100

957

282

1,239

913

206

1,119

77

23

100

82

18

100

953

306

1,259

952

247

1,172

76

24

100

81

19

100

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Financial and industrial sector in the U.K. economy 26 7

work to effect this articulation in a more 'indirect' fashion. It must be stressed however that although there are certain common characteristics between different social formations with this regard, each particular formation is unique in its precise articulation.

What then are the forms of this more decentralized and indirect mechanisms within the UK. To answer this we must return t o the forms of economic calculation embodied in the disclosure of accounting data required by law and custom within the UK context and to the 'prudent' and 'acceptable' practices embodied in the financial scrutiny of banking capital.

Table 6 shows the range of gearing typical of a number of advanced capitalist economies.

Table 6 : 'Gearing' in a number of industrialized economies 1972

Country

Japan Italy France Belgium West Germany USA Netherlands UK

Gearing Ratio

Source: NED0 Finance for Industry page 32.

'Gearing' denotes the ratio of the fixed interest capital to the capital with a variable remuneration, for any company. The higher the gearing ratio, the more fixed interest capital there is to variable dividend capital.

Gearing amplifies the effects of profit fluctuations on equity earnings. If a new project is financed through fixed interest borrowings rather than by increasing equity, any excess of the return from the project over the payments on the fixed interest securities will go to the benefit of the shareholders. On the other hand the issue of fixed-interest securities renders the ordinary shares more risky because the former will constitute an additional prior charge.

It is psychologistic attitudes towards 'risk' which are supposed t o underlie the determination of the most appropriate level of gearing for any company in given circumstances. Great emphasis is given to the scrutiny of balance sheets t o find the true 'gearing'

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268 Graharne Thompson

of different companies when any additional capital is t o be raised or when 'take-overs' are on hand.

However, the question must be posed 'Why is the "acceptable" level of gearing some five times as great in Japan as it is in the UK?' Is this really because Japanese firms are five times less 'risk conscious' than are firms in the UK? Clearly, this is unlikely. In fact it is precisely the structural relationships between the financial and industrial sector which 'enables' a much higher level of gearing to be acceptable, not some psychologistic aversion or otherwise to risk. The Japanese system is continually in what is known as an 'over-lent' situation, that is, the banks continue to lend more on a long-term basis than they are able to directly cover by their deposits (hence the 'liquidity ratio' of banks is much lower than in the UK). Despite this, however, the system is able to function effectively because a practice has developed whereby the commercial banks can go directly to the Central Bank for special assistance when their cash and liquid assets are low, so that substantial direct short-term borrowing from the Central Bank is quite acceptable and normal practice and this helps to reinforce a close liaison between the banks and their industrial customer^.^^ Such an 'over-lent' position would not be possible in the UK since the Bank of England does not lend directly to the financial institutions other than for short periods in emergencies.

Within the UK context it is the valuation of a company on the Stock Exchange that has traditionally established its 'viability' financially. Although the raising of additional capital for industrial and commercial activity is of only limited importance, the buying and selling of existing securities is one of the prime modes by which banking capital exercises its domination over such industrial and commercial activity. On the one hand, the institutions themselves engage in such trading t o adjust their own liability and asset structure hence every share is continually vulnerable to the scrutiny of 'credit-worthiness' exercised by the institutions. 'Reasonable' profit margins must continually be returned otherwise a run on the company's shares can ensue in which takeovers loom. This is similary true as far as the holding of shares as financial assets by other economic agents is concerned. The dual nature of the share form - its existence as a financial asset and as a means of gaining control of firms - makes units of production particularly vulnerable to the effects of the changing value of their shares. In a financial system where the share form is still strongly represented and where there exists an organizational separation between the units of production and commerce and the financial agencies a very short-term outlook on the part of industrial and commercial capital results. Hence the commitment

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of capital on a long-term basis for the restructuring of production techniques is discouraged, since this can mean disruption of cash- flows and low returns during the longish adjustment periods.

In addition, here, the nature of the share form itself discourages additional issues. It has already been pointed out that there is a presumption against the further issue of fixed interest stock (or the increase of debt), but the further issue of share capital also reduces the 'worth' of existing share capital, particularly in the short-run since this also represents an additional claim upon surpluses produced. Hence there might be a 'capital loss' for existing shareholders which discourages industrial capital from making such issues.27 It is at this stage that the 'acceptable' and 'prudent' gearing and liquidity position of the firm becomes important. The gearing and liquidity position of the firm must be kept within such acceptable bounds as will facilitate the continued provision and 'location' of credit in its various forms. The particular accountancy calculations that are pertinent to such control over the debt or loan aspects of the firm's financial management are the various 'liquidity ratios' and 'yield ratios' common to so called financial management.28

Liquidity ratios measure the ratio of current assets to current liabilities and represent an assessment of a company's ability to meet its short-run obligations; whether it can repay its liabilities. In addition the yield ratios represent some measure of income generated by the assets of a firm overall. Within these calculations are embodied the acceptable financial practices of the firm itself. From the accounting data presented by the firm for disclosure (required by law, by the Stock Exchange Council, City Panel on Takeovers and Mergers etc.) banking capital makes these kind of calculations to decide the 'credit worthiness' of firms; 'where' any additional credit will be located and also whether the already existing credit is 'effectively' located. These kinds of loans or creditor calculations, are articulated around the 'balance sheet' data dealing as they do with the liabilities of the firm and the assets it has to back these liabilities. Creditors are particularly concerned with this aspect of a company's position (its asset cover) since they hold the debt capital and the security of this is dependent upon the company's ability to continually meet its obligations as well as secure a return on these assets. Obligations to creditors can only be met from the realized value of assets in the case of bankruptcy.

These kinds of calculations are rather different to those through which banking capital exercises its control over the other major form of lending in the British system, that of the share form. These 'shareholder' calculations tend to articulate around the

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income statement (various 'earnings ratios') and are concerned with 'profit and loss' and the past and future assessment of 'cash- flow'. 'Earnings ratios' represent an assessment of the firms profitability. This is usually designated by the ratio of declared income (after meeting taxation and preference dividends) as a ratio of ordinary share issue. This is particularly important for the shareholder since it is 'profitability' that determines the price of shares and hence the capital value of his shareholding (via the 'secondary market'). The overall financial status of a company represents a balance between the sometimes conflicting aspects of these creditor and shareholder calculations, representing claims on the surplus produced.

We can see here the way in which the 'internal' allocation of resources within industrial capital is profoundly influenced by the ideology of banking capital in the particular form of its domination over the circuit of finance capital. Whether industrial capital is to raise funds via the stock market or via the loans from the bank, its ability to do this is vitally dependent upon the way it has 'managed' its funds internally. This manifests itself in its 'status' on the stock-exchange and in its public declaration of financial viability via the balance sheetlincome statement. Thus even those funds that are not subject to the market, i.e. internal retained surpluses, are conditioned by the practices and ideology of banking capital. In fact, elsewhere it is argued that the practices of accounting as such are themselves partisan in this relationship between banking and industrial capital and do not simply represent a neutral technical practice as is often thought.29

In more abstract terms we can characterize the practices of banking capital under the general term of a 'consolidationist' ideology.30 By this is meant a pre-occupation with maintaining the value of money wealth. Banking capital wants above all to consolidate its monetary holdings but at the same time to earn a 'return' on these. This is an extremely contradictory position and is a reflection of this capital's divorce from any actual involvement in the immediate productive process. For these reasons it constitutes the most 'cautious' form of capital, requiring firm 'collateral' before any credit can be given etc.

The ideology of commercial capital can be expressed as 'realiza- tionist'. Commercial capital is concerned with the 'turnover' of commodities, their repeated buying and selling as quickly as possible so as t o 'realize' its capital in the form of money, with which it can repurchase commodities once again. Since commercial capital makes its profit through exchange; simply on the basis of the 'skill' it displays in the cycle of this turnover, there is an emphasis on realizing capital as quickly as possible.

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Finally, we can term the practical ideology of industrial capital as 'accumulationist'. This expresses an emphasis upon 'rationaliza- tion' in the productive process; a technocratic outlook concerned with efficiency; a preparedness to take risks in the search for additional surplus, etc.

Although none of these ideologies are exclusive to any one capital they represent the dominant characteristics associated with each. In any combination of capitals the material basis for each 'brings' something to the combination so none is 'parasitic' (in the moralistic sense) on the other. What is clear, however, is that the particular form of the combination in the UK has resulted in the partial 'dissolution' of the particular ideologies associated with commercial capital and industrial capital and the more or less rampant extension of the ideology of banking capital throughout the practices of the financial and the industrial sector itself. In this sense then industrial capital is no longer 'represented' within the combination in an 'independent' form. Its particular practices are informed by the practices of banking capital, 'dissolved' into them and hence 'dominated' by them.

Within this process of 'representation' the means of representation (the forms of debt, various accounting calculations and ratios, etc.) and the practices of the financial system entailed in the action of these means of representation dissolve the conditions of repre- sentivity of the other forms of capital. What this means is that the unity of the forms of capital is hegemonized, within the economic, under the 'rentier' practices of banking capital in the particular forms discussed above.31 Within this combination the position of industrial (and commercial) capital cease to exist as such, and only the 'industrial sector' exists. This is important because it has a direct impact upon any discussion of economic strategy. I t must inform and at the same time condition the possibility of any attempt to 're-represent' the position of industrial capital by attempts to alter the practices of the financial system. This can only be briefly raised in the final sections of the paper.

6. The proposals to nationalize the banks and insurance companies

Two additional features of the recent developments in the UK financial system have been instrumental in provoking the call for the nationalization of the Banks and Insurance Companies. One of these more general features is illustrated by the data contained in Table 7. This shows the flow of funds through the various institutions and the growth of these over the period 1963-7 3 . The importance of

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Grahame Thompson

Table 7: Institutional flow of funds ( E millions)

% A 1963 1963 1973 1973

Building Societies 512 2,137 317 Savings Banks 134 180 34 Investment and Unit Trusts 127 173 36 --- ---------- - - - - ------ -- Insurance Companies 514 1,227 148 Pension Funds and Property Units Trusts 403 1,023 154

Total Insurance Cos., Pens. Funds & Propt. Trusts 917 2,300 151

Others and Unallocated (including Finance Houses) 145 636 338

TOTAL 1,835 5,426 196

Source: NEDO, Finance foulnvestment. Adapted from Table 6.1 pages 104-5.

the Insurance Company and the Pension Funds is clear here in absolute terms but what is perhaps more interesting is the growth of importance of the Building Societies and the 'Other' category. This latter comprises some adjustment items and the Finance Houses. These are involved with the financing of consumption as are the Building Societies (which actually support the housing market and therefore to a large extent the price of second-hand houses). Thus it is pointed out that by far the fastest growing sector for funds has been to finance consumption and not pro- d ~ c t i o n . ~ ~ Of those institutions which predominate in the financing of production (the Insurance Companies, Pension Funds, Investment and Unit Trusts, holding as they do large portfolios of industrial and commercial securities) the Insurance Companies are the largest and most important.

A second feature of recent developments concerns changes in the nature of the financial institutions themselves. Increasingly in the UK these are taking a much greater interest and share in the purchase of new securities and in the trading of existing securities. This is shown in Table 8. Generally the household sector has been quitting the direct holding of company securities in favour of increasing its holding of pension and insurance policies, building society deposits and bank deposits. Within the institutional block, the Insurance Companies are the most important and it is thought, most powerful. Generally the institutions as a whole are extremely sensitive with regard t o risk and they use the secondary markets heavily in an attempt t o maintain the 'risk-profile' of their portfolios largely by trading between themselves. This has led to wide fluctuations in share prices, according to many sources

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(NED0 page 115 in particular). These pension funds and insurance companies represent the quintessence of conservative 'rentier' ideology.

Table 8: The pattern of ownership of quoted ordinary shares in the UK 1963 and 1969-7 3 (%)

Category of Ownership 1963 1969 1970 1971 1972 1973

Persons, executors and trustees resident in UK 58.7 47.0 45.0 44.0 43.0 42.0

Insurance companies 10.6 13.8 14.4 15.3 15.5 16.2 Pension funds 7.0 9.4 10.4 11.0 11.3 12.2 Investment trust 6.7 7.0 6.9 7.0 6.9 6.5 Units trusts 1.2 2.9 2.9 3.2 3.1 3.4

Total institutions 25.5 33.1 34.6 36.5 36.8 38.3

Charities and other non profit making bodies 2.6 3.6 3.8 4 .0 4 .2 4 .4 Banks and other financial institutions not specified 2.3 3.6 3.7 3.5 3.7 3.3 Non-financialcompanies 4.8 4.6 4 .7 4.6 4 .7 4.3 Public sector 1.6 2.5 2.4 1.8 1.9 2.5 Overseas 4 .4 5.6 5.8 5.6 5.7 5.2

Source: Incomes From Companies and its Distribution, Table 10, page 17.

These considerations, plus the fact that there are large public sector holdings in the banks of the UK's EEC partners and also the fact of the banks operating differently in other economies has lead t o the call to nationalize these and the 'powerful' Insurance C ~ m p a n i e s . ~ ~

The question that can be briefly posed here is 'How relevant are these nationalization proposals?'

It is not the intention of this paper to offer a full exposition and critique of the NEC's document. Only those aspects of its proposals which raise important considerations for the functioning of the British financial system will be considered.

In the first place, it is interesting to note that the Building Societies are only mentioned in the document's preface, and there they are dismissed as being only important in solving the housing problem. As we have seen from Table 7, however, these institutions were in fact the largest in terms of flows of funds in 1973. Clearly they are vital in channelling funds into consumptive activity and

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really act like any other banking institution, borrowing short and lending long. The particular terms under which they borrow have an important impact on the direction of flows of funds within the British system. In fact, at the end of 1975 the deposits of the Building Societies were greater than the sterling deposits in the London Clearing Banks, the largest four of these being the ones considered for nationalization.

This demonstrates one of the serious shortcomings of the document. It misunderstands the importance of the borrowing/ lending relation as such, dividing the institutions up in a completely arbitary manner depending upon their 'areas of activity'.

Returning to the substantive proposals of the document, there is a presumption that the nationalization as such will solve the problem of the lack of investment in British manufacturing industry. As we have seen above, however, it is the practices of the British financial system that are at stake here and these need not change with a change in the legal form of ownership. There is little evidence to suggest that it is the private ownership as such of the Banks and Insurance Companies that is the 'cause' of the low level of investment in British industry; that this has produced some kind of 'investment strike' by the institutions of the City.

For instance, Table 9 shows that the company sector as a whole has in fact been a net lender t o the rest of the economy throughout the early 1970's, despite heavy borrowing from the banks. Thus far from there being an 'absense' of funds for productive investment, the company sector has chosen to lend to other sectors. Why is this? Clearly, money capital flows where the rate of return is highest. In recent years the following have been typical rates of return:- internal capital, 6%%; prime property, 6%; gilts 14/15%.3 It is perhaps not surprising therefore that the public sector has attracted much of the money capital of industrial and commercial enterprises. This is reflected in Table 9 where the acquisition of various forms of public stock is shown in column 2. Like any other profit maximizers, industrial and commercial firms invest where the return is highest and over recent years this has not been in their own productive activity but in other forms of debt particularly that issued by the State.

This raises an issue which is more or less completely ignored in the Labour Party document, that is the articulation of the State into the circuit of finance capital. To understand this requires that the nature of the banking mechanism within the UK context be more thoroughly spelt out. Only some of the more pertinent features of this can be discussed here.

In detailing the practices of the banks in their lending policies it must not be forgotten that banks also borrow and that they

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Table 9 : Industrial and commercial sectors net acquisition of financial assets (Em)

Year Total Treasury Bills, Difference between Notes Govt. Securities Bank deposits and and

& L.A. Debt. Bank advances Coin

1971 499 11 368 116 1972 1,136 121 -781 255 1973 469 193 -2,077 70 1974 -2,500 145 -3,977 355 1975 332 321 1,749 408

1st ?h 1976 1,118 - - -

TOTAL 1,054 79 1 -4,718

Note: - means borrows on this item or overall. Absence of -, means lends on this item overall.

Source: National Income and Expenditure 1965-75, Table 14.4 p.95, HMSO 1976, and Financial Statistics, November 1976.

borrow under certain terms. For banks there is a certain relationship between their borrowings (deposits) and their lending. This relationship is traditionally controlled by the 'reserve-ratio' which is customarily fixed within the UK system by the Bank of England. However, this reserve ratio (which is something of a device to force the commercial banks to hold government debt) effectively controls only the technical multiple creation of credit mechanism in the system. The banks are the major institutions in the financial system that can directly create money (or credit). Within the British System it is not the State which directly creates money but the financial system itself. The State does not directly print money, instead it creates 'financial instruments' through its borrowing requirements which effectively act as the basis of the banking systems deposit creating activity via the reserve ratio (these being legally defined as liquid assets for the banks). As has been pointed out by Hussain, this means that the State can only create 'money' under the conditions laid down by the financial system, i.e. within the conditions under which the financial system will hold government short-term debt, and that this immediate control of the money supply by the financial system is the basis of the so called 'orthodox monetary policy'. The Bank of England does not act as banker to the Government, it does not lend directly to the government and state apparatuses but only acts as broker between the State and the financial institutions which hold its debt.3s

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The importance of this is two-fold. In the first place it makes a nonsense of that ideological current which argues that the State borrowing 'crowds out' lending to the industrial sector.36 The implication of this argument is that there is a certain given amount of credit which can then be 'distributed' amongst the competing claims (State, personal sector, industrial sector etc.). But i t is clear that it is the State's borrowing activity itself which creates the conditions for the augmentation of credit to these other sectors. Within the practices of the British system the absence of the State as borrower would severely restrict the amount of credit (money) that the banks could create since it is just this short-term lending that acts as the basis upon which such credit creation can take place (via its legal status as 'near money' and the reserve ratio that it supports). I t is not the existence of State borrowing as such which 'crowds out' the other sectors but the competitive conditions (competitive with other sectors) under which such borrowing can take place which is the crucial issue. As was pointed out above the State has had to offer its debt at something near double the return available from the debt of manufacturing and commercial activity.

The reasons for this involve another dimension to the operation of the borrowing and lending function which is again ignored by the Labour Party's document. This is the international dimension. Interest rates have had to be kept high in London to attract and keep short-term deposits in the U.K. during a period of sustained balance of payments deficits and sterling devaluations. (These conditions are now changing.) This has affected the conditions under which government debt itself could be held.

To analyse the form of control of international banking capital over different national formations is beyond the scope of this paper but suffice is t o say that one of the major features of the British economy has been its position within the 'field' of international financial flows. To a significant extent the economy itself has acted much like a bank - borrowing short, holding minimal reserves and lending long both internally and abroad. This has had a profound impact upon the practices of the industrial sector itself, articulating these into this function.

The second major implication of the way the banks operate to create credit within the system concerns the relative importance of the issue of securities and bank loans (or the creation of deposits). Clearly securities are not only issued to raise additional investable funds. They can also be issued for a number of other reasons; to maintain control over a company in the face of a takeover bid; to restructure and reorganize the company's capital base; even to 'distribute' surpluses (by affording shareholders a

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capital gain as opposed to a dividend distribution). But even those issues made for genuine capital investment do not necessarily augment the amount of credit in the system as a whole, though they do for individual companies. I t is only in as much that the share issue is 'purchased' with genuine credit created by the banks, that the credit base as a whole is expanded. If this is simply 'purchased' out of savings no additional credit is created. One advantage of those formations with high levels of savings is that lending to the industrial sector need not involve the complications of the creation of credit for the system as a whole and hence need not be so sensitive to the conditions under which short-term government debt might be held.

7 Conclusions

One serious additional point must be made with regard to the arguments outlined above and this relates to the general determinants of the decision to invest in productive activity itself. It has been stressed that the practices of the financial sector are crucial determinants in this decision, but clearly they are not the only determinants. To 'restructure the industrial sector' would need other than purely changing the conditions of raising finance for investment. This relates to the issue of the ideological and political formation of managers in the broader sense. Obviously this formation is not independent of the practices of the financial sector, which informs the practices and mechanisms of the industrial sector in the manner discussed above. But we cannot reduce, for instance, the rampant anti-planning and anti-worker ideology which pervades the British social formation and which also has its impact upon the efficiency of the industrial sector, simply t o an expression of the domination of the practices of banking capital.37 This has other determinants which are located in the educational and training system for managers, and in the class practices of the ideological and political apparatuses as such. The function of management and the formation of managers as agents of this function is the result of a 'field' of determinations which is not purely economic let alone 'financial'. A restructuring of the practices of the financial system can only be one component part in any overall restructuring of the social formation. - What is clear, however, is that those calls made to provide the conditions for increased profitability as an incentive to investment will not alter the practices of the financial system at all. They will only tend to reproduce and 'restimulate' the existing practices

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which themselves have precisely resulted in the present predicament facing the UK economy - a cycle of low investment, low profitability, balance of payment difficulties, declining living standards, etc.

Finally, bearing these points in mind we can look briefly at the possible forms of development for the medium term in the relations between the financial and industrial sector. In a very schematic manner these are sketched in Figure 4. For convenience this does not directly link up with the functions of the State in these relationships.

Figure 4: Simplified structure of UK capital market

PATH 1 PATH 2 PATH 3

HOUSEHOLD SECTOR

I Deposits

Commercial Pension Funds, Insurance Cos.,

Unit and Property Trusts

Cash Deposits

The Stock Exchange

~oans 1 ~ecukities Securities

INDUSTRIAL SECTOR

The traditional path is shown as 3 in the Figure. As we have seen this is declining in importance as the household sector switches to path 2. Over recent years this latter has shown the most significant increase involving the two-level institutional structure shown. On the other hand, path 1 has traditionally been 'blocked' because of the primacy of the Stock-Exchange in establishing firms' financial status and the practices involved with this. Recently, however, this seems to have been stimulated some- what by the space created with the demise of the stock-exchange as provider of funds and the competitive increase in medium term

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lending. Within the capitalist structure path 1 looks the most progressive. Path 3 is unlikely to reappear with any renewed vigour and Path 2 represents the least progressive alternative, being articulated on the existing short-term and conservatively controlled practices, though this is the alternative most likely to re-establish itself in the medium run.

More interesting from a socialist point of view however, have been the recent attempts to 'by-pass' these existing structures. On the one hand these are represented by attempts to involve the State directly in providing finance for industry through agencies like the National Enterprise Board. By and large this particular form has not been successful. Political opposition has restricted its access to finance to a minimum and the criteria it is to employ in deciding 'where' t o invest largely duplicate the already existing criteria of the financial system.38

On the other hand there are attempts to 'by-pass' the existing structures by setting up 'worker-cooperatives'. These represent direct attempts at opposition to the circuit of finance capital, but they are severely restricted by their ambiguous legal position and lack of any systematic privileged access t o finance. T o a large extent, because of these features, they have been gradually re-integrated back into the dominant cycle of finance capital. However, they represent the most progressive form of opposition and development, embodying as they do a rejection of present 'managerial practices' and the beginning of their replacement by the ideology of the skilled worker (the absence of demarcation disputes, egalitarian incentive structures, etc.). To establish these on a serious and lasting basis would require their integration into a fully developed alternative financial structure which could act as a focal cycle in opposition to the present structure of the financial system. A more systematic conception of the form of this and the conditions under which it would be possible for it t o exist must await a fuller analysis of the financial system, of the social formation as a whole, and of some strategy adequate to a transformation to socialism.

Notes

1. A previous version of this paper was presented to the CSE Money Group and at a seminar organized by the Political and Economic Sciences Committee of Cambridge University. I am especially grateful to the members of the CSE Money Group for helpful comments - in particular to Stuart Birchell, David Fishman, Athar Hussain and Jim Tomlinson. To a large extent the revisions contained here represents the results of collective discussion within this group. In addition I would like to mention discussions with Mike Gane which have contributed to a clarification of the arguments contained here.

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2. See in particular the following: The European Money Puzzle, Peter Readman e t al., Michael Joseph, London 1973; Finance for Industry, NEDO, London 1975; Company Finance in Europe, J. M. Samuels, R. E. V. Groves and C. S. Goddard, The Institute of Chartered Accountants in England and Wales, London 1975; National Attitudes and The Financing o f Industry, Yao-Su Ha, P.E.P., London 1975; The Stock Market and Company Finance, Peter Milne, LEFTA, London 1976; and, 'The Unchanging City', The Economist Survey, 9 October 1976. 3. Banking and Finance, The Labour Party, London, August 1976. 4. A notable exception to this is Athar Hussain, 'Hilfreding's Finance Capital' Bulletin of the Conference o f Socialist Economists Vol.VI No.13 March 1976. To a large extent the following paper represents an elaboration of the very suggestive ideas contained in Hussains paper. See also L. Harris, 'On Interest, Credit and Capital' Economy and Society, Vo1.5 No.2 May 1976. This paper is problematical but it is not intended to embark upon a critical analysis here. 5. Since the concept of 'finance capital' is employed in a particular manner later on, henceforth the circuit of interest bearing capital will be designated as the form 'banking capital'. 6. This analysis pertains t o banking capital in its most abstract form. Below and in another paper (Some issues in the Development o f Accountancy, Thompson, 1976). It is shown that actual forms of lending to industrial capital considerably complicates this picture in as much that struggles can develop between banking and industrial capital over the limits of such possession. 7. Hence the arguments about the role of merchants capital in relation to the development of underdevelopment. See G. Kay, Development and Under- development: A Marxist Analysis, Macmillan, London, 1975. In Chapter XX of Volume 3 of Capital - 'Facts about Merchants Capital' - Marx goes on to discuss the forms of the transition to capitalist manufacture and the role played by the independent merchants capital in this process. This aspect will not be pursued here. 8. This highlights the point made earlier about the danger of conflating the different sectors as empirically defined with the forms of capital. What is usually denoted by the 'financial sector' includes such technical activities as the trading in the money commodity and providing means of payment but this is not the same as the relationship of lending and borrowing embodying the function of banking capital. In a similar manner the capital tied up in the 'accountancy' function is strictly speaking part of 'commercial capital'. Particular institutions like commercial banks might thus embody the functions of 'banking capital' as well as 'commercial capital1 (and this applies equally well t o manufacturing enterprises). 9. To some extent, what is written immediately below in the text appears more a t the level of 'assertion' and not 'demonstration' at this stage. This is necessary because of the formal abstract character of the definition provided. As the argument progresses in the paper the conditions of existence of finance capital as defined will be more rigorously demonstrated and elaborated. 10. See also Kay, op. cit., Chapter 4, and C. Palloix, 'The Internationalization of Capital and the Circuit of Social Capital' in Hugo Radice (ed.), Inter- national Firms and Modern Imperialism, Penguin, 1975. 11. For MfC > MC (i.e. for the commercial capital t o share in the surplus), the commercial capital must either buy below value a t some stage or sell above value at another, or engage in some combination of the two, i.e. i t must

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Financial and industrial sector in the U.K. economy 28 1

engage in unequal exchange. For instance if it buys commodities c ' ~ at below value, MI1 is not as large as it would have been and therefore commercial capital shares in the surplus value produced within the productive process of industrial capital. It may, however, purchase at value but sell higher than value. In this case commercial capital either (temporarily) swindles the consumer or 'pre-appropriates' surplus from the productive process of that industrial capital to which it sells commodities as means of production. The point to note is that no additional value is produced within the circuit of commercial capital as such. Clearly it is possible for the commercial capital to both purchase at below value and also sell below value and at the same time make a profit. This happens when the purchase is further below value than is the sale. 12. A. Hussain op . cit . pp.1-18. Note that Hussain uses the term finance capital to designate what is here termed banking capital. 13. Strictly speaking, what the existence of generalized and perpetual borrowing and lending (and hence credit) does is to establish the possibility of this dominance. It establishes the 'space' within which the actual form of dominance or otherwise must be constructed. For instance, if the rate of interest were zero, all the surplus would form 'profit of enterprise' and although money was lent and borrowed the quantitative importance of this would be nil. However, dominance might still be exercised in the sense that certain restrictions could be put upon the employment of the money capital so lent. In other words a zero rate of interest would not necessarily dissolve the actuality of a dominant relationship between banking capital and industrial capital. Money could still be lent and any coercion in terms of its use might be effected by ideological or political means. The dominance would thus be effected immediately by 'extra-economic' means in this instance. This relates to the 'qualitative factors' referred to above. 14. A. Hussain, 'On the Theory of Money', September 1975, mimeographed. 15. These data do not simply refer to funds that are available for additional productive accumulation in the Marxist sense. This is because the coverage of companies includes those engaged in distribution (commercial capital) and makes no distinction between that part of capital employed in activities associated with so-called 'productive labour' and that part associated with un- productive labour. 16. This is also true of more recent years. See Walker (1975). 17. See Hussain 1976 op . cit . and also Tom Hadden, Company Law and Capitalism, Weidenfeld and Nicolson, London 1972 (though not his Chapter 4 where the issue of the 'divorce of ownership from control' is actually raised). 18. There are equally stringent legal restrictions placed upon the directors serving their own interest as opposed to that of the company. This particularly applies to the directors of nonquoted private companies where opportunities for malpractice seem to be greater. See in particular Hadden, o p . cit . Chapters 5 and 6. 19. It is a confusion over this issue that leads to the problem over the so called 'divorce and ownership and control'. Far from the issue being one revolving around the divorce of 'ownership' (a legal relationship) and 'control' (an economic relationship), the primary pertinent feature is the precise economic relationship between industrial capital and banking capital and the differential forms of debt - shares and loans in this case - which express this borrowing and lending relationship. Of course there is a legal relationship ('ownership' in the orthodox sense) which 'accompanies' and is 'in addition to' this economic relationship, but it is not a question of their 'divorce' in the sense of a simple juxtaposition of the one against the other. The shareholder does not 'own'

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the assets of the company - he owns a right to a distribution of the surplus and he is in exactly the same legal position vis-&is the company as legal subject as is the debtor - they are both debtors and have no proprietary rights in the company's assets as such. (These points are developed further in Thompson (1976).) 20. The high figure for the USA in 1970 is mainly because of the exception- ally high issue of fixed interest bonds, i.e. loan capital. Note also the radical change in Japan's position. 21. Samuels, et al. op. cit., Table 3.9 p.82. 22. Milne, op. cit., p.8. 23. It is very difficult to get substantial overdrafts secured upon future income prospects alone whether in the personal or corporate sector. 24. See 'The Unchanging City', The Economist Survey, 9th October 1976. 25. See S. Mason, The Flow o f Funds in Britain, Paul Elek, London 1976. The growth of overseas banking in Britain has been exceptional over the last decade and is likely to have an important impact upon the practices of British commercial banks. With this growth has come a much greater articulation of the British banking system into the international flow of funds mechanism which itself has profound effects upon the industrial sector as well. 26. L. S. Presnel1,Money and Banking in Japan, MacMillan 1973, Chapter 10. 27. See A. Wood, A Theory o f Profit, Cambridge University Press 1975. In fact, the decisions to issue shares is not solely conditioned by the desire to raise additional capital for investment, so that a more complex analysis is necessary. See below, section 6. 28. For a clear exposition of these and the various 'earning ratios' mentioned below, see T. A. Lee, Company Financial Reporting, Nelson 1976 Chapter 10. 29. See Thompson op. cit., 1976. 30. In what is written below the concept of ideology is used in a very des- criptive sense. It is employed simply to denote, more or less, the direct reflection of real economic functions in certain established patterns of technique, rules, 'know-how', etc. 31. In other formations, although this hegemonization is present, it is exercised through different practices. In particular, being very schematic at this juncture, in those formations where a more 'centralized' and 'direct' articulation can be found the ideological practices of industrial capital tend to be partially reproduced within the practices of banking capital itself. 32. This is not to argue that this might not have some indirect affect upon production itself, but by and large, particularly in the housing sector, this is not necessarily so. 33. Ranking and Finance, The Labour Party, August 1976. 34. 'The Unchanging City', op, cit. 35. Hussain, op. cit., 1975 and 1976. See also D. Fishman, 'Analysis of the British Financial System', May 1976 mimeographed. 36. Harold Rose, Banking and Finance: A Reply, City Capital Markets Committee. September 1976. 37. This rampant anti-workerism has been given a concrete expression recently with the outright rejection by British capital of the mild suggestions made by the Bullock Committee for 'workers representation' on the boards of companies. 38. NEB - Draft Guidelines t o Operation, Department of Trade, 1976. D

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Financial and industrial sector in the U.K. economy

References Department of Trade (1 976) NEB-Draft Guidelines t o Operation, London. The Economist (1976) 'The Unchanging City' T h e Economist Survey, 9 October. Fishman, D. (1976) 'Analysis of the British Financial System', Mimeographed. Hadden, T. (1972) Company Law and Capitalism, London, Weidenfeld and Nicolson. Harris, L. (1976) 'On Interest, Credit and Capital' Economy and Society Vo1.5 No.2. Hussain, A. (1976) 'Hilfredings Finance Capital' Bulletin o f the Conference o f Socialist Economists, Vol.VI No.13. Hussain, A. (1975) 'On the Theory of Money', mimeographed. Kay, G. (1975) Development and Under- development: A Marxist Analysis, London, MacMillan. Labour Party (1976) Banking and Finance, London, The Labour Party. Lee, T. A. (1976) Company Financial Reporting, London, Nelson. Marx, K. (1962) Capital Vol. 111, Moscow, Foreign Languages Publishing House. Mason, S. (1976) The Flow o f Funds in Britain, London, Paul Elek. Meeks, G. and Whittington, G. (1976) The Financing o f Quoted Companies in the United Kingdom, Background Paper No. 1 Royal Commission on the Distribu- tion of Income and Wealth, London, HMSO. NEDO, (1975) Finance for Industry, London. Palloix, C. (1975) 'The Internationaliza- tion of Capital and the Circuit of Social Capital' in'Radice, H. (ed.), The Inter- national Firm and M o d e m Imperialism, Hamondsworth, Penguin. Presnell, L. S. (1973)Money and Banking in Japan, London, Macmillan. Radice, H. (ed.) (1975) International Firms and M o d e m Imperialism, Hamonds- worth, Penguin. Rose, H. (1976) Banking and Finance: a Reply, City Capital Markets Committee. Samuels, J. M. e t al. (1975) Company Finance in Europe, London, The Institute of Chartered Accountants in England and Wales. Thompson, G. F. (1976) 'Some Issues in the Development of Accountancy', mimeographed. Walker, J. L. (1975) 'Structure of Company Financing' Economic Trends, ~ 0 . 2 6 3 . Wood, A. (1975) A Theory o f Profit, Cambridge, Cambridge ~ n i v i r s i t ~ - ~ r e s s . Yao-Su Ha (1975) National Attitudes and the Financing o f Industry, Political and Economic Planning, London.

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The relationship between the Financial and industrial sector in the U. K. economy