Learning from Hilferding’s Finance Capital: Money, banking and crisis tendencies

Note by Said El Mansour Cherkaoui, Ph.D.:

The preeminence of British Banks such as Barings and Rothschild Maison de courtage and bankers that traces their profits making in the arm trade contingent of the mercantilist trade of the iberian colonialism in Latin America.  The change of the world trade epicenter had provoked continual functional losses to such banking and monetary systems identified in the pretension of imperial domination and conquest.  

These changes were promulgated first by the courtesans of the British Crown of Great Britain who promoted the Classical School of Economic thoughts that have addressed the value and the money with Adam Smith and David Ricardo which have prompted the response of Karl Marx, going through all the changes taking place in Europe giving their inter-bilateral wars and the rise of fierce competition to conquer colonies following the loss of the North Hemisphere by the British Crown.

New forms of exchange around the world was implemented in form of liberal trade and direct transfer of value through establishing direct line of exchange and transfer of values that was accentuated by the abolition of the slave trade and newly “emancipated slaves” transformed in wage-earners but more unemployed masses in the cities like in the “Fields of Nightmares”.

From India, Central Asia, China to North and South Africa and the Middle East with the “Sick Man of Europe” resulted in the rise of Communist Soviets and in two consecutive world wars and later breaking the Gold Exchange system and paving the path for the first clashes on money not on territories.

The time when John Maynard Keynes was addressing the issue of the money value during the Bretton-Woods and up to the monetarist of Friedman and the Economic School of Chicago and their Avatars as Techno-militaro-bureaucrats of Latin America, that was relayed by the Arab Boycott and the quadrupling of oil price followed by the waves of stagflation.

Populism, defense of the Western and Christian Values and Socio-fascism became the New Popular Formula feeded to the masses by regimes that have been collaborating with the new form of multinationalisation of capital and circulation of money.

We have seen that to be the stimulant for imposing regimes that are supported on their ideological colors, Red you are, Red you will be marginalized and do not cross the line drawn in the sand.   In face of that, we have “Pueblo Unido Jamás Será Vencido” and “No Passaram.”

Stagflation has been here some time, it is like a dormant virus of the capitalist system. It came out when the inflation has nested in the major economic sector and in the first place, the interest rate.  These are the symptoms that there is here is a deep recession that will be only reduced by the Federal spending to stimulate the growth and the consumption as well as demand for heavy equipment including the arm sales and race taking place around the world.

New forms of instability are needed around the world also to instill fear and increase the spending and purchase of weapons.

These purchases will be financed through loans and credits which will increase the demand for the Euro and the Dollar and give a stimulus to the growth in western economy and support the need to keep the interest rate at the level needed to be in accordance with the demand and the rate of convertibility of the dollar and the euro.

The increase of the external debt for countries that are hesitant in joining the sanctions against Russia and the distancing from China will be exposed to the reduction of their revenues coming from their exports, given that the primary goods and natural commodities will have their pricing relatively lower to the manufactured products and the weapons.

In time of scarcity of international capital and foreign direct investments, external debt will be the leverage to flatten the playing field and recuperate the excess of dollars and euros floating in the international market given that the increase of interest rate can be a double sword hurting the economy through the reduction of investment and bank loans.

Said El Mansour Cherkaoui Articles

Email: saidcherkaoui@triconsultingkyoto.com

World Economy Spectrum: Tandem of Inflation and Recession

🌎 Said El Mansour Cherkaoui 🌍 Updated on 9/10/2022 – Initially published on June 26 6:46 pm The State of the World and the Global Economy 🌎 🌎 Said El Mansour Cherkaoui 🌍 🌍 🆕📈#OECD #inflation rises to 🔟.5⃣% in September 2022, with inflation pressures broadening beyond food and energy in most countries. Find out more ⤵️https://fal.cn/3tm8R Continue Reading →

Changing World Economy

Said El Mansour Cherkaoui Oakland California – USA 15 Janvier 2021 Work and Research by Said El Mansour Cherkaoui on Latin America L’Accord de libre-échange nord-américain (ALÉNA) – … Continue reading Said El Mansour Cherkaoui and Latin America GLOBALLEVERAGE Amérique Latine: Secteur Informel, Commerce Électronique et Subcapitalisme Le secteur informel du Pérou, du Brésil, de la Colombie comme au Continue Reading →

The “Financialisation” of Capitalism as defined by Rudolph Hilferding was also the result of the emergence and the shaping of the “Subcapitalism” in the former economies of the European countries, such as the Latin American economies following their independence from Spain and Portugal and their dependency on the capital from Great Britain.

Said El Mansour Cherkaoui, created the concept of “Subcapitalism” and defended it as Doctoral Thesis following 14 years of research and the writing of an initial 1400 pages for his thesis which the Thesis Committee could not have time to read it entirely and I have subsequently obliged to reduce my thesis to 400 pages.

To read more on this:

Doctoral thesis CHERKAOUI Said El Mansour Réf ANRT : 13965


CHERKAOUI Said El Mansour: POLITICAL ECONOMY OF SUBCAPITALISM IN LATIN AMERICA (1830-1930): ARGENTINA – BRAZIL – CHILE – PERU – http://www.diffusiontheses.fr/13784-these-de-cherkaoui-said-el-mansour. html

Creation of the concept of subcapitalism through the study and analysis of the integration of Latin American economies in international economic relations and the global economy. Argentina, Brazil, Chile and Peru are the case studies of this research and analysis of their participation in international trade and the modernization of the policies they have applied to respond to favor the attraction of new European immigrants and to adapt to the new demands of international capital. under the direction of the United Kingdom and related banks and trading houses which direct and dominate international transactions between peripheral third countries and Western Europe.

Identifiant BU : 92PA030099 – 403 pages – Disponible au format microfiche – Contact us


by Patrick Bond – 25 March 2021



A century ago, as the Weimar Republic was set up in Germany, the leading Marxist strategist aiming to socialise the economy was Rudolf Hilferding (1877-1941). Although he was an Austrian, and was educated in Vienna as a pediatrician, Hilferding rose to prominence under Karl Kautsky’s mentorship, and served briefly in mid-1923 and again in 1928-29 as Germany’s finance minister. Neither effort was successful: on the first occasion he was unable to control hyperinflation, and on the second, could not stand up to economist Hjalmar Schacht, who in leading the Reichsbank (prior to serving as Adolf Hitler’s lead economist), pressured the social democratic government with loan conditions, leading to Hilferding’s firing shortly after Wall Street crashed.

But it is for a book written in 1910 that Hilferding is best remembered: Finanzkapital. His theory of money, credit and capitalist crisis tendencies has never been more important to reconsider than today, for its strengths and weaknesses have been exposed to 110 years of testing. Similar to his own era, the current conjuncture combines financial power and vulnerability, with Finanzkapital now popularly described as “financialisation.” And unearthing the laws of motion of the ‘finance capital’ formulation requires digging deeper than what was apparent in early 20th century Germany, Hilferding’s main empirical site of praxis, since so many features of economic organisation evolved in very different directions than he predicted.

While Hilferding contributed to understanding how generalities of the capitalist debt system – especially corporate financing – could be advanced beyond the disorganised state of Marx’s Kapital Volume 3, a critique is essential for both intellectual and practical purposes. And Hilferding’s masterwork, published when he was just 33 years old (and translated in 1981 for publication by Routledge and Kegan Paul), remains the most detailed Marxist analysis ever undertaken of the role of finance in the capitalist economy. In spite of errors, the book is a leading example of how to develop an applied analysis beginning at the very roots of political-economic theory.

But the errors were profound, and the contrast with classical Marxism is most explicit when comparing Finance Capital to the ‘breakdown’ theory of Henryk Grossman (1992), who revealed in March 1929 several profound flaws in Hilferding’s conception of banks and the real economy. Hilferding (1981, p.368) attributed far too much managerial power to “six large Berlin banks” whose control, allegedly, “would mean taking possession of the most important spheres of large scale industry, and would greatly facilitate the initial phases of socialist policy during the transition period, when capitalist accounting might still prove useful.” (The difference between German financial-industrial relationships and others in the West meant Hilferding’s observations were context-specific.)

Just before he took up his second posting as finance minister in 1928-29, Hilferding contradicted Grossman: “I have always rejected any theory of economic breakdown. In my opinion, Marx himself proved the falsehood of all such theories” (Liepziger Volkszeitung, 27 May 1927). But, replied Grossman (1992, 52-53), “No economic proof of the necessary breakdown of capitalism was ever attempted. And yet, as Bernstein realized in 1899, the question is one that is decisive to our whole understanding of Marxism… Marx provides all the elements necessary for this proof.”

In contrast to Hilferding’s reformism Grossman (1992, 200) concluded in 1929, “The historical tendency of capital is not the creation of a central bank which dominates the whole economy through a general cartel, but industrial concentration and growing accumulation of capital leading to the final breakdown due to overaccumulation.”

Hilferding’s theory of capitalist self-stabilization was not anticipated by Marx and Engels when Kapital Volume 3 was being assembled. Nevertheless, from 1870 to 1920, according to Paul Sweezy [1972, p.179]), it appeared to many observers that a new institutional form – “finance capital” – was achieving hegemony over the entire world economy. In the 1910s, the leading German Marxists – Kautsky, Bernstein and Bauer (although not Luxemburg) – believed that banks and other financial institutions had actually pushed capitalism into a new and perhaps final stage, the era of monopoly, imperialist, “finance capitalism.” Even revolutionary Russian theorists of the first decades of the twentieth century – Bukharin and Lenin – adopted this broad argument, citing Hilferding generously, although there was internal debate about whether this final stage was one of strength or one of decay.

However, from 1929-33, the banks that were supposedly at the centre of power in this new era of capitalism suffered systemic bankruptcies, culminating in crashes that left the financial system in tatters. Still, until then, Hilferding’s theory of “finance capital” had much to recommend it, as “the unification of capital. The previously distinct spheres of industrial capital, commercial capital and bank capital are henceforth under the control of high finance.”

In 1915, Bukharin used the phrase “the coalescence of industrial and bank capital.” And in 1917, Lenin termed finance capital “the merging of industrial with bank capital.” These definitions each emphasise institutional power bloc characteristics, at the expense of failing to draw sufficient attention to the vulnerability implicit in financial relations.

In contrast, Grossman’s The Law of Accumulation and Breakdown of the Capitalist System, published presciently in March 1929, insisted that over-accumulation of capital was the core contradiction, and the implications for financial crisis were potentially vast, a point demonstrated by stock market meltdowns within seven months’ of the book’s publication. The increasingly centralized financial system that Hilferding wrote about – and tried unsuccessfully to regulate as German finance minister – did not provide the economy with more stability, but instead with greater vulnerability. Nevertheless, Hilferding maintained his thesis as late as 1931 (Sweezy, 1968, p.298), and it is useful to uncover where his argument came from and went to, in order to assess what mistakes we must avoid today when grappling with financialization’s powers and vulnerabilities.


In Finance Capital, Hilferding attempts no less than “a scientific understanding of the economic characteristics of the latest phase of capitalist development” (1981, p.21). The two characteristics most important to this phase are the growth of trusts and cartels, and the emergence of banking hegemony. Hilferding’s emphasis reflects authentic concerns of the era, for the first few years of the 20th century, when Hilferding’s ideas were forming and the book was written, saw an unprecedented quickening of the centralization of banking capital and important new geopolitical developments.

But Hilferding also sought a theoretical framework that might apply across the history of capitalist development. With a work geared to finance and credit, it is not surprising that the defining theoretical idea is exchange, so it is with money that we begin a survey of his thought.

The starting point in Hilferding’s analysis of the finance capital phase of capitalist development is when credit rises, beginning with the necessity of ‘idle money,’ which plays a mediating role in the relationship of money to capitalist investment. Institutions that develop in response to the functions of money and credit take on new functions of their own. Huge banks, joint stock companies, trusts and cartels are logical outcomes of these processes.

But inherent contradictions based in the nature of production reassert themselves, leaving the capitalist system in crisis. The institutions of Finance Capital develop their own responses to crises, resulting in imperialism and a new role for the state.

To be sure, Hilferding reintroduces the Marxist categories of commodities, value, and socially-necessary labor time within production, since contradictions emanating from this core are the basis for an analysis of the breakdown in capitalist exchange. Within the process of capitalist exchange, money is necessary because ‘the law of price’ “requires a commodity as a means of exchanging commodities, since only a commodity embodies socially necessary labor time” (1981, p.35).

Money is thus a means of exchange, but it is also a commodity which expresses the value of all other commodities. This dual role – as medium of circulation and measure of value – is important as a contradiction that allows crises to develop, and it will be introduced again later. Some brief explanation is in order as to how money, credit, and financial institutions are related.

As a medium of circulation and as a measure of value, money must be fundamentally tied to commodity production. “The value of money and the price of bullion follow completely divergent courses” (1981, p.47), so even the power of the state in manipulating coinage or bullion markets is insufficient to prevent the value of money from expressing “the socially necessary value in circulation” (1981, p.47).

Hilferding rejects the quantity theory of money, arguing against the notion that “changes in value are caused by either an excess or deficiency of money in circulation” (1981, p.56). Instead, money plays an accommodating role. It is brought into circulation according to its supply and the unmet demand for it. Hilferding concludes, “At any given moment, all the commodities intended for exchange function as a single sum of value, as an entity to which the social process of exchange counterposes the entire sum of paper money as an equivalent entity” (1981, p.56).

However, money must also have its own intrinsic value. Hilferding acknowledges that for two reasons at least, there must be a gold or other metal complement to money. The first reason is the need to settle international balances. Pure paper currency that is not based on metal “would be valid only within the boundaries of a single state” (1981, p.57).

States might be tempted to change the quantity of money in their economies without a corresponding change in the value of commodities. The second reason is that in addition to being a medium of exchange and measure or value, money also logically serves as a store of value, and for that purpose, a metal base is necessary because it is “in a form in which it is always available for use” (1981, p.58).

Money “as a means of payment” (1981, p.60) is introduced to describe how as a commodity, money can itself be sold and paid for later in the form of credit money. “This means that the money which is turned over in payment can no longer be regarded as a mere link in the chain of commodity exchanges or as a transitory economic form for which something else may be substituted.” (1981, p.60) In addition to lubricating the exchange process, money – particularly credit money – plays a decisive role in the scope and scale of exchange relationships.


Credit money is treated in a careful, detailed way by Hilferding. Several important characteristics are noted. First, credit money is a function of individual business decisions, not the state. As such, individual credit money can be created at any time and can be depreciated when loans are not repaid.

Second, credit money facilitates a far more rapid velocity of circulation than does money as merely a medium of circulation. Thus, “The greater part of all purchases and sales takes place through this private credit money, through debit notes and promises to pay which cancel each other out” (1981, p.64).

Third, and most importantly in times of crisis, credit money makes “the circulation of commodities independent of the amount of gold available” (1981, p.64).

Credit money is itself initially and ultimately dependent upon conditions of production and circulation. When an economic crash has occurred, Hilferding notes, a fall in commodity prices “is always accompanied by a contraction in the volume of credit money… [which] is tantamount to a depreciation of credit money” (1981, p.65).

At that point, credit money “becomes suddenly and immediately transformed from its merely ideal shape of money of account into hard cash” (1981, p.65). It is this contradiction between the financial system and its monetary base that is the hallmark of financial crises.

The relationship of credit to a ‘long-wave’ economic cycle – as defined by Kondratieff (1926) – which culminates in a crash must be examined closely to understand the full importance of Finance Capital. In fact, Hilferding does not use the long-wave description, but his reasoning is quite in keeping with it. He begins by outlining some mechanisms by which credit assumes a greater role in the economy as growth or the capitalist system progresses.

Hilferding looks at the process of growth from the viewpoint of the circulation of industrial capital. Industrial capital is created through the combination of means of production (MP) and labor (L). While in Hilferding’s view, it is rare to find loans arranged for the purpose or hiring labor (a mistake discussed below), credit is a common form of financing the purchase of means of production. This is particularly true during the expansionary period, as demand for goods increases, prices rise, the quantity or money demanded increases, and a regular rate of return appears guaranteed.

As a result, financiers are more able and ready to extend credit. Indeed, Hilferding argues that “as capitalist production develops there constantly takes place an absolute, and even more a relative, increase in the use of credit” (1981, p.70). During the expansion, the organic composition of capital increases, as “the growth of M-MP outpaces the growth of M-L, with the resulting more rapid increase in the use of credit compared with the use or cash.” (1981, p.70)

In the process of spurring on production, credit acquires “a new function” (1981, p.70), that of taking idle money capital and putting it to use. At the level of the firm, idle money, or ‘hoarding’ plays a role when fixed capital is consumed and needs to be replaced.

To preserve continuity in the production process, it is important that the amount of fixed capital consumed be measured in terms of money. This “requires periodic hoarding, and hence also the periodic idleness of money capital” (1981, p.74), ideally available to a firm through its bank account, where it will earn a rate of return. Idle money is also a factor, Hilferding argues, as surplus value begins to build up in an enterprise but before there is actually enough to use as productive capital for new investment.

Idle money increases as fixed capital grows relative to circulating capital, requiring more funds held in a state of readiness. However, with the development of new technology, the turnover time of capital shortens, leaving idle money less time to be idle. In terms of the long-wave, prices start relatively low, technological advances are introduced rapidly, and turnover time is relative quick. At the cycle’s peak, there are greater amounts of idle money available due to longer turnover times, prices are rising, and the demand for credit is higher.

Credit is paid for by interest. In his discussion of banks, Hilferding analyzes the nature of the supply of and demand for credit. He notes that interest is utterly unlike profit: “It does not arise from an essential feature of capitalism – the separation of the means of production from labour – but from the fortuitous circumstance that it is not only productive capitalists who dispose over money” (1981, p.100).

Interest is not autonomous, however: “an increase in production and thus in circulation means an increased demand for money capital which, if it were not matched by an increased supply, would induce a rise in the rate of interest” (1981, p.103). The amount of cash in the economy, the health of the national currency, and the nature of the gold stock also have a role in mediating the increased demand for money capital. So ultimately, “In a developed capitalist system, the rate of interest is fairly stable, while the rate of profit declines, and in consequence the share of interest in the total profit increases to some extent at the expense of entrepreneurial profit” (1981, p.104).

Hilferding concludes that “since money is always needed to defray the cost of circulation, and capitalist production has a tendency to expand more rapidly than the supply of money capital, the resort to credit becomes a necessity” (1981, p.80). A system of managing credit is also a necessity, and exists through a complicated maze of financial entities that have a symbiotic relationship to corporate institutions such as joint stock companies, trusts and cartels.

Institutions of finance capital

First, consider banks. Financial intermediation by banks is necessary, Hilferding argues, because productive capitalists are unable to adequately cancel debts and credits amongst themselves. Productive capitalists may offer each other bills of exchange or other kinds of promissory notes in attempting to realize a balance of payments without the inconvenience of money exchange.

But in Hilferding’s day, these direct credit instruments were found to be inferior to the credit money offered by banks. This was both because banks were more creditworthy than individual productive capitalists and because there were efficiencies and economies of scale involved in allowing banks to mediate.

For example, the time period required to verify the quality or a promissory note or the time period required to collect collateral on a note in the event of refusal to pay could be bridged by the use of bank notes. In issuing its own notes – instruments which effectively substituted for the promissory notes offered by productive capitalists – a bank served to guarantee in the public’s mind the safety of the investment. The bank also offered a mechanism for sharing the risk of the demise of any given productive capitalist.

In sum, Hilferding argues, credit offered by banks “extends the scale or production far beyond the capacity of the money capital in the hands of the capitalists. Their [productive capitalists’] own capital simply serves as the basis for a credit superstructure… ” (1981, p.84).

Here the spatio-temporal features of finance are vital: “What the banks do is to replace unknown credit with their own better-known credit, thus enhancing the capacity of credit money to circulate. In this way they make possible the extension of local balances of payment to a far wider region, and also spread them over a longer time period as a consequence, thus developing the credit superstructure to a much higher degree than was attainable through the circulation of bills limited to the productive capitalist” (1981, p.86).

Hilferding acknowledges an important role for state intervention in the event of fear that excess bank note issuance might lead to problems in dilution or inconvertibility of the notes. But regulation of credit in this manner “fails as soon as circumstances require an increased issue” (1981, p.85). Then, when crisis occurs, there is a sharp increase in demand either for high quality credit issued by the banks thought to be most stable, or for legal tender state paper money.

Hilferding places great emphasis on the distinction between the credit described immediately above (circulation credit) and the credit created through mobilizing idle money (capital credit). The latter is an actual transfer of funds from unproductive sources to productive capitalists, while the former is “merely a substitute for cash” (1981, p.87). The power of finance capital lies not in lubricating the circulation of credit money, but in supplying capital credit in specified amounts, to specified borrowers, at specified times.

It is here too that the difference between ‘financial capital’ and finance capital is evident, and that Hilferding’s definition of finance capital is understood. The capital of banks is oriented to issuing credit to accommodate circulation.

Finance capital, on the other hand, involves the centralization (through the mediation or banks) of productive capital’s idle money for the purpose of reinvestment in other productive capital. Productive capital – i.e., industrial and commercial capital – is also a lender in this sense, and the bank becomes a borrower. Finance capital, then, can be seen as the ‘unification’ of banking capital and industrial/commercial capital.

The distinction between providing circulating credit and capital credit is also important to the bank from a technical standpoint. Because it is based on generally short-term notes from productive capitalists, circulating credit is returned to the bank in a manner consistent with the way it was lent. In Hilferding’s words, “its value is reproduced during a single turnover period” (1981, p.91).

But capital credit is extended as a kind of long-term investment in the enterprise; its value is returned “in piecemeal fashion, in the course of a long series of turnovers, during which time it remains tied up.” (1981, p.91) Because of this, the provision of circulating credit (more commonly used by merchant or commercial capital than by industrial capital) allows the bank more freedom of action than does the provision of capital credit.

The difference between circulating credit and capital credit can be seen not only in the accounting process for debt repayment, but also in terms of the relative power position of banks vis-a-vis other capitalists. Hilferding develops another distinction in credit categories – that of commercial (or payment) credit as opposed to investment credit – which parallels the circulating credit versus capital credit distinction.

In issuing commercial credit, banks do little more than collect bills of exchange, promissory notes, and other forms of payment from industrial and commercial capitalists. The banks are thus heavily “dependent on the state of business and the payment of bills” (1981, p.92). In issuing investment credit, on the other hand, a bank invests funds in the fixed capital of an enterprise and thereby assumes an entirely different, more important, role.

In terms of relative power, Hilferding notes that “Every merchant and industrialist has commitments which must be honoured on a specified date, but his ability to meet these obligations now depends upon the decisions of his banker, who can make it impossible for Him to meet them by restricting credit… the bank is able to dominate and control the function much more effectively” (1981, pp.92-3).

The distinction is also felt across national boundaries, as central banks take on different roles depending on, for example, the pressure to invest in foreign capital or national regulations concerning use of the gold stock. The Bank of England, Hilferding argues, had far less autonomy than the Bank of France, because the former extended largely commercial credit, while the latter, with “its enormous gold reserve and relatively small commercial obligations” (1981, p.92), served as the principal international investment banker.

One function of the increased power of banks which specialize in investment credit is their ability to affect the profitability of productive capital. Industrial capitalists can use credit to gain an advantage over their competitors in at least two ways, by borrowing:

  1. to increase output and thus realize economies of scale, and
  2. to lower “prices, for that proportion of… output produced with borrowed capital, below production prices (cost price plus average profit) to the point where they equal cost price plus interest” (1981, p.93).

This latter mechanism allows prices to fall but does not affect the capitalists’ profits on that proportion of output produced with equity capital. In aggregate, this allows the total sum of profits in the economy to increase (although it does not raise the average social rate of profit) and thus accommodates the system’s drive to accumulate.

In the process of achieving greater power over industrial capitalists due to the relationship of dependency on investment credit, the banking industry itself experiences tendencies to greater concentration. This occurs autonomously, because it is efficient to concentrate banking functions to realize economies of scale, particularly as regards international commercial credit. But more importantly, “the concentration of industry is the ultimate cause of concentration in the banking system” (1981, p.98).

In providing a greater volume and more sophisticated kinds of investment credit to ever more dependent capitalists, the banking industry tends to concentration because such credit is the “keystone for all other banking activities in industry, such as promotion and the flotation of shares, direct participation in industrial enterprises, participation in management through membership or the board or directors. In a large number of cases such activities are related to bank [investment] credit as effect to cause.” (1981, p.97)

Banks excel at these other functions when they have an inside operating knowledge of the capitalist concern, which is easily acquired through issuing and holding investment credit assets.

The stock market

One ancillary function of banks which Hilferding examines more closely is that of share-issuance, a function captured in the investment banking (as distinguished from investment credit) role of banks, in joint-stock companies and the Stock Exchange itself. From a base of power that begins with dependence via capital credit, banks play a vital role in determining the nature and timing of transformation from individually-owned enterprise to joint-stock company (or corporation).

In Hilferding’s time, there were no regulations to prohibit commercial banks from engaging in brokering or issuing shares of stocks. The larger the bank, the more control over the process could be exerted:

“The large bank is able to choose the appropriate time for issuing shares, to prepare the stock market, thanks to the large capital at its command, and to control the price of shares after they have been issued, thus protecting the credit position of the enterprise. As industry develops, it makes increasing demands on the flotation services of the banks” (1981, p.97).

The power of banks relative to others involved in the joint-stock company can be traced to the actual earning mechanism of the new enterprise. The shareholder in a joint-stock company resembles more closely a money capitalist than an industrial capitalist, Hilferding argues, because through the stock market, the capital invested can be regained at any time: “Liquid money capital competes, as interest-bearing capital, for investment in shares, in the same way as it competes in its real function as loan capital for investment in fixed interest loans” (1981, p.109).

Shares are claims to future profits, realized by the sum of dividends and of the increase in value of the shares. Hilferding believed that the yield on such shares would be reduced to the level of the rate of interest in the long-term, as liquid money capital flowed freely, levelling the rate of return.

The issue unresolved in identifying joint-stock company capital as money capital is the category of entrepreneurial profit. Assuming the joint-stock company return to shareholders is equal to the rate of interest, this entrepreneurial profit can be described as the “profit rate minus the rate of interest.” Hilferding explained this category in terms of the difference between the total capital stock outstanding and the shares that were issued to represent, in a legal sense only, that capital.

Hilferding remarked that a doubling of capital seemed to occur during the transition to joint-stock company status, since the original capital stock was augmented by the capital raised in sales or shares. The capital extended received profit as its return; the share “is a claim to a part of the profit” (1981, p.110), and not to the actual capital stock invested in the enterprise.

But since the interest rate upon which fluctuations in share prices ultimately must rest is independent of the profit rate of any particular enterprise, it is “obvious that it is misleading to regard the price of a share as an aliquot part or industrial capital” (1981, p.111). Indeed, once the share was issued, “None of the developments or misfortunes which it may encounter in its circulation have any direct effect on the cycle of the productive capital” (1981, p.113).

Hence, in the transformation of profit-bearing capital stock to interest-bearing shares, the capital stock which received – in Hilferding’s example (1981, p.111) – a 15% profit rate became shares which received a 7% rate of return. The difference was explained by recalling that the shares represent a claim on the profit that accrues to the original capital stock. The original capital, in the meantime, has been augmented by proceeds from the sale of shares.

That ‘doubling’ mechanism thus made the original capital twice or more valuable than the shares it supposedly was represented by. Because of higher administrative costs associated with the joint-stock company form, the value was typically more than twice as great. This difference was a one-time only profit that Hilferding renamed ‘promoter’s profit’ (1981, p.112) and which accrued to the issuing bank.

By controlling much of the process or joint-stock company promotion, a bank could also affect the rate of return on shares by manipulating the value and amounts of preferred and common shares. This was done by allowing or encouraging stock watering or fraudulent activities, if business conditions made such avenues lucrative.

By watering down or manipulating the shares, “the amount of capital necessary to ensure control of a corporation is usually less than [half of the shares], amounting to a third or a quarter, or less” (1981, p.119). By spreading their resources widely, big capitalists could maintain and distribute control over numerous entities.

The joint-stock companies would also have greater ability to utilize bank credit than would individually-owned enterprises, mainly because bank familiarity with the joint-stock company – as well as internal divisions of labor in the bank and corporation – allowed for more effective supervision, and for the use of credit in an optimal way (i.e., with the possibility of use for more profitable functions – speculative in nature – than circulation or investment in new fixed capital) (1981, p.125). Hence the use of credit made the joint-stock company more competitive than the individually-owned enterprise that would typically not have such good access to credit.

Through manipulation of shares, through provision of credit and through interlocking board directorships, banking capitalists were on a par with leading industrial capitalists – Hilferding called this a ‘personal union’ (1981, p.119) – then banks could relatively easily insist that instead of obtaining new credit from them, joint-stock companies must instead acquire needed capital by issuing new shares, again to be accompanied by promoter’s profit.

In sum, to support the system or joint-stock companies, banks

“advance [the initial capital], divide the sum into parts, and then sell these parts [as shares] in order to recover the capital, thus performing a purely monetary transaction (M-M’). It is the transferability and negotiability or these capital certificates, constituting the very essence of the joint-stock company, which makes it possible for the bank to ‘promote,’ and finally gain control or, the corporation” (1981, p.120).

Of course, this was not done without some struggle by the corporations, first for self-determination, and second, for a share of the promoter’s profit.

One means of avoiding bank dominance was the stock exchange. As noted above, such a marketplace could support the circulation credit facilities of major industrial capitalists, although with far less efficiency and stability compared to the banks. Similarly, the issuance of securities could be carried out in the stock exchange, but again, with certain important disadvantages which allowed investment banks to gain the upper hand in competition.

According to Hilferding, the main role of the stock exchange was in speculation. Even for those outside the banking industry, the speculative drive could easily come under bank control.

In this sense of the word, speculation is merely taking advantage of fluctuations in share prices, and has nothing to do with realizing surplus value. Speculators thus do not gain from any outright expansion in the productive capacity represented in the stock exchange, but merely from gambling with one another. Speculators make decisions to buy or sell particular shares of companies based on the two aspects of share price, the level of profit and the rate of interest.

To assess the former, speculators have no inside edge compared to banks, for example. Assessing the latter, in Hilferding’s time, was a relatively uncontroversial task.

One constant feature of speculation in stock exchanges then and now, is that big shareholders manipulate the prices of shares simply in order to siphon off earnings from small shareholders, who are typically too uninformed to keep up with the latest maneuvers. Another aspect is the use of credit to ‘buy on the margin,’ allowing

“the speculator to take advantage even of minor price fluctuations, in so far as he can extend his operations far beyond the limits of his own resources, and thereby make a good profit through the scale of his transactions, despite the small extent or the fluctuations… futures trading, which defers the completion of all transactions to the same date, is the best way to take advantage of credit” (1981, p.145).

But banks have their own insights into this process, and when the time is right, they can withdraw lines of credit that their small and mid-sized speculative clients had become dependent upon, thus

“putting these clients ‘out of commission’, making it impossible for them to go on speculating, forcing them to unload their securities at any price, and by this sudden increase in supply depressing prices and enabling creditors to pick up these securities very cheaply” (1981, p.147).

Speculation in a commodity exchange has the important advantage of standardization. The use of a new investment vehicle, futures, “makes the commodity, for everyone, a pure embodiment of exchange value, a mere bearer of price… the buyer is spared the trouble of investigating their use value… ” (1981, p.153).

Banks also have some say in the stock exchange when it comes to larger speculators. In obtaining credit on a ‘contango basis’ – i.e., at times when the futures price of a commodity is higher than the current spot price – these speculators must temporarily consign to their creditor bank the shares of stock they use for collateral. At the time of shareholder meetings, this is particularly valuable to a bank. In addition, when doing contango business, “the banks can directly influence the rate of interest, because in this case the supply or credit is to an exceptional degree at the discretion of the banks” (1981, p.148).

And through their other relationships to corporations, banks can “carry on all their speculations with considerable security. The declining importance or the stock exchanges is obviously connected with this development or the large banks” (1981, p.149).

In trade-related speculation, the banks’ involvement reduces the return on commercial trading capital per unit, since with greater access to credit, a trader can spread his/her own resources over a larger volume of commodities. The commercial mark-up on these commodities need not be so high, allowing the ‘industrial profit’ on the commodities to increase.

Finally, speculation in commodity markets also assists productive capital, through lowering the circulation time of commodities and providing insurance against price fluctuations. In the process, part of the commercial profit is converted into interest, which goes to the banks.

Cartels and trusts

The banks increase their earnings and general control over the economy in the commodity exchange. In order to stabilize the exchange from recessionary forces, banks use their power to encourage cartelization, according to Hilferding. This phenomenon is repeated in the realm of industrial production, as well. In order to understand the tendency to concentration – specifically, the development of monopolistic forms of corporate organization – Hilferding first outlines the competitive forces of capitalism that direct the equalization of the rate of profit. Obstacles to equalization arise, however, as capitalism develops.

To encourage new capital flows into spheres that are experiencing an above-average rate of profit, or to drain resources from spheres that are performing badly, are not easy tasks in highly-developed, large-scale areas of business, particularly in two areas: where there is a heavy build-up of fixed capital and where small capital operates individually-owned. Both sectors of production tend to become overcrowded and experience below-average rates of profit.

Hilferding notes that when certain firms in healthy industries win a competitive struggle and achieve consistently high profits, then banks – which have themselves become concentrated and have spread their interests over a large range of industrial enterprises – stand to lose their investments in the non-competitive firms and industries. “Hence the bank has an overriding interest in eliminating competition among the firms in which it participates” (1981, p.191). Banks, then, are an obstacle to free competition but support the tendency for the rate of profit to equalize.

The process of bank manipulation of industrial organization is straightforward. The unification of industrial enterprises can take various forms which lead to varying degrees of monopolization: vertical or horizontal integration, mergers, consortia, cartels, or trusts. When bank intervention occurs, the struggle for unification – often a competitive, hard-fought battle – takes on a new, almost preordained nature. When banks facilitate combinations between clients, “unnecessary waste and destruction of productive forces is avoided” (1981, p.199).

For the bank, a number of benefits accrue from facilitating industrial concentration, including greater security and the opportunity to engage in investment banking. While in these arranged marriages, ownership centralizes but does not necessarily concentrate per se (because the resulting enterprise is most likely to be shared by the owners or the premerger firms), production does concentrate, leaving Hilferding to remark that this is a “striking expression or the fact that the function of ownership has become increasingly separated from the function of production” (1981, p.198).

Another outcome of the process of concentration is the attempt of cartels and trusts to try to minimize ‘commerce’ retail trade, especially – so as to better control prices. In doing so, commercial profit as a share of the total profit on a sale of a commodity declines. The difference can be divided into the other component parts of profit: entrepreneurial profit, interest, and rent.

Hilferding asserts that the existence of the monopolistic combine “confirms Marx’s theory of concentration, [it] at the same time tends to undermine his theory of value” (1981, p.228). Price distortions develop that will reduce profits in the non-monopolized industries. Cartels specifically reduce the level of production to elicit greater marginal profits.

“Consequently,” Hilferding concludes, “while the volume of capital intended for accumulation increases rapidly, investment opportunities contract” (1981, p.235). One solution to this problem, which Hilferding touches on, is imperialism – understood as necessitated by the export of over-accumulated capital.

At some point, Hilferding notes, the ability to serve advanced cartels requires the amalgamation of banks. Banks must take greater pains to invest in industry rather than trade or speculation. Hilferding therefore calls

“bank capital, that is capital in money form which is actually transformed in this way into industrial capital, finance capital… An ever-increasing proportion of the capital used in industry is finance capital, capital at the disposition of banks which is used by the industrialists” (1981, p.225).

Thus, the banks which when acting as userers were resisted by productive capital, and as money-dealing capital merely accommodated the circulation needs of industrial capital, slowly gained power. They “become founders and eventually rulers of industry whose profits they seize for themselves as finance capital” (1981, p.226).

The amalgamation of banks, Hilferding argues, is consistent with the trend towards an “increasingly dense network of relations between the banks and industry… [which] would finally result in a single bank or a group of banks establishing control over the entire money capital. Such a ‘central bank’ would then exercise control over social production as a whole” (1981, p.180).

This is one of Hilferding’s most controversial predictions, and did not fare well historically. Grossman (1992, p.198), explained: “Hilferding needed this construction of a ‘central bank’ to ensure some painless, peaceful road to socialism, to his ‘regulated’ economy.”

And consistent with the trend toward parallel concentration of banks and industry, Hilferding believed, would be a general cartel: “a single body which would determine the volume of production in all branches of industry” (1981, p.235). Prices and money would no longer matter, and the only conflict would be over distribution.

Given these trends, Hilferding concluded that “a fully developed credit system is the antithesis of capitalism, and represents organization and control as opposed to anarchy” (1981, p.180). This prospect would not theoretically eliminate crises, however. With finance capital in a hegemonic role, economic downturns would develop in important new ways.

Capitalist crisis

Hilferding began his discussion of crisis consistent with other themes, by emphasizing circulation. According to Hilferding, a likely manifestation of a crisis in capitalist production would be an interruption in the circulation process due to the hoarding of money, the result of which is an inability to purchase the next round of commodities.

If this was hoarding of money in its role as a means of circulation, i.e., if it only hindered the exchange process and left in its wake a temporary glut of commodities, avenues could be developed to surmount the problem. But the situation is more deeply affected when money has gone beyond a means of circulation to become a means of payment and credit.

When a temporary glut becomes a slump under conditions of credit-based production, it may be impossible for producers to meet their debt obligations. The problem expands, as “The chain of debtors resulting from the use of money as a means of payment is broken, and a slump at one point is transmitted to all the others, so becoming general” (1981, p.239).

Of course, crisis conditions, including the hoarding of money, emanate from contradictions in the production process. Since “Goods are produced in order to obtain a specific profit and to achieve a specific degree of valorizat1on or capital” (1981, p.240), the priorities of production drive consumption.

Hilterding thus eschewed a narrow perspective emphasizing underconsumption of commodities, in part because the logical solution would not in fact resolve the conditions of crisis: ‘‘under capitalist conditions expansion of consumption means a reduction in the rate of profit” (1981, p.242), because the rise in workers’ wages needed to fund consumption would come directly from surplus value extraction. In fact, he later argued, “A crisis could just as well be brought about by a too rapid expansion of consumption, or by a static or declining production of capital goods” (1981, p.256).

Hilferding considered two versions of why capitalist economies develop hoards, gluts of commodities, excessive inventories, overproduction, overaccumulation, or whatever term is preferred. The two versions are captured in the theories of ‘profit-squeeze’ versus ‘underconsumptionist’ tendencies to crisis: as consumption increases, profits are squeezed (because wages rise relative to surplus value extraction); or as profits increase, consumption drops more quickly below levels of production (as workers are unable to afford the goods they produce due to surplus value extraction).

Hilferding suggested that with these contradictory tendencies at work, crises in capitalism must be explained not from the standpoint of production and consumption, but instead in the realm or circulation by looking at ‘disproportionalities.’

As mentioned above, hoarding of money sets the stage for an interruption in circulation. Hoarding of money is a function of processes that are important in reproduction and balanced accumulation as opposed to production. Hilferding first mentioned the need that capitalists have to hoard in order to save to replenish fixed capital that is consumed in the production process. The fixed capital must be replenished in a manner consistent with the amount of circulating capital.

From Marx’s reproduction schema, it is necessary to faithfully recreate the ratio of means of production (Department I goods) to means of consumption (Department II goods) if growth is to be steady and positive. But in order to guarantee some consistency within ‘the anarchy of capitalism’ – e.g., to “safeguard against unpredictable consumer wants and constant fluctuations in demand” (1981, p.246) – some overproduction is necessary. A reserve supply or money and commodities must be hoarded.

Hilferding then described the role of hoarding in achieving an equilibrium in the accumulation process. Once surplus value has been realized in exchange – once the commodity has been sold for money – the capitalist temporarily hoarded that surplus value portion of the proceeds while contemplating which sector of production (Department 1 or Department II) would be most profitable for reinvestment.

Hilferding called these factors in the interruption of circulation ‘general conditions of crisis.’ An inexorable need to hoard to reproduce capital and to balance accumulation are features of “the dual existence of the commodity, as commodity and as money” (1981, p.239).

To arrive at the actual causes of crisis, he argued, required a sense of the basis for disproportional ties between production of Department I and Department II goods. That basis lay in the price structure which signalled investment opportunities, which Hildferding described in terms of the business cycle. At the beginning of the cycle, production expands with “the opening of new markets, the establishment of new branches of production, the introduction of new technology, and the expansion of needs resulting from population growth” (1981, p.258).

Perhaps the most important facet of the upsurge in business activity is the shortening of the turnover period of capital that accompanies technological progress. Profits rise, as do demand and hence prices, in a self-sustaining upward spiral. However, the system sows the seeds of its own destruction with the introduction of new technology, for the organic composition of capital increases, leaving in its wake an ever-smaller basis for expropriation of surplus value.

And, Hilferding recognised, even as technological progress allows inefficient fixed capital to be replaced with more efficient fixed capital, the turnover period of capital was lengthened by counteracting tendencies. As the business cycle progresses, one can observe increases in fixed capital relative to circulating capital, shortages in labor and other inputs, overutilization of constant capital leading to physical damage of the means of production, and the development of foreign markets. These factors raise the general turnover period of capital, leading to a declining rate of profit and eventual crisis.

Hilferding observed a problem in the short-term, however, with the rising organic composition of capital scenario. The problem, due again to a faulty price structure, results in new investments occurring in sectors that are particularly prone to the falling rate of profit tendency. Demand for products or heavy industrial sectors typically runs ahead of output, due to the fact that new investment of large amounts of fixed capital in these sectors takes time and is relatively inflexible.

With demand outstripping supply in the short-term, prices in heavy industrial sectors can increase at the same time organic composition does. This will signal, incorrectly, that more liquid capital should flow into these sectors. When the new investment in fixed capital in these sectors finally comes on line, supply suddenly increases dramatically, resulting in the disproportionalities which in Hilferding’s view were the more proximate ‘cause’ of overaccumulation and crisis.

In other sectors, especially those dependent on raw materials, similar processes of mismatching prices to opportunities for profit exist. ‘Convulsions’ in raw material supply follow the disequilibrium tendency of demand.

Violent price fluctuations and further inaccurate signals for new investment follow naturally. Reserve money supplies which might have corrected some of the imbalances are often countered by the money supplies that have been hoarded. Accumulation proceeds more rapidly than consumption, and disproportionalities develop throughout the system.

Ultimately, Hilferding believed, these factors produce “deviations of market prices from production prices, and hence disruptions in the regulation of production, which depends for its extent and direction upon the structure of prices” (1981, p.266). Bottlenecks, hoarding, slumps in sales, and crisis then logically follow.

Credit here becomes an especially interesting ingredient. On the one hand, credit could provide the means to rationalize production and level out the disproportionalities in pricing. However, upon closer examination, finance exacerbates underlying tendencies to crisis. Part of the reason for this can be traced to the dual nature of money as a means of circulation and as a measure of value, which permits the financial system to detach itself from its monetary base. This occurs both because of value changes in money itself – currency becomes unfixed from its gold value and because credit (centralized idle money) is created in a manner unrelated to the value of circulating commodities.

Certain mechanisms in the business cycle feed off the contradiction in the dual role of money. Hilferding argues that during the expansionary phase of the business cycle, both the system’s disproportionalities and the general turnover time of capital increase. To accommodate, more credit is needed. For example, disproportionalities produce gluts in the stocks of commodities in certain sectors, particularly those with rising prices and heavy fixed capital. A ready supply of bank credit to these favored sectors permits producers.to avoid equilibrating forces (production or price cuts) so that production levels will continue unhindered by the developing disproportionalities.

Also during the expansionary phase, as fixed capital increases relative to circulating capital, turnover time is extended. In the process, the velocity of the circulation of credit slows, requiring more credit for rollovers, extensions, and renewals. As delays hit one sector and affect payment schedules, they are transferred throughout the economy, requiring ever-increasing credit transactions.

Beyond this role of finance capital – i.e. in ameliorating certain mechanical problems when managing the growth of the capitalist system during the expansion – credit is also demanded in greater quantities for speculative purposes. As interest rates rise during the expansion, speculation in the stock exchange requires an ever-greater return, and hence more credit.

Share prices for joint-stock companies then increase, allowing banks more lucrative activity in the promotion of new enterprises. In the commodity exchange, greater demand for credit arises to facilitate the practice of withholding certain commodities from the market in order to artificially inflate their price.

At some point, interest rates are too high to permit profitable speculation, and as banks refuse to extend more credit, the stock exchange can experience a rapid crisis, characterized by an immediate downward spiral in share prices and investor confidence, and ultimately, significant declines in commodity prices.

While this has occurred primarily because of a turnaround in the money and credit markets, “it can well precede the onset of a general commercial and industrial crisis” (1981, p.271). Hilferding hastened to add, “Nonetheless, it is only a symptom, an omen, of the latter crisis, since the changes in the money market are indeed determined by the changes in production which lead to a crisis” (1981, p.271).

The crisis in the stock exchange is exacerbated by the strain on bank credit in production. As the crisis hits, goods which were financed with bank credit can no longer be paid for at prices high enough to cover interest payments. With falling prices, bank credit cannot be extended at this stage to cover unpaid bills. Defaults increasing, the credibility of the lending institutions comes into question. Runs on banks occur, and what David Harvey (1982) describes as the reversion of the financial system to its monetary base begins. The limited supply of circulating cash is then subject to hoarding, bid up in value beyond its intrinsic worth, and no longer tied even to its metallic base.

For Hilferding, the relationship of the monetary crisis to the crisis in production varies depending on several factors: the degree to which some banks’ credit positions remain unimpaired, the country’s gold balances, the role of the state, and the degree of concentration in the banking industry. He concludes ambiguously, by describing certain changes in the character of crises involving the role of banks that can help prevent both the monetary crisis and the crisis in production.

For example, the strength of a country’s gold stock can play an important role in managing an economic slide. A deteriorating balance of payments at the peak or expansion weakens the gold stock, since (in Hilferding’s day) “gold functions as world money for the settlement of international payments balances” (1981, p.275).

The balance of payments normally swings against economies that are peaking because rising domestic prices encourage imports and leave a weakened balance of trade. A country leading the boom is likely to have the highest interest rates, thus attracting foreign money and further weakening the balance of payments. Speculators finally sense the impending doom and flood the securities market with declining paper.

With gold flight a logical response to these trends, the domestic financial markets are seriously threatened. Conversely, a strong gold policy can ameliorate the conditions of crisis.

The role of the state in mediating the crisis is important in other respects. The most damaging yet widely-used tool of the state, Hilferding maintained, is limiting the extension of bank credit. Ideally, the adverse balance of trade experienced by the most advanced oapitalist countries during the peak of expansion should be matched by a favorable balance of payments.

The best mechanism for this is increased foreign lending. If the banking industry is highly concentrated, Hilferding argued, the risk associated with the conditions of crisis (speculation, default, monetary problems, etc.) can be more widely shared, because banks can spread their resources more widely through different sectors at different stages of capitalist development, and also because depositors are less able to find banks that are unaffected by the crisis.

The power of financiers vis-a-vis commerce and industry shifts, in the banks’ favor. By the time a banking crisis has arrived, “speculation, in both commodities and securities, has declined considerably in volume and importance” (1981, p.292). Thus, trends in finance capital might, in Hilferding’s view, actually prevent a monetary crisis from occurring.

Countervailing forces such as increasing exports, defaults on foreign debt, and an influx of gold during the crisis also help limit the damage. But a monetary crisis can, quite autonomously, push the productive sector into its own crisis.

During the crisis, both industrial and money capital sit idle and liquidity is high. As Hilferding put it, “Money does not circulate, or function as money capital, because industrial capital is not functioning” (1981, p.285). It is then in the depth of crisis that the financial system reverts to reflecting the conditions of value production from whence it began.

Hilferding ended his comments on crises by contemplating the Marxist proposition that they deepen and worsen over time. The possibility of crises emanating from the finance capital sector – with “large-scale bankruptcies, and from stock exchange, bank, credit, and money panics” (1981, p.294) – actually diminishes as finance capital develops, he posits, and the existence or commercial and industrial cartels allows conditions of crisis to be shuffled into non-cartelized industries.

As a result, he insisted, “The difference in the rate of profit between cartelized and non-cartelized industries, which on average is greater the stronger the cartel and the more secure its monopoly, diminishes during times of prosperity and increases during a depression” (1981, p.298).

The ability of monopolies to manipulate prices exacerbates the disproportionalities mentioned previously and prevents the restructuring necessary to end a depression. All of this works over time to further the process of concentration, Hilferding argued. If there is no monetary crash, finance capital, he seemed to suggest, may emerge from crises relatively unscathed, able to continue playing a hegemonic role in the economy.

Errors and omissions

Much of the preceding analysis of the relationship of financial phenomena to production, exchange, and distribution has stood the test of time. The power of Finance Capital is the classical-Marxist theoretical base from which the arguments emanate, and Hilferding’s analysis generally appears beyond reproach. Unfortunately, however, the climax to Finance Capital – the discussion of crises – is where contrary conclusions can and should be drawn, due to the contradictions not only within capitalism, but within Hilferding’s own understanding of capitalist dynamics.

There are other retrospective objections that should be mentioned: the failure to discuss consumer and government credit (then far less prevalent than today), the emphasis on power blocs, and the political lessons that Finance Capital teaches us. The most telling criticism may be derived from the role of financial institutions in major crises during the history of capitalism, both before and after the 1910 book. While Hilferding could draw on major financial meltdowns in the 1840s-50s and 1870s-90s, subsequent crises were more informative about capitalism’s dynamics.

The first, from 1929 until World War II, was marked by an explosion of speculation, mismanagement by the central bank, and the ultimate collapse of both the financial and the productive systems. The second, occurring in fits and starts since the 1970s, can also be characterized by speculative tendencies and the impending prospect of financial collapse at the same time numerous sectors in deindustrialized parts of the world economy have faced severe productive system decay.

These crises have not only persisted over the past half century – after a period of financial regulation stabilized the system from the 1940s-60s – but have become increasingly amplified. The early 1980s world recession was followed by the late 1980s financial meltdown in energy and U.S. Savings&Loan housing finance institutions, the mid- to late-1990s emerging market collapses, the early 2000s dot.com bubble bursting, the 2007-09 world financial meltdown catalyzed by a property crash but displaced through Quantitative Easing (QE) and the Chinese infrastructure boom, and the brief March-April 2020 crisis based on Covid-19 lockdowns that again were displaced by another bout of QE.

For Hilferding, these crises would offer surprises, for he suggested several factors in “militating against a banking crisis” (1981, p.291) that bear repeating: risk can be shared through the centralized financial and productive systems; the strong role of gold and oof other state policies could shore up the creditworthiness of the system; speculation would decline in volume and importance; and joint-stock company production could continue because it need not realize an immediate return.

Hence for Hilferding, it was “sheer dogmatism to oppose the banks’ penetration of industry… as a danger to the banks” (1981, p.293). Not only that, “As the power of banks continues to grow, it is the banks which dominate the movements of speculation, rather than being dominated by them” (1981, p.293).

These arguments, not unreasonable as hypotheses, are in fact untenable given the earlier analysis. There are at least seven reasons to judge Hilferding’s approach inadequate.

  • First, the disproportionality tendencies Hilferding described in discussing reproduction schema are demonstrably exacerbated by the growing role of finance capital. With the onset or a production-based crisis, the financial system was bound to suffer.
  • Second, while increased concentration or banking allowed any given bank’s risk to be shared with many more depositors, it seems logical that this would be offset by the growing risk to the general creditworthiness of the entire system, as profit rates tend to fall and banks must look further afield to maintain healthy loans and a growing deposit base. (In retrospect, the stable banking system of the 1950s and 60s subsequently suffered unprecedented concentration, at the same time risk spread out of control, especially after geographical expansion began in earnest in the 1970s and financial deregulation began in most Western economies during the 1980s.)
  • Third, public policy – especially bank regulation as practiced in the West – has made the stability of the banking system a top priority, but some problems are larger than the state alone can handle. The lack, since 1971, of a gold-base to world exchange rates has been an important drawback to global financial managementt, one that has relieved the U.S. economy of great economic pressure at the expense of a late-1970s gold-hoarding phase and various ad hoc measures to shore up supervision and regulation since.
  • Fourth, there is much evidence to suggest that speculation increases immediately prior to a crisis rather than declining in volume and importance. The theory behind this is simple: what Hyman Minsky (1982) termed ‘Ponzi financing’ compels speculators to borrow both to speculate more and to simply to pay back old loans, as their previous investments fail to pan out. Speculation always begets more speculation, for if not, the bubble is burst and the pyramid scheme topples. The air from a burst bubble tends to be released quickly rather than slowly, as it is not difficult to identify a failed line of investment, and as memories of taking baths, losing shirts, or other graphic descriptions are brought to the fore by the media.
  • Fifth, to argue that joint-stock company production would continue unhindered by a banking crisis was to ignore the interplay so well developed earlier in Finance Capital. If credit is a key ingredient for the smooth operation of the stock exchange, and if the stock exchange is crucial in a company’s ability to raise funds for increased production (through splits in shares or through the bond market which relies on stock prices), it follows that a banking collapse would affect joint-stock companies quite considerably.
  • Sixth, given the tendencies outlined above – especially increasing risk, the breakdown of the state’s protective role, and uncontrolled speculation – it was reasonable to attempt to prevent banks from crossing the barriers between banking and commerce, for their own good and for the good of the stability of the system, if such are desirable goals. Franklin Delano Roosevelt’s bank regulation – especially the 1933 Glass-Steagall Act – accomplished this. As if to prove the point, though, its repeal by the Clinton Administration – at the behest of Treasury Secretary Larry Summers, and its replacement with the Graham-Leach-Bliley Act – led the way for catastrophic contagion of the 2007 housing crisis into the investment banks by 2008.
  • Seventh, given the basic definition of speculation, it is unlikely that banks would be able to harness the phenomenon once out of control. Indeed, it is that very inability, given the fusion of banking, speculative finance and over-indebted productive capital, that causes such severe financial-management problems. As Suzanne de Brunhoff (1976, p.xiv), put it, Hilferding’s dissociation between money and the credit system was “one of the reasons for the overestimation of the role of finance capital.”

In sum, the arguments Hilferding made as to why and how crises can be avoided are all inconsistent with his earlier theory or with proven reality. One reason is that Hilferding neglected government and consumer credit. For Hilferding, credit was based upon the needs of firms either to rationalize a plethora of bills of exchange and promissory notes (circulating credit), or to raise funds for new investment (capital credit).

By neglecting state debt and consumer finance, Hilferding missed important features of modern capitalism. One is the ability of the system to raise the social wage of labor through debt, buying labor peace and giving weight to the notion of an advanced capitalist ‘labor aristocracy’. Another is the ability of the system to maintain effective demand, buying time and avoiding crises in ‘underconsumption’ but putting off until later the unavoidable need to repay the debt. In this sense, credit creation begins to simply resemble speculation: gambling that future income will permit the present rate of borrowing.

Earlier in Finance Capital, Hilferding had commented, “A bank crash results only from industrial overproduction or excessive speculation, and manifests itself as a scarcity or bank capital in money form, due to the fact that bank capital is tied up in a form which cannot be immediately realized as money” (1981, p.180). This is indeed the true nature of financial crises, and his later attempt to rationalize a stable banking system was unsuccessful.

In sum, nearly all of Hilferding’s previous analysis leads to the logical conclusion that, contrary to finance capital’s hegemony during a crisis, banks do indeed lose self-control, as well as control of outside entities and processes. Sweezy (1968, p.267) may have been correct in this respect when he commented, “Hilferding mistakes a transitional phase of capitalist development for a lasting trend.”

The transitional phase was one of recovery from the 1870s-1890s financial crises; these crises would emerge again in the early 1930s and again in recent decades. Part of the reason Hilferding erred in understanding financial crises was his overemphasis on bank control of corporations and hence the economy, and underemphasis on systemic vulnerability.

After all, during a crisis, banks are the first, not the last, to lose self-control and control of outside entities and processes. Yet Hilferding empowered banks in the finance capital era with tremendous influence, offering few caveats. This tended to give a conspiratorial air to finance capital, unnecessary given Hilferding’s rooting of its contradictions within the basic capitalist production process.

While there are certainly genuine capitalist power-blocs and institutional symbols of intra-capitalist cooperation in all economies, and while their role may at times be truly autonomous with strong feedback into the accumulation process, the experience of the 1930s confirms that banks are not permanently powerful, nor can finance capital be a permanent symbol of, the last phase of capitalist development.

A final criticism is that in analyzing class fractions, Hilferding was geographically simplistic, leading him to conclude that highly-liquid finance capital could always find harmony with relatively-fixed heavy industrial monopoly capital. In reality, when an international bank demands debt repayment from a poor country, it insists that the borrowing country shift its economic orientation to exports (for the sake of debt repayment).

This tendency towards the neoliberal economic policy favored by the financial industry occurs even when such exports might compete with the banks’ own hometown productive capitalists. The financing of U.S. deindustrialization by major northeastern U.S. banks, as productive capital shifted first to the U.S. South and then to Mexico and finally East Asia, is just one recent example of the contradictions associated with the financing of uneven and combined development.

What political strategy emerges from the previous analysis? Since finance capital has operated in a somewhat autonomous manner in recent years, and since a banking collapse will further the fractionalization of big capital, it may well be possible to view finance capital as an autonomous target and to consider serious prospects for taking power from a banking system weakened by crisis.

In sum, based on Hilferding’s analysis – rooting credit in money in commodity exchange, and adding the Ponzi nature of credit creation and speculation as the business cycle matures – it is quite obvious to conclude that the emergence and power of finance capital does indeed signal a new era of capitalism. But instead of a hegemonic finance capital fusion, the new era is one of periodic, worsening financial system fragility. That fragility logically leads to a crash, and that in turn finally devalorizes the overaccumulated financial capital, reestablishing the roles of money and credit within – not above and beyond – the process of value production.

But between a new start-up (where credit emanates from idle money and bills of exchange) and the next crash, finance capital can be said to operate autonomously, as if it had a life of its own. Finance capital gains and uses power in ways in which Hilferding documented and which are well known in subsequent times.

Financial institutions’ rising power allows credit and speculation to careen beyond bounds of rationality, and to funnel new investment off into the far corners of the globe, speeding the uneven development of capitalism at the same time competition is heightened and profits increasingly equalized. It is for these reasons that the first major step of any progressive movement upon taking state power should be to socialize control of finance capital. And it is likely that the only opportunity for such a step would be in the shambles following a crash.

Likewise, concluded Hilferding,

The response of the proletariat to the economic policy of finance capital – imperialism – cannot be free trade, but only socialism… The blatant seizure of the state by the capitalist class directly compels every proletarian to strive for the conquest of political power as the only means of putting an end to his own exploitation (1981, pp.366-370).


A version of this article was published in J.Dellheim and F.Wolf (Eds), Rudolf Hilferding: What do we still have to Learn from his Legacy? London: Palgrave Macmillan, 2020

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Patrick Bond 

is professor at the University of Johannesburg Department of Sociology, and co-editor of BRICS and Resistance in Africa (published by Zed Books, 2019).

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