Bankers and Globalization, Past and Present:
From Pinstriped Conservatism to 7/24 Speculation

by Doug Dowd

This is a talk delivered to a conference entitled Reflections on the Social Impact of American Multinational Corporations, in Grenoble, France, January 2002.

Introduction

From the era of colonialism to the end of pre-World War II imperialism, the financial entities of the evolving major powers have always exercised various degrees of supervision and control over economic activities in the subject societies. But, and in keeping with capitalism’s always increasing technological and organizational strengths, the nature and the consequences of such controls have altered greatly over time. In doing so, with each successive stage their consequences have become humanly, socially, and environmentally always more destructive to the weaker societies, and, though less obviously, with always more serious consequences in the major powers.

We now live in the most destructive and dangerous period ever, made all the more so by ubiquitous financial — and, therefore, socioeconomic — fragility. That fragility is due to the simultaneous and accelerating rise to dominance of finance over the economy, and of speculation over finance. What follows is in effect a generously annotated outline of the main elements of that evolution in recent decades.

The background

The way words are used has always been important; in this day of public relations sophistication, and the powers and enticements of the media, they have become even more so. One word is of concern here: “investors.” There was a time when investors owned or controlled part of an enterprise through holding shares or

bonds, and had become so in order to gain an income over (usually) an extended period of time. That had begun to undergo serious change already in the 1920s, leading Keynes to make his famous observation (in his General Theory):

Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. And his reference point was the 1920s, when speculation, frenzied though it already was (especially in the USA) was, by comparison with its post-World War II evolution, embryonic.

The bases for that evolution of contemporary financial domination and its domination by speculators in the USA and abroad are many, but two developments since the 1960s top the list: a) the extraordinary and always accelerating increases in household, business, governmental, and foreign indebtedness, and b) the ever multiplying processes of mergers and acquisitions (themselves entailing large jumps in corporate indebtedness), most especially as these involved the emerging, numerous, and powerful TNCs, and the latters’ unavoidable involvement in foreign exchange and speculation. Herewith some of the most relevant processes and data:¹

1. In the 1960s the emergence and spread of excess productive capacities in the USA had several related consequences: a step up in mergers and acquisitions, an increased push for foreign markets, and (largely forgotten) a successful drive on the part of the U.S. financial sector (lacking sufficient domestic business borrowers) to have the U.S. government cease its grants and subsidized loans to the poorer countries, to be replaced by private loans. Moreover, interest rates were expressed in dollars and tied to inflation. While increasing their costs of “development” this had an always greater deleterious effect on the poorer countries, most especially as regards their oil purchases (always denominated in dollars).

2. Meanwhile, by the late 1960s, a changing relationship between nonfinancial corporate profits and interest on financial assets was well underway: In 1949 corporate profits were ten times those of net interest; ten years later, the ratio had fallen to five to one; to half that by 1969; to only 25 percent by 1979; and since 1989 net interest has always exceeded corporate profits. And net interest payments are of course only one part of incomes derived from financial activities; the others including, of course, gains from speculation in foreign exchange, stocks, and bonds.²

3. In the 1970s, the total financial trades by U.S. firms or on U.S. exchanges was a dollar amount less than GNP. “By the 1990s, however, through a twenty-four-hour-a-day cascade of electronic hedging and speculation, the financial sector had swollen to an annual volume of trading thirty or forty times greater than the dollar turnover of the ‘real economy...’ Each month, several dozen huge domestic financial firms and exchanges... electronically trade a sum in currencies, futures, derivative instruments, stocks, and bonds that exceeds the entire annual gross national product of the United States.”³

4. The M&As during and after the 1960s broke all records for numbers and types; among them, increasingly, were those of expanding insurance companies merging with other financial institutions These gave an added impetus to the already growing financial sector which, in turn, was considerably sped up by the emerging importance of money, equity, and pension funds, plus the quantum growth of financial speculation in the explosive derivatives market. (Of which, more in a moment.) First, a relevant “aside.”

The S&L Follies. From having been the “neighborhood” source for reasonable mortgages, the savings and loans banks were legislatively transformed in the Reagan years into hot new centers for speculation. And then they imploded.⁴ Far from that slowing down the hyper growth of finance, however,

the national power structure bailed out the shaky financial sector, and on a large enough scale that in the end the banks and S&Ls rescued through federal insurance payouts represented a higher share of the nation’s deposits than the institutions forced to close their doors in the late 1920s and early 1930s....The result was not only to prop up the stock market but to allow it to keep hitting new highs, while Wall Street firms achieved new record earnings....and the financial economy...continued to eat the real economy...(Phillips, Arrogant Capital, xvi-xvii).

5. Speculative finance. The uproar over S&Ls drew attention to other rapidly expanding realms of speculation, the greatest of which was that in foreign currency. Thus, in 1986 the Bank of International Settlements was prompted to note daily currency transactions were $186 billion — and that but 2 percent of those transactions were for trade or investment, the rest being sheer speculation. By the early 1990s that amount had more than quadrupled, to $800 billion; now it moves between $1.5 and $2 trillion: daily. It is not difficult to understand the precariousness of smaller economies in terms of their trade balances, domestic and foreign-held investments,and the overall troubled behavior of their economies in the face of the “vampire” behavior of global speculators. And when to this is added the constant pressure from the IMF (et al.) to open their economies always more and the high price paid for doing so and for not doing so....

“Speculators.” The word calls up visions of sleazy folks in Las Vegas, cigarettes hanging from their lips, bent over the crap table, the slots, the cards, whatever. But, leaving aside the indirect role of derivative mongers, the largest of the speculators in foreign currencies are the largest companies in the world: the TNCs. They must speculate, given their multiplicitous economic activities over the globe, both to avoid losses and to enhance gains. It may be guessed that every TNC has, by one name or another, a “Division of Currency Speculation.”

Given all that, not to say what will be noted regarding debt in a moment, it is not surprising that “even” the populist/liberal Clinton, in his first year in office, and after campaigning with the slogan “It’s the economy, stupid,” finds himself saying “It’s the bond market, stupid” — having already appointed the “Tiger of Goldman Sachs” as his Secretary of the Treasury. And then there is the underlying largest element of all in the emergence of financial domination of the economy.

Debt. It has risen to astronomical levels in all quarters of the economy and, all the more ominously, must continue to do so if the not just the U.S. but the global economy is to not to collapse and — given that the U.S.A. is “the consumer of last resort.”

Household debt as a percentage of household disposable income in 1978 was about 62 percent; in 1999 it was about 102 percent; by the beginning of 2001 it was over 120 percent. The triumph of consumerism in recent decades has required that Himalaya of household debt, in that the economy has required always increasing per capita consumption: the economy has, so to speak, a tiger by the tail.

Corporate debt as a percentage of corporate output in 1978 was under 60 percent; by 1999 it was over 80 percent; financial sector debt as a share of GDP rose under 20 percent to 80 percent;

U.S. foreign debt, non-existent when Reagan took office (when we were history’s largest creditor nation), now inches toward $4 trillion.

Moreover, as regards corporate debt, whether despite or because of the huge gains in the stock market in the 1990s, corporate finance turned from equity to debt, with corporations borrowing to buy back shares: in 1999 3.6 percent of GDP went into stock buybacks. Finally, “direct borrowing by financial institutions plus securitized lending held by investors has soared from $2.4 trillion in 1989 to $7 trillion in 1999, bigger than household debt and almost double the size of nonfinancial corporate debt.”⁵

Conclusion

The foregoing conditions make for degrees of economic fragility hitherto never existent, both within the U.S.A. and internationally, adding to whatever processes are at work that threaten economic wellbeing — pervasive excess capacity, rising unemployment, political/military developments, not least. At the same time, and “lest a worse fate befall,” the seemingly irreversible tendencies toward financial domination and speculation require the continuation, indeed the acceleration of those very tendencies.

1. Many of the following data are drawn from Chapter 5 of my Capitalism and Its Economics (Pluto, 2001), the sources for which are given here in ensuing notes.return to text

2. Such data are found in the annual Economic Report(s) of the President. These were taken from the 1991 Report. return to text

3. Kevin Phillips, Arrogant Capital: Washington, Wall Street, and the Frustration of of American Politics (New York: Harper Perennial, 1994), pp. 79-80. His emphases and exclamation mark. It is worth noting that Phillips is a self-styled “conservative.” return to text

4. For a full discussion, see R. T. Naylor, Hot Money and the Politics of Debt (New York: Simon and Schuster, 1987). return to text

5. Almost all the data (and the final quoted sentence) concerning debt may be found in the feature essay of Business Week “Is the United States Building a Debt Bomb?” (November 20, 1999)return to text

June 24, 2003