In Capital, Marx argues that the tendency toward the centralization of capital is a contradictory phenomenon that reflects capitalism’s fundamentally contradictory nature. He saw capitalism as a system that, on the one hand, liberated humanity from the darkness of slavery, feudalism and religious backwardness; and, on the other, enslaved the toiling masses to exploitation and war. Similarly, the centralization of capital—in monopolies and joint-stock companies in Marx’s day—represents the birth of a primitive form of planned economy that simultaneously allows for vast increases in production and productivity while at the same time deepens the exploitation of the masses and gives birth to the predatory and catastrophic wars of capitalist imperialism.
Marx’s goal in Volume II was to highlight this contradiction in order to chart a revolutionary path to the overthrow of the fundamentally anarchic capitalist production system and its replacement with a planned, collectivized, worker-run economy. Of key importance is that Marx saw a centralized, proletarian democracy as a strategic goal of the workers movement, but it was impossible to fight for this without understanding contemporaneous economic structures and how these structures had to be revolutionized to achieve this goal. So Marx asked, how has capitalism already achieved some level of centralized planning? What are the class contradictions that define this centralization? And how might a workers government revolutionize central planning, i.e. resolve its class contradictions and unleash its full potential?
In this article, I will outline a potential application of Marx’s theory of the tendency toward the centralization of capital to an understanding of the fundamental contradictions of the capitalist banking system and the centrality of banking to capitalist war. The history of American banking has been defined by the push and pull of centralization and decentralization, with centralization eventually winning out in the early twentieth century. During this process, the capitalist ruling class has had to negotiate its desire to preserve the basic anarchy of the capitalist system founded on private property—ideologically defined as “freedom”—with its desire for a stable and transparent investment environment where profits rise in perpetuity. In other words, an imaginary utopian capitalist society.
The historical victory of centralization represents the coalescence of a capitalist ruling class that defined itself most clearly in the United States through war. The ultimate goal of capitalist wars is the defense and expansion of the interests of the capitalist ruling class and its state apparatus. Centralization of capital allows the most conscious and influential sections of the capitalist class, i.e. the ruling class, to exert leverage over the system to ensure their supremacy. Most of the time, this involves “peaceful” activity such as mergers and acquisitions, export of capital to other countries (foreign direct investment) and macroeconomic management. However, it reaches its highest culmination in war.
Again, this article is a preliminary outline—it lays out the basic structure of a potential argument that requires more in-depth research. There are several areas that need to be analyzed more closely in order to really understand how the banking system works, historically and structurally.
This is also not meant to refute Lenin’s theory of imperialism. Instead, it is to trace a different path from Marx’s Capital that sheds additional light on imperialism, but that also serves the dialectical purposes of Marx’s analysis—to revolutionize the means of production and bring about socialism. The key here is that the aspiration of capitalist ideologues for a predictable, stable investment environment is simply not possible under capitalism. To achieve true democratic central planning, we would need a socialist revolution that collectivizes the means of production under a workers government. In this vein, Marx writes,
If we were to consider a communist society in place of a capitalist one, then money capital would immediately be done away with, and so too the disguises that transactions acquire through it. The matter would be simply reduced to the fact that the society must reckon in advance how much labour, means of production and means of subsistence it can spend, without dislocation, on branches of industry which, like the building of railways, for instance, supply neither means of production nor means of subsistence, nor any kind of useful effect, for a long period, a year or more, though they certainly do withdraw labour, means of production and means of subsistence from the total annual product.
Marx 1992: 390
We can see that Marx was anticipating how a planned communist society would produce and allocate resources on a rational basis in contrast to capitalist society. The idea of doing away with money would be to strip away the “disguises that transactions acquire through it.”
Herein lies the fundamental problem with the capitalist monetary system: its opacity and anarchic nature. Money, as a universal abstraction, is used to conceal the ways in which capitalism not only exploits labor power (as per Marx’s commodity fetish), but also the chaotic and unaccountable ways in which it produces and allocates resources.
So while capitalism achieves some rudimentary form of centralized planning through the growth of joint-stock companies and banking, investment decisions are by and large made behind closed doors by the unelected heads of thousands of corporations, banks, hedge funds, money market dealers and rich individuals. These investment decisions fundamentally shape life under capitalism, yet they are completely unplanned and concealed from the masses whose lives they effect. This is what I would call centralized anarchy. As Marx alludes to, the task of a workers government would be to reveal all of this for the masses in order to create a rational plan for the development of society and liberate humanity from the so-called “invisible hand of the market.”
But Marx was writing in the nineteenth century, when the capitalist imperialist world system was only just emerging. He saw and understood its rudimentary social structures such as the centralization of capital, the joint-stock company, financialization and export of capital to the colonies. But it was not until the early twentieth century when it became clear to Marxists that these inherent centralizing tendencies had led to the rise of a predatory imperialism as the “highest stage of capitalism,” in Lenin’s words. Imperialist war was now an endemic feature of this decaying world system. In 1915, during the inter-imperialist slaughter of World War I, Rosa Luxembourg set out the choice for the workers movement: “socialism or barbarism.”
Reproduction, Accumulation and Centralization: A Brief Summary
Marx’s argument in Capital is largely structural as opposed to historical. At times, he adopts a historical view of how capitalism came into being, but for the most part, he focuses on how it fits together in a sort of interdependent system with each part playing a particular role. The underlying structure is constituted by a series of economic processes that are contained in a thing, the commodity. The commodity mediates human relationships through exchange and serves as the ideological governing mechanism that conceals the true nature of the various processes.
Marx proceeds from simple to complex. The most fundamental and simple process is labor because no value is possible without it. All other processes are ultimately dependent on labor because they do certain things with the value created by it. As we move to more and more complex processes through Volume I, the next step up after labor is the extraction of surplus-value in production, then the various ways in which surplus-value can be augmented (absolute and relative), then simple reproduction, then expanded reproduction and accumulation and finally concentration and centralization of capital.
Volumes II and III do not add anything fundamental to this but they add color to the most complex processes. To put it simply, Marx argues that the survival needs of the capitalists force them to reproduce their capital through reinvestment of surplus-value—this is their means of existence as a class. However, simple reproduction is not enough: the coercive laws of competition ensure that this cycle is overtaken by the accumulation spiral: capital expands outward instead of simply being reproduced. Individual capitalists reinvest surplus-value in expanded production and improved technology, which begets more surplus-value, which begets more production, etc. This culminates in centralization, as the bigger capitals eat the smaller. We start to see the accumulation of not just capital, but great social power in the hands of those capitalists who are able to rise to the top of the centralization pyramid. They control entire industries and influence political decisions and people’s daily lives.
As I will describe, capitalist banking intervenes in these overlapping realms of reproduction, accumulation and centralization.
Two Levels of Centralization of Capital
Centralization of capital is an inherent feature of capitalism in its most developed form. It takes two forms, one explicitly identified by Marx and the other implicitly alluded to in Volumes II and III. In the first form of centralization, the larger capitals take over or defeat the smaller capitals and industries tend toward monopolistic concentration. The growth of capitalist finance allows individual or groups of capitalists to accumulate even greater social power over production because it allows them to leverage other people’s money to buy out rivals or vastly expand production and distribution.
The dialectical point here is key: on the one hand, this enables the construction of massive fixed-capital projects such as transportation systems and other infrastructure because companies can float long-term bonds, deferring payment many years into the future; on the other hand, the consequences of failure become that much more spectacular when things go wrong, as they inevitably do. The quote from Marx cited earlier draws attention to the construction of the railways in Britain, a major fixed capital investment which would not have been possible without centralized capital due to the long turnover time. The flip side was the spectacular bubble and bust that accompanied it. This is what leads Marx to comment,
Capital, which is inherently based on a social mode of production and presupposes a social concentration of means of production and labour-power, now receives the form of social capital (capital of directly associated individuals) in contrast to private capital, and its enterprises appear as social enterprises as opposed to private ones. This is the abolition of capital as private property within the confines of the capitalist mode of production itself.
Marx 1981: 567
You will never see Marx argue that capitalism was evil through and through. He saw that it was capable of accomplishing a certain amount of progress, but that its internal contradictions generated crises and immense suffering on the part of the working class. For example, he appreciated the ability of joint-stock companies—the most significant type of centralization during his time—to raise the capital to build railroads, but he also recognized that this inevitably led to a heightened rate of exploitation and pauperization as productivity gains caused layoffs and the anarchy of the system led to booms and busts, repeatedly whipsawing the working class from hope for a better future to despair. Again, Marx’s quote on planning under communism indicates that he believed this power to harness resources was of great benefit to society, but that its manifestation under capitalism was utterly distorted and wasted. The implication is that a workers state could resolve the contradictions.
The second form of centralization, which Marx was not explicit about, occurs above the corporation and the large commercial bank. Its locus is the capitalist state itself: the state must cohere a regulated market and national banking system in order to introduce an element of stability into an inherently unstable system. This task is part of Marx’s concept of the reproduction of capitalist economic relations mentioned earlier. It is not enough for capitalists to produce a product; they need to be able to sell the product and make enough money to channel back into production to continue the process.
To this effect, he asks, “How is the capital consumed in production replaced in its value out of the annual product, and how is the movement of this replacement intertwined with the consumption of surplus-value by the capitalists and of wages by the workers?” (Marx 1992: 469) The means of production, whose use-values are consumed during the production process, must be replaced or reproduced for production to continue. Similarly, the labor-power of the workers that has been used up in production needs to be reproduced. Furthermore, the interrelation of different industries implies they each reproduce each other. For example, electric cars cannot be produced without a supply of copper and the wage laborers who produce the electric cars cannot be reproduced without the production of food, clothes and shelter by other industries.
At a larger scale, it is the system as a whole that must be reproduced and defended against threats from the working class, nature, other capitalist classes and—most importantly for this analysis—its own internal anarchy. The layout of Volume II first brings the reader through an ideally reproduced capitalist society where all industries feed into each other and the system is self-sustaining, presumably pointing the way to what Marx believes would be possible under a workers government. But then he tells us how capitalist reproduction really works.
To this effect, Marx describes how commodity circulation mediated by money gives rise to
…conditions for normal exchange that are peculiar to this mode of production, i.e. conditions for the normal course of reproduction, whether simple or on an expanded scale, which turn into an equal number of conditions for an abnormal course, possibilities of crisis, since, on the basis of the spontaneous pattern of this production, this balance is itself an accident.
Marx 1992: 571; my emphasis
For Marx (and for bourgeois ideologue Hyman Minsky as we will see later), capitalism was an inherently crisis-prone system whose periodic stability was no natural state of affairs.
Any conjunctural balance of capitalist reproduction is merely an accident and an accident waiting to happen. No sooner is this balance achieved than it is overthrown by the underlying anarchy of capitalist production. We can see this today as the world lurches from war to financial crisis, to pandemic, to more financial crisis and more war while the working classes are subject to mass unemployment, lockdowns, inflation, deflation and whatever else lies on the horizon of this horror show.
The anarchic pursuit by each capitalist to constantly increase their accumulation of surplus-value entails reinvesting a portion of their surplus-value in expanded production to gain more of it and out-compete the other capitalists. While Marx admits that expanded production is generally good for society, under capitalism, it introduces imbalances because the economy is never able to fully absorb the surpluses that it produces. And of course, there is no central plan, as each capitalist has the “right” to his own plan for his own profits.
The result is that equilibrium conditions are a fantasy. As greater surplus accumulates in one portion of the economy, e.g. overproduction, it creates disproportion with other portions of the economy, e.g. leading to underconsumption. Crises of realization, then are built-in features of the system.
Marx argues that one aspect of this tangled and chaotic web of market relations that makes up capitalism is routine hoard formation, i.e. the accumulation of money among different segments of the population, which is a necessary element of capitalist accumulation. He writes,
It is a “dead weight” on capitalist production. The attempt to make use of this surplus-value that is being hoarded up as virtual money capital, either for profit or for revenue, culminates in the credit system and “papers”… This absolute increase in the virtual money capital annually reproduced, however, also makes its segmentation more easy to achieve, so that it can be invested more quickly in a particular business…
Marx 1992: 574
In essence, the basis of the capitalist banking system is in the money surpluses that result from this uneven reproduction system. Without a banking system, certain capitalists may earn large profits and not invest them because there are no opportunities. Meanwhile, other sections of the economy are starved for investment and cannot grow. The results of this are either crippling crises or lack of expansion as capitalists avoid taking risks, for example, on fixed capital investments. Banking finds the surpluses and channels them to areas of the economy that are in deficit, creating a credit system—for a fee of course.
So banking is essentially a tool to channel social power, but not just for leveraged buyouts or mergers. It goes beyond that as Marx writes:
On top of this, with the development of large-scale industry money capital emerges more and more, in so far as it appears on the market, as not represented by the individual capitalist, the proprietor of this or that fraction of the mass of capital on the market, but rather as a concentrated and organized mass, placed under the control of the bankers as representatives of the social capital in a quite different manner to real production. The result is that, as far as the form of demand goes, capital for loan is faced with the entire weight of a class, while, as far as supply goes, it itself appears en masse as loan capital.
Marx 1981: 491; my emphasis
Later, he continues this point: “A bank represents on the one hand the centralization of money capital, of the lenders, and on the other hand the centralization of the borrowers.” (Marx 1981: 528) One can see from this description why those who control banks have enormous social power, as they can influence where the major investments in society are made.
This is not lost on the most conscious sections of the capitalist class, i.e. the ruling class. The ruling class seizes on the potential of the credit system as the most effective way to leverage their power over the entire marketplace. National banking systems then are the manifestation of this ruling-class power. As banking allows for individual and groups of capitalists to defer payments or gain access to capital they would not normally have, the ruling class sees the potential for a national banking system to defer and displace the contradictions resulting from this anarchic reproduction system, the goal being to avoid crisis and expand outward.
While the credit system ultimately allows for accumulated surpluses to be deployed faster and in larger quantities, the underlying accumulation system persists, which results in even greater and more catastrophic crises. They can defer and displace, but they cannot eliminate crisis.
Dealers: The Making of Financial Markets
When Marx was writing Capital, the credit system was still taking shape and the imperialist world system had not developed yet. I will discuss some of this history later, but first, we need to understand how the centralization of capital plays out in today’s context. This analysis will focus on the U.S. but it applies in varying degrees to other countries as well.
Above, we saw that there are two forms of centralization: centralization at the level of the firm and centralization of the credit system to attempt to smooth out the contradictions of capitalism and enable a higher growth rate. Both are present today, but the latter has been neglected in Marxian theory and exerts a significant influence on the development of the imperialist state.
According to this second view of centralization, in brief, centralization is the market. In order for the overall economy to grow, for the ruling class to compete, it needs to have a market that is integrated over time and space. Without a centralized money market, the capitalist economy fractures and cannot grow because it cannot overcome time and space barriers. (The credit system is not the only mechanism of market centralization used by the ruling class, but it is arguably the fulcrum that allows for the most leverage. For a detailed reading of the so-called “spatio-temporal fix,” see David Harvey’s The Limits to Capital. While this work does a good job of teasing out these themes in Volumes II and III of Capital, it misunderstands the more fundamental role of centralization of capital in fully developed capitalism.)
The centralization of the money market allows a national group of capitalists to join forces to compete against others. They agree to divide the spoils of the centralized market between them. In this context, money dealers are vitally important because they perform the key role of establishing prices, which signal how best to allocate resources to maximize profits.
As cogently argued by Perry Mehrling, originator of the “money view” of banking, the essence of contemporary banking is dealing. Dealing creates markets that would otherwise not exist by exploiting the distorted prices created by spatio-temporal contradictions. Arbitrage is the key linking dispersed markets together into a centralized system. Central banks play a key role in this process of creating national credit markets.
To unpack this, we can go back to Marx’s depiction in Volume II of how the reproduction cycle of capitalism encounters certain practical barriers. Products need to be brought to market and sold, they need to fetch an appropriate price, labor needs to be reproduced to continue producing surplus-value, means of production need to be procured at an affordable price, etc. At any point during this cycle, the process can fail, leading to varying degrees of crisis. For example, during the Covid-19 Pandemic, consumers reoriented their spending patterns, which disrupted supply chains, causing significant bottlenecks in the distribution of goods and massive inflation. As I write this, the inflation is choking off demand for goods and services, potentially plunging the economy into recession.
Each of these potential failure points represents either a spatial or temporal obstacle or both. During Marx’s time, one of the main trading relationships was between England and India, which was a British colony. One of the primary purposes of the British banking system at this time was to allow traders to hedge their investments in the face of this significant spatio-temporal obstacle—India was far from England and it took goods a long time to make the trip. The banking solution was to provide bills of exchange: an agreement between the buyer and seller guaranteeing payment at some future date. The bank would discount the bill, i.e. guarantee the payment and take an arbitrage premium, so that the buyer would end up paying a little more and the seller would be paid a little less for the convenience of maintaining a stable reproduction cycle. (Marx also recounts the speculative bubbles in bills of exchange that developed in the 1860s and resulted in spectacular crashes, but this is a separate topic to be explored elsewhere.)
With the massive growth in global trade since the late nineteenth century, these opportunities for spatio-temporal arbitrage have grown exponentially and are largely captured in the contemporary financial instrument of the “swap.” In her voluminous work on the money markets, Marcia Stigum explains,
Globalization has been thrust forward not just by the breaking down of various barriers to international capital flows, but by the introduction of new financial tools. The most important of these have been swaps—cross-currency and interest-rate swaps. There has also been a sharp increase in the amount of credit default swaps outstanding. Swaps have played a key role in the explosion of opportunities open to borrowers and lenders.
Stigum 2007: 134
Swaps provide individual capitalists with temporary solutions to their spatio-temporal obstacles, largely by allowing them to hedge their investments through swapping IOUs. Dealers are the agents that facilitate this. As with the British bankers of the nineteenth century, dealers are experts at spotting the spatio-temporal contradictions in capitalist markets (although they do not see it this way) and exploiting them to capture the arbitrage.
A contemporary analogue to the nineteenth-century market in bills of exchange is the market for cross-currency or forex swaps. Because currencies fluctuate against each other on a minute-to-minute basis in the contemporary global capitalist economy, the profits of companies that trade goods internationally face forex risk. For example, company A produces oil to sell on the world market. Oil is priced in dollars, so company A earns dollars, but company A needs country a’s currency, not dollars, to pay its workers and resupply its rigs. The risk here is that the dollar depreciates against country a’s currency so that the dollars it earns pay for less means of production and labor power, cutting into its profits. Separately company B has the opposite dilemma: it has the currency of country a but needs dollars.
Without a banking system, company A and company B would face risks that would result in either a reduction in profits or less risk taking and therefore less trade and growth. Company A may decide to take the risk, at which point the dollar depreciates against country a’s currency, and company A suffers a massive loss and goes out of business. Company B may decide the trade is just not worth it and abandon its international operations, reducing global trade growth. These results are roadblocks that impede the general reproduction of capitalist accumulation.
But here comes the dealer with a forex swap. This financial product allows company A and company B to swap interest payments in the respective currencies to essentially lock in an exchange rate some distance into the future in order to hedge currency risk. The dealer, as expert arbitrageur, has access to a vast digital network of companies all over the world that seek to hedge currency risk. Indeed, this is its product—as Stigum writes, “Each brokering firm is selling to its client banks a vast, fast-operating information network, which banks could not easily duplicate.” (2007: 841) It can therefore match up company A with company B. Companies A and B are willing to pay the dealer a spatio-temporal premium, i.e. a cut of their profits, in order to ensure a stable reproduction cycle. They no longer have to worry about exchange rate risk and can accumulate capital.
Relaxation of the Coercive Laws of Competition
While dealers play a key role in knitting these markets together, it would be a serious error to assume that the markets make themselves. On the contrary, the capitalist ruling class uses its repressive state apparatus to centralize and maintain these markets. Capitalism is a fundamentally unstable, crisis-prone system that cannot operate on a laissez-faire basis—state intervention is fundamental to the functioning of the system. As we will see, the credit system that exists in the U.S. today is a highly centralized market regulated by the Federal Reserve and the U.S. Treasury, i.e. the capitalist state. The dealer system is centralized around a few select “primary dealers” that work within the boundaries set up by the state.
But first it is important to understand the key tool the ruling class uses to centralize the credit system: a relaxation in what Marx termed the “coercive laws of competition,” the fundamental laws that guide the behavior of capitalists and drive them to seek greater and greater profits. John Maynard Keynes referred to the “animal spirits” of the economy in a similar vein—if the animal spirits die, the system is threatened.
But while capitalism would not function without these laws, they are not absolute. If the coercive laws of competition are allowed to operate freely without the conscious intervention of the ruling class, growth is threatened from another angle. Describing the instability of the U.S. banking system at the turn of the twentieth century, Allyn Young wrote,
There was no possible remedy save in a more elastic relation between loans and reserves, and that was impossible without centralized control and centralized responsibility. Sometimes the best interests of the country demanded a banking policy which ran counter to the interests of individual banks. Such a policy in the nature of the case could not be the outcome of the operations of competitive banks, however, public spirited.
Young 1999: 302; my emphasis
So centralization was key to cohering a stable national banking system. And in order to achieve this, the coercive laws of competition needed to be relaxed.
This dilemma of balancing the operation of the coercive laws of competition led Hyman Minsky to develop the concept of the “survival constraint:”
According to Minsky, we need to understand finance not because it is an important part of our modern economy, but because it is the very heart and motive force of that economy. In the logic of finance, the most basic element of the economy is cash flow and the most basic constraint on the behavior of every economic agent is the ‘survival constraint.’
Mehrling 1999: 139; my emphasis
Modern central banking theory revolves around the question of how to sustain the survival constraint while at the same time avoiding financial crisis. In the contemporary U.S. context, this means that the Federal Reserve uses open market operations to attempt to adjust financial conditions between elasticity and discipline, i.e. loose and tight monetary conditions, respectively. Elasticity represents the temporary relaxation of the survival constraint (in Marxist terms, the coercive laws of competition)— cheaper money means less competition for financing. Discipline represents the reassertion of the survival constraint—tight money means greater competition for financing.
This description of central bank operations is, to an extent, theoretical: the degree to which central banks actually control financial conditions is considerably exaggerated by most mainstream accounts. That said, the central bank plays a key role in allowing the ruling class to channel finance as a means to assert leverage over the economy and sustain and grow profits. The Fed’s open market operations center around trading Treasury securities with the dealers. As we will see later, since Treasuries sit at the center of the money market and are considered the most pristine collateral, these open market operations affect the degree of tightness or looseness of conditions in the money markets described above.
Historically speaking, before the widespread adoption of central banking, this practice of relaxing the coercive laws of competition was carried out on an ad-hoc basis by various groups of capitalists. Monopolies—the unification of an entire industry under one company, such as Standard Oil in early twentieth nineteenth century—are the clearest examples of this practice. Industrial cartels, wherein oligopolistic companies agree to not compete in order to stabilize and control a market, are another. In the realm of banking, there is the role that J.P. Morgan played in the Panic of 1907—this banker of bankers stepped into a financial crisis to support the markets with liquidity. While the unmitigated competitive drive would have normally compelled Morgan to crush his rivals, he saw that the collective interests of the capitalist class would be served by helping to make his rivals whole, so he relaxed their survival constraint. Financial clearinghouses have existed for centuries—these are groups of banks that get together to pool payments so that they net out at the end of a particular period. Clearinghouses, such as the contemporary Clearinghouse Interbank Payments System (CHIPS), allow banks that are solvent, but may not have available liquidity to make necessary payments, to access funds on a short-term basis.
Under these arrangements, banks agree to support each other temporarily because the collectivization will benefit all individual members. Credit markets in general function this way: promises to pay are a relaxation of the survival constraint/coercive laws of competition. The benefit to an individual capitalist is that they can make a truce with other capitalists now, sacrificing some of their profits, with the hopes of making more profits in the future. During boom times, all capitalists in the collective benefit, but when credit inevitably contracts, the coercive laws of competition reassert themselves and the capitalists battle each other for survival.
After the financial crisis of 2007-09, there was an attempt to create an international clearinghouse of central banks. Since that crisis, the Fed, European Central Bank, Bank of England, Bank of Japan and others have coordinated interest-rate policy and long-term asset purchases to some degree. The Fed opened swap lines during the financial crisis to extend liquidity to non-U.S. banks. However, this collaboration has had limited purchase, as is shown by the repeated Eurodollar shortages that have plagued the global monetary system since the financial crisis resulting in the Euro crisis of 2011, the seizing up of credit markets at the beginning of the Covid-19 Pandemic and other dollar funding crises.
While financialization does allow capitalism to transcend its narrow limits to some degree, its fundamental contradictions are ultimately displaced either in time or space. Swaps or other financial instruments may allow certain companies or entire ruling classes to displace contradictions, but they ultimately manifest somewhere else in the future. For example, the accumulation of credit default swaps on the books of U.S. banks such as AIG in 2007-08 contributed to a cascading financial crisis and mass unemployment. Some analysts also argue that the Latin American debt crisis of the 1980s was directly tied to the Fed raising interest rates in the early 1980s. While runaway inflation in the U.S. abated, a subsequent funding shortage for Latin American economies provoked the debt crisis and severe economic pain for the masses. Or consider today’s tightening financial conditions: the Fed is raising interest rates and cutting its quantitative easing program, again to tame inflation, but the value of the dollar against all major currencies has skyrocketed, threatening to seize up global funding, especially for emerging markets.
Writ large, ruling classes are ultimately able to use the various apparatuses of centralized capital to defer and displace contradictions by exporting financial crisis and, in the last resort, going to war.
War Finance and the Centralization of Capital
Lenin’s argument was that imperialism was the highest stage of capitalism. In other words, it was not a policy that could be turned on or off, but was built into the historical development of this system. It was a logical outgrowth of the tendency of the centralization of capital initially identified by Marx. Using the framework developed in this article, another way to say this is that war is the highest form of centralization of capital—it is the instance where capital is deployed in its greatest mass and focus. Historically, centralization of capital has been both the cause and result of war. Considering the history of the United States, the highest forms of centralization of capital have occurred during wartime.
The ruling class’s need to exert enough leverage over the economy to finance war and to drive the wartime economy proves to be the greatest motivation for centralization. But the tools of war finance then persist in the postwar economy and become absorbed into the ruling class’s arsenal of ways to manage its rule. In the U.S., this originates with the Civil War and grows to maturity through the Great Depression and both World Wars. After World War II, the centralization of capital in the complex of the Treasury, the Federal Reserve and the largest commercial banks, which grew out of war financing, has persisted to this day.
The Civil War, which smashed slavery, was the last social revolution led by the U.S. capitalist class. While the Civil War was progressive, the maturity of American and global capitalism meant that the U.S. capitalist class played the contradictory role of simultaneously ending slavery and consolidating wage slavery under capitalist rule. American capitalism thus developed rapidly from revolutionary to imperialist by the late nineteenth century.
Economically, much of this development had its basis in the National Bank Acts of 1863 and 1864. The financing needs of the federal government during the Civil War led it to consolidate a national banking system, the first substantive move toward national centralization of capital in the U.S:
In the National Bank Act provision was made for the incorporation of banks under the federal law. The new banks could only obtain the issue privilege by purchasing government bonds and depositing them as security with the Treasurer of the United States. In this manner a market was created for the government’s securities. To drive out of circulation the notes of state banks a tax was imposed in 1865 of ten per cent. This tax virtually compelled banks to take out federal charters or give up the note issue privilege. Trade was no longer to be handicapped by the existence of a disorganized mass of partly irredeemable bank-note issues.
Young 1999: 289
In this way, the government ensured a market for its war debt. The government needed weapons, so it coerced the banking system into supplying it with the money. This highlighted the superior centralization capacity of the northern capitalist state as compared with the decentralized Confederacy. War, then, was the foundation for the modern capitalist state as a centralized capital formation.
The contradictory nature of the U.S. capitalist class—on the one hand, fighting for liberation from slavery and on the other, attempting to consolidate its rule—was quickly resolved in favor of the latter. The most notable example of this was the removal of federal troops from the South and the resultant defeat of Reconstruction. No sooner had the Union Army smashed slavery than the capitalist ruling class allowed the Ku Klux Klan to establish a regime of terror against free blacks in the south.
The international analogue of this consolidation was the beginnings of an expansionist policy by the Grant administration of 1869-1877, as Don Cane recounts in Workers Vanguard (2009):
It was the Grant administration that took the first steps to convert the Caribbean into an American lake—recognizing the importance of securing an island with a large harbor and building the Panama Canal connecting the Atlantic Ocean with the Pacific Ocean. It was the Grant administration that anticipated the Anglo-American alliance—deferring to the British as the world’s superpower as it simultaneously sought to be both competitor and ally of British imperialism. It was the Grant administration that recognized the need for a strong navy to pursue Pacific Rim trade under the banner of ‘free trade.’
Cane 2009
This expansionism culminated in the Spanish-American War at the turn of the twentieth century, which resulted in the U.S. taking possession of the Spanish colonies of Puerto Rico, Cuba and the Philippines. This crowned the rapid ascent by the U.S. capitalist class from revolutionary in the Civil War to imperialist by the turn of the century.
The late nineteenth century was also marked by the further centralization of capital at the level of the firm, with the rise, for example, of Standard Oil, a monopoly that vertically integrated the U.S. oil industry. As mentioned earlier, several economic crises including the Panic of 1907 pointed the capitalist ruling class toward the need for a regulatory banking regime that would attempt to stabilize the system. While the National Bank Acts had begun the process of centralization of the banking system, there was still a great push and pull between the forces of centralization and decentralization that continued even past the establishment of the Federal Reserve in 1913. In the Fed document “The Federal Reserve System After Fifty Years,” (1964) one Professor Westerfield of Yale is quoted in 1933 as saying:
The American Bankers Association in its publicity featured “the demonstrated impotence of the Federal Reserve System to retain control over the situation *** quite unable to coordinate its forces and marshal its resources with a unity of purpose that is adequate,” and suggested as a solution the “formation of a ‘Central Bank of the United States,’ with the present Reserve banks as branches. *** Twelve scattered banks, each with its governor and its chairman and its board of directors, loosely ruled by a Board of eight in Washington, composed of men of diverse opinions, do not provide the country with an organization well adapted to act promptly and decisively.”
United States 1964: 1991; my emphasis
Central to this struggle, from the founding of the Fed to the mid-1930s, was who would control open market operations—the scattered reserve banks or the centralized Fed itself: “In testifying before the House committee, Mr. Marriner Eccles of the Federal Reserve stated that open market operations are the most important single instrument of control over the volume and the cost of credit in this country.” (United States 1964: 1995; my emphasis)
But it was ultimately World War I that marked the emergence of modern central banking for the U.S. ruling class, as the Fed began buying Treasury bills and using them as collateral instead of loans to main street. Mehrling quite convincingly argues that the two world wars and the Great Depression cemented the role of Treasury debt at the center of the banking system, even though he strangely states that this was an anomalous “cosmic accident” as opposed to a “natural process:”
Such a natural process of institutional evolution was, however, diverted by the cosmic catastrophes of World War I, the worldwide Depression, and World War II. From a banking perspective, the significant consequence of these events was an explosion of government debt and an ongoing responsibility of the new Federal Reserve System to ensure liquid markets for that debt. By cosmic accident, and quite against the intentions of both the orthodox framers of the 1913 act and their shiftability opponents, Treasury debt, not commercial loans, thus became the shiftable asset sine qua non, and the consequent liquidity of Treasury markets became the source of liquidity for the entire system.
Mehrling 2011: 36-7; my emphasis
While Mehrling has a keen sense of history here, he sees the structural evolution of U.S. central banking backwards. Considering that the capitalist class needed a stable financing source for government debt as a means to leverage its power over the system, it seems only natural that it would have forced its banks to finance that debt as it did during the Civil War and—with the establishment of the Fed—to further centralize this financing to ensure its pursuit of imperialist expansion during World War I. From this point of view, centralizing government financing in the Fed was the natural evolution of capitalist banking. Young notes this clearly:
It was exceedingly fortunate for the United States that the federal reserve system was in operation during the Great War. The concentration of the reserves of the country in the federal reserve banks, together with the reduction of the reserve requirements in member banks, led to a tremendous expansion—a multiplication in fact—of the aggregate lending capacity of the banks of the country.
Young 1999: 305; my emphasis
The result was a vast centralization of financial power, largely in U.S. banking, but also in the other imperialist powers:
Gold, silver, and bimetallic monetary standards had prospered best in a decentralized world where adjustment policies were automatic. But in the decades leading up to World War I, the central banks of the great powers had emerged as oligopolists in the system… The Federal Reserve Board, which ran the system, centralized the money power of an economy that had become three times larger than either of its nearest rivals…
Mundell 2000: 328; my emphasis
In the U.S., the post-World War I period, however, was still marked by the conflict between proponents of centralization and decentralization and it was not until the Banking Act of 1935, when the exigencies of the Great Depression allowed for the consolidation of power by the Federal Reserve Board through its centralization of open market operations in the Federal Open Market Committee. “The ‘emergency’ atmosphere of the depression doubtless contributed to what was undeniably the establishment of a true central bank—independent and able to determine for itself its policies and goals.” (United States 1964: 1994)
During World War II, U.S. government debt was monetized and the Fed engaged in what is now called “yield curve control” to ensure low interest rates on Treasury debt to finance the war. This monopolization of Treasury debt by the Fed was then relaxed in the Post-War period, but its essential form was normalized: government debt monetization by the Fed lay at the center of the credit system even if a relatively “free market” was cohered by cultivating the primary dealers as market makers. This is the essential form of the monetary system we see today. This process is captured well by this quote from the “The Federal Reserve After Fifty Years:”
Securities of the Federal Government have come to play a unique role in the flexibility and sensitiveness of the American money market. Our financial institutions now hold the bulk of their secondary or operating reserves invested in these issues, particularly in the shorter term securities. This is true especially of commercial banks but also of insurance companies and savings banks, as well as savings and loan associations. It is also increasingly true of many of our larger industrial corporations. As a result, any change in the demand for funds or their supply is felt promptly in the open market for Government securities. When our financial institutions gain funds, they usually invest immediately in Government securities, and, conversely, when they have net payments to make, they liquidate Government securities. When their customers borrow or opportunities for profitable investment arise, financial institutions switch out of Government securities, and when loans are paid or investments are sold the proceeds are usually invested, at least temporarily, in Government securities. The resulting daily turnover of securities in the market is enormous. It reflects the transactions by which thousands of individual financial institutions and business organizations keep their funds fully employed at interest, without sacrifice of their ability to meet the changing financial requirements of their more basic business operations.
United States 1964: 2005; my emphasis
The result is a fully centralized banking system wherein the Treasury and the Federal Reserve regulate the most pristine collateral of the credit system through the dealer network: the Fed purchases Treasury debt, the dealers then serve as intermediaries between the Fed and commercial banks and the latter take Treasuries onto their balance sheets (and the cycle works in reverse simultaneously). The Treasury is then able to spend the money into the economy with the ultimate guarantee of the U.S. taxpayers. The system is characterized by a division of labor between the Fed and the Treasury:
While the Treasury is primarily responsible for debt-management decisions, that responsibility under this second view is shared in part by the Federal Reserve System, and while the Federal Reserve is primarily responsible for credit and monetary policy, that responsibility must also be shared by the Treasury. According to this position, the problems of debt management and monetary management are inextricably intermingled, partly in concept but inescapably so in execution. The two responsible agencies are thus considered to be like Siamese twins, each completely independent in arriving at its decisions, and each independent to a considerable degree in its actions, yet each at some point subject to a veto by the other if its actions depart too far from a goal that must be sought as a team.
United States 1964: 2018; my emphasis
Ultimately, this centralized banking market is geared toward the stabilization and expansion of capital accumulation in the U.S, but it is rooted in war finance. As stated earlier, the capitalist class taps into the leverage that banking capital provides to centralize power and stabilize its rule. War is an essential aspect of defending and expanding this power and that is why it is so central to the system’s functioning. The rise of imperialist war, then, is no accident; it is the defining feature of the highest form of centralization of capital.
Centralized Anarchy
To review, we started from understanding banking as dealing: a way to ostensibly smooth the capitalist accumulation spiral, by knitting together markets spread out over time and space and to defer and displace contradictions. We also saw how control over the surpluses that arise from the uneven reproduction cycle is centralized in large banks, which concentrates social power. Then we saw how the capitalist ruling class uses this concentrated social power to further centralize capital in the state apparatus in order to leverage control over the entire national economy. Far from creating a symphonic, elegant and abundant reproduction cycle, this progressive centralization of capital instead defers and displaces its contradictions, resulting in more catastrophic financial crises and war.
The dream turns out to be a nightmare. Capitalism cannot escape its underlying anarchy by centralizing. Ultimately, the logic that prevails at the level of the individual capitalist who seeks to defer and displace his own immediate contradictions applies up the ladder to the ruling class as whole. This process never eliminates the crisis, but simply pushes it off for someone else to deal with.
The contradiction between the crude form of planning introduced by the centralization of capital and capitalism’s underlying anarchic economic structure was not only noticed by Marx, but also by Hyman Minsky, the bourgeois economist whose theories on financial instability have gained traction in recent years.
When considering the thought of Hyman Minsky, one is struck by, on the one hand, his insightful understanding that finance was the “fundamental flaw” of the capitalist system with its booms, busts and Ponzi finance cycles; and, on the other hand, his ideological faith that finance could somehow introduce order into anarchic capitalist markets.
Describing Minsky, Mehrling writes,
From a social point of view, finance is important most fundamentally because it puts order into the anarchy of decentralized market exchange in the face of a future that is fundamentally uncertain, not just risky. As an institutionalist, Minsky recognized that the institutions of finance are not the only institutions giving form to the void, but he believed they were the central institutions for the capitalist systems with which he was concerned. It is the complex structure of interlinked and overlapping cash commitments, rash promises about an uncertain future, that lends ‘coherence’ to the system, and financial breakdown is so dangerous and frightening largely because it represents ‘incoherence…’ Coherence is thus not a once and for-all thing—it is not equilibrium—but a temporary and tenuous thing, constantly in flux as time rolls forward.
Mehrling 1999: 139-40; my emphasis
This recalls Marx’s argument from earlier that the balance achieved in any given accumulation cycle is not some defining feature of the system, but is itself an accident. But while Marx saw capitalist finance as a means to displace and heighten the contradictions of capitalism, Minsky held onto faith that the capitalist class could manage its way out of crisis by controlling debt and excess speculation.
Why did Minksy seek to reform capitalism while Marx sought its overthrow? In short, Minsky’s ideology was bourgeois to the core. He believed that the uncertainty in capitalist markets was the source of freedom. This was a fundamentally anti-communist idea because he believed that eliminating this uncertainty would eliminate freedom:
Uncertainty is not just the dark forces of time (as Keynes once put it), but more importantly the product of free social evolution. In Minsky’s way of thinking, uncertainty has a two-edged quality. On the one hand, it is a threat to the very coherence of our economic system, a threat that must be defended by institutions that place structure on the set of future possibilities. On the other hand, it is the very source of our ability to act freely, both as individuals and as a society. To eliminate uncertainty would be to eliminate freedom. The balance between cash commitments and cash flows is at root a balance between these two sides of uncertainty.
Mehrling 1999: 140
Marx posited a diametrically opposed idea: eliminate the uncertainty produced by the underlying anarchy of the capitalist system in order to allow the people to collectively plan how society will produce and distribute resources. Where Minsky saw freedom in the uncertainty of capitalist markets, Marx saw the enslavement of the masses to an irrational, inefficient and cruel system.
But beyond this, Marx was trying to solve a problem. Dialectical materialism is not just an interesting way to think about history: it is a method for understanding how to change social conditions. In contrast to the crude, class-based centralization brought about by capitalism, Marx sought the real centralization of society’s resources under workers control. A revolutionary workers government would expose the opaque financial flows, speculation, bottlenecks, financing asymmetries and hoards of capitalist finance, and put allocation of society’s resources up for democratic votes by the workers themselves. This would require the expropriation of all private financial institutions and the collectivization of their resources in a workers revolution.
Works Cited
Cane, Don. 2009. “The Grant Administration (1869-1877) and the Rise of U.S. Imperialism: Part One.” Workers Vanguard 938(2009).
Marx, Karl. 1992. Capital, Volume 2. New York: Penguin Books.
Marx, Karl. 1981. Capital, Volume 3. New York: Penguin Books.
Mehrling, Perry. 1999. “The Vision of Hyman P. Minsky.” Journal of Economic Behavior & Organization 39(1999): 129-158.
Mehrling, Perry. 2011. The New Lombard Street: How the Fed Became the Dealer of Last Resort. Princeton: Princeton University Press.
Mundell, R. A. 2000. “A Reconsideration of the Twentieth Century,” The American Economic Review 90(2000): 327-340.
Stigum, Marcia. 2007. Stigum’s Money Market: Fourth Edition. New York: McGraw-Hill.
United States. Congress. House. Committee on Banking and Currency. Subcommittee on Domestic Finance, 1964-1975 and Eighty-Eighth Congress, 1963-1965. “Volume 3, April 9, 13, 14, 16, 22, and 29, 1964” in The Federal Reserve System After Fifty Years : Hearings Before the Subcommittee on Domestic Finance of the Committee on Banking and Currency, House of Representatives, Eighty-Eighth Congress, Second Session, on H.R. 3783, H.R. 9631, H.R. 9685, H.R. 9686, H.R. 9687, H.R. 9749 (1964) (April 9, 13, 14, 16, 22, and 29, 1964). https://fraser.stlouisfed.org/title/729/item/23586, accessed on August 16, 2022.
Young, Allyn. 1999. Money and Growth: Selected Papers of Allyn Abbott Young, edited by Perry G. Mehrling and Roger J. Sandilands. London: Routledge.
World of Lenidzky 