‘This book is about how the global financial system works, and in whose interests’, Tony Norfield announces at the start of The City.footnote1 He also sets out to explain the functions of the Square Mile for British capitalism, its importance to the world market, and why it is wrong to counterpose the financial sector to a more productive ‘real economy’. Norfield’s credentials are based on his own experience. He began a twenty-year career in the City of London’s dealing rooms soon after the Thatcher government’s ‘Big Bang’ deregulation of financial markets in 1986. Unlike the soldier on the battlefield, who may know little about the war he is fighting, Norfield claims that ‘the basic mechanism of finance is clear to anyone who witnesses it from the inside’. Working in the City as a senior economist for Bank of America and Mitsubishi Bank, and as head of foreign-exchange strategy at abn Amro, no doubt helped to confirm the impression that London is at the centre of global finance. Norfield departed abn Amro at the end of 2006, shortly before its ill-fated takeover by a consortium of British, Belgian-Dutch and Spanish rivals. A doctoral dissertation at soas under Ben Fine helped to substantiate a view of the international financial system that had apparently long been refracted through a rather traditional Marxist lens. ‘There was no small irony in my going to work in the City’, he acknowledges. ‘I had decided some years before that organizing society on capitalist principles was a bad idea.’ But as he rather cursorily explains: ‘Needs must.’
The City argues that the global financial system must be analysed in terms of the economics of imperialism, in which ‘a few major corporations from a small number of countries dominate the world market’, and the major powers can use financial markets ‘to control world resources and siphon off the value created elsewhere’. On this view, finance is an integral part of the capitalist economy: rather than a cancer that should be removed to restore the body to health, it should be understood as a central nervous system, while its profits are little more than parasitic deductions from the surplus value created in commodity production. Although big-power governments support their financial sectors, whose revenues are important to their balance sheets—especially for the uk, whose reliance on the City’s earnings for two centuries has been thoroughly documented—Norfield argues that political institutions are subordinate to economic forces. Policy makers have little choice but to follow the logic of world-market imperatives. These themes—the City as a core element in economic imperialism; the explanatory primacy of the economic over the political—run through nine loosely connected chapters in which two distinct, but related, matters are addressed. The first is general: to establish the parasitic role of international finance, based on its appropriation of global surplus value. The second is historically specific: to explain the City’s survival as ‘the pre-eminent international financial centre’. Yet Norfield’s insistence upon the theoretical subordination of the political produces an unresolved tension between the two issues.
Much of The City’s historical account covers well-trodden ground. Norfield starts by documenting the uk’s exceptional position in the global financial system. It ranks second only to the us in the number of banks among the world’s top 50. More remarkably, in 2013 London accounted for 40.9 per cent of foreign-exchange turnover—more than double the us’s 18.9 per cent, with no other centre claiming more than 5.7 per cent. These and other data are invoked as a corrective to the widely held assumption of the us’s absolute dominance. Norfield flatly rejects Gowan’s description of the City ‘as a servicing centre for the dollar currency zone and as a satellite of Wall Street’. (Gowan later depicted the City more evocatively in nlr as Wall Street’s Guantánamo, where it could do what was not allowed at home.) Instead, global finance is seen as a binary system in which the uk and the us financial markets exert a ‘significant “gravitational” pull’ on each other.
Norfield’s account of the ‘Anglo-American system’ adds little new to the story of Wall Street’s failure to displace London as the world’s major financial centre in the interwar period. Strangely, there is no mention of Charles Kindleberger’s seminal account, nor the debate arising from his conclusion that the international disorder of those years was the result of the uk’s inability and the us’s unwillingness to manage their currencies as world money. Others have argued that the us was not merely unwilling, but also institutionally and politically incapable, of assuming a hegemonic role at this juncture. Norfield refers to the undoubted disabling effects of the fragmented structures of the us financial system and Federal Reserve, but only hints at the political conflicts, based on economic and regional interests, which stymied the New York financial elite’s ambition to supersede London. Later, at the Bretton Woods conference which devised the post-World War Two international monetary system, Treasury Secretary Henry Morgenthau pressed for the us to become the unrivalled global financial power. However, as Norfield points out, ‘New York did not quite achieve the domination that he had envisaged’. In fact, as we are all now aware, despite the us’s even stronger economic position, the ‘implausible’ occurred: the City staged a remarkable revival because it ‘had the expertise to develop a business largely on the basis of using the new world currency, the us dollar’.
The City goes on to outline how the us and uk positioned their financial systems after the disintegration of Bretton Woods at the start of the seventies. The deregulation of Wall Street on May Day 1975 was followed by the uk’s abandonment of exchange controls in 1979 and the ‘Big Bang’ which opened up London to foreign financial institutions. The ensuing invasion by us investment banks seeking to evade their stricter domestic regulation and take advantage of the Eurodollar markets led to the displacement and takeover of many of the City’s firms, as chronicled in Philip Augar’s The Death of Gentlemanly Capitalism (2000). ‘The Thatcher government’s policies made more sense as a capitalist strategy than most critics admit’, Norfield insists—no matter the wasting of the industrial sector while financial markets boomed. Her administration ‘placed a bet that looked to have better odds than any others on offer, especially given the international status of the City’.
Capitalism’s need for financial services is explored in a chapter titled ‘Power and Parasitism’, using Marx’s categories of money-dealing and interest-bearing capital. It is confidently asserted—if not actually demonstrated—that the activities of banks, brokers, asset managers, pension funds and insurance companies are funded by a deduction from the surplus value extracted from the productive sphere. Norfield commendably tackles a particularly contentious question in the analysis of capitalism, the creation of money by bank credit, candidly conceding that ‘this topic is often poorly covered by Marxist writers’. (It should be added that it has also been poorly covered by mainstream neoclassical economics.) Money creation by banks is not directly dependent on surplus-value production; nor do they lend money to borrowers by taking it from depositors. After decades of resistance to the heterodoxy of Schumpeter, Keynes and their followers, the Bank of England Quarterly recently acknowledged, as Norfield notes, that banks produce money by merely creating a deposit for the borrower. In time-honoured Marxist fashion, this seemingly autonomous process of money creation is readily reconciled with materialism’s primacy of surplus value. The funds allocated to the borrower ‘should be seen as fictitious deposits, since they are created out of thin air by the bank and do not depend upon how much actual cash the bank has at its disposal at the time’.
This distinction between fictitious credit and actual cash, found in both mainstream economics and Marxism, obscures the way in which capitalist banking transforms private debt into public money. ‘Thin air’ is not involved in the process; rather, it is grounded in the social reality of the confidence that the borrower’s private debt to the banks will be repaid. The institutional arrangements of the banking system, central bank and the state enable private debts, transformed by the act of spending, to enter the economy as public money through myriad forms of transmission—cash, cheque, electronic transfer. Norfield is compelled to deal with the problem that ‘for a while, credit creation can also appear to be completely independent of capitalist production’. The credit system obscures value relations in the capitalist system, so that it appears that ‘money creates money’. Yet, ‘how can production or profits that do not yet exist generate wealth now?’ Billions may be wiped off the fictitious wealth of stocks and share value, ‘but it was nevertheless once an asset that could have been cashed in’. The creation of credit by the banks and the formation of fictitious capital as financial securities may ‘appear to break the link between the production of value in the economy and the resources at the command of capitalists’, but the link is merely ‘stretched’.