Socialist Appeal - the Marxist voice of Labour and youth.

There is a tendency amongst the leaders of the labour movement to draw a distinction between the ‘parasitic’, ‘irresponsible’ financial sector of the economy and ‘productive’, ‘responsible’ manufacturing. But is it useful to draw this distinction between financial and industrial capitalism? In this history of finance capital, Luke Wilson discusses how such a distinction is artificial: the growth of industrial capitalism was intimately bound up with the growth of finance capital.

After the great financial collapse of 2008, we find ourselves in a turbulent period. Mass unemployment and savage attacks on living standards are the order of the day; revolutionary upheavals across the Middle East, Europe and America are the response. Many people have begun to ask fundamental questions about the way society is organised; in particular, the role of banks and financial institutions - ‘finance capital’ - has been put under the microscope.

Under these circumstances, the temptation exists to draw a distinction between the ‘parasitic’, ‘irresponsible’ financial sector and ‘productive’, ‘responsible’ manufacturing. Indeed, this is the line taken by the leadership of the labour and trade union movement. Ed Miliband, leader of the Labour Party, talks of a “responsible capitalism” where “a more vibrant and innovative manufacturing sector” replaces “the predatory, short-term speculation that was at the root of our financial crisis – which involved a small number of people standing to make huge personal gains from taking inappropriate levels of risk, without adequate responsibility for the financial downside.”[1]

Miliband is not alone. Len McCluskey, leader of Britain’s largest trade union Unite, has attacked the “feral and uncontrolled capitalism” of “spivs and speculators”[2], demanding instead that the government “start pursuing an industrial strategy that supports manufacturing and promotes jobs and growth.”[3]

But is it useful to draw this distinction between financial and industrial capitalism? Marxists argue that such a distinction is artificial: the growth of industrial capitalism was intimately bound up with the growth of finance capital; neither could have developed without the other. To explain this, we must study the historical origins of capitalism, beginning in the late Middle Ages.

The rise of the Italian city-states

The real origins of capitalism lie in the late Middle Ages, with the decline of feudal relations and the rise of the city-states. At the centre of this process stood Italy, where the existing medieval communes, or universitates, transformed themselves into powerful city-states. As Anglo-Swiss historian S. R. Epstein explains:

“Communes, as they became known in the thirteenth century, developed into municipal bodies engaged in local government, which depended on external seigneurial or monarchical authority for fiscal, military and trade relations...

“Communes gained these rights or liberties between the late eleventh and thirteenth centuries. In the same period, some of them managed to transform themselves into independent city-states. City-states... practiced their own foreign policy, were fiscally independent, could raise an army and enforce the death penalty, and could mint coins, sign commercial charters with other independent states, and requisition foreign merchants’ goods. Self-ruling urban communes were ubiquitous in the late medieval and early modern West; city-states were not.”[4]

Many of these semi-autonomous communes grew out of the great imperial cities that remained amidst the wreckage of the Roman Empire, and their growth was made possible by the disintegration of the Roman state and its centralised authority. “The eastern Byzantine administration was unable to withstand increasing Arab, Dalmatian and from the tenth century Norman incursions, and Apulian cities began to organise their own defences and to develop communal forms of self-government.”[5] The communes of southern Italy became particularly wealthy, due to “better opportunities for trade with the eastern Mediterranean.”[6]> Nevertheless, the growth of trade lead to the flourishing of the communes in northern Italy.

The character of these communes is expressed clearly by Epstein, when he explains that “the main purpose of the communes was to provide members with secure property rights, arbitration and dispute settlement for trade... [T]hey first arose in the most advanced mercantile centres like Genoa, Pisa, Venice and Milan.”[7] As they grew more economically powerful, they transformed themselves into fully autonomous city-states, whose wealth was based on the accumulation of merchant capital via trade.

Medieval England

Feudalism can be characterised as a system where production is dominated by agriculture, and where land is organised into manorial estates under the control of a class of barons. A series of feudal dues or responsibilities governed the majority of economic interaction: peasants were bound to work the land of their lord for a certain number of days, and to maintain the roads and highways; lords were required to provide soldiers to the crown during times of war; and so forth.

During the 11th and 12th centuries, however, money began to play an increasingly important role. The development of embryonic finance capital in England was in no small part due to the pressures of the endless internecine wars of the Plantagenet dynasty, which stretched the feudal mode of production to its limits. As Marxist historian A. L. Morton explains in his seminal work, A People’s History of England:/p>

“Henry II began to allow and even encourage his barons to make a payment called scutage as a substitute for personal service in the field. The proceeds were used to hire troops for the duration of a campaign.

“Scutage is an indication of the extent to which money payments were now replacing many of the older dues in kind or services which had still survived in the eleventh century. At the same time there was a marked tendency for landlords in turn to seek to transform parts of their demesnes into tenements held for rent, and even to ‘commute’ labour services owed by their villeins on the same conditions. Money was becoming a normal and increasing requirement, partly as exchange became more normal and partly with the beginning of a century and a half of rising prices which dates from the middle of the twelfth century.”[8]

Of course, this process did not continue mechanically in a straight line; over the next two centuries, the growth of money and commerce came into contradiction with the inertia of the dominating feudal system, and for periods, the march of money was pushed back and feudal dues appeared to dominate again. However, the overall tendency was the increasing domination of money and finance as the mechanisms for exchange, which made the accumulation of capital possible on a qualitatively higher level than before.

England had been a centre of trade and commerce from Roman times and before. During the Middle Ages, Italian and Flemish merchants traded extensively with England. For example, the expulsion of the Jews in 1290 made the English crown dependent on Italian financiers from the Lombardy region. From the 14th century onwards, England played an important role in the wool trade. Flanders was the centre of wool production at the time, and England had a virtual monopoly on the export of raw wool to Flanders. Due to the political weakness of Flanders, torn apart by internal divisions and weakened by its endless conflicts with France, England gained a certain economic and political independence, and many of its wool producers grew rich. The Cistercian monasteries owned vast sheep farms in the Pennines, and using the capital they accumulated via the wool trade, they began to act as financiers to the state. Under Edward II, for instance, their capital amounted to five times that of the crown!

The late Middle Ages can thus be characterised by the growth of merchant capital in Italy, Flanders and England, and the beginnings of its transformation into finance capital.

The growth of modern finance capital

The seventeenth century saw the bourgeois revolution emerge in England on a qualitatively higher level than had been seen before. Although the bourgeois republic of Cromwell was short-lived and unstable, the constitutional settlement that emerged at the end of the century paved the way for the growth of modern capitalism, and, in particular, of finance capital. As Marx explains in Capital,

“The ‘glorious Revolution’ [the constitutional settlement of 1688, in fact neither glorious nor a revolution] brought into power, along with William of Orange, the landlord and capitalist appropriators of surplus-value. They inaugurated the new era by practising on a colossal scale thefts of state lands, thefts that had been hitherto managed more modestly. These estates were given away, sold at a ridiculous figure, or even annexed to private estates by direct seizure. All this happened without the slightest observation of legal etiquette. The crown lands thus fraudulently appropriated, together with the robbery of the Church estates, as far as these had not been lost again during the republican revolution, form the basis of the to-day princely domains of the English oligarchy. The bourgeois capitalists favoured the operation with the view, among others, to promoting free trade in land, to extending the domain of modern agriculture on the large farm-system, and to increasing their supply of the free agricultural proletarians ready to hand. Besides, the new landed aristocracy was the natural ally of the new bankocracy, of the newly-hatched haute finance, and of the large manufacturers, then depending on protective duties.”[9]

Here, Marx describes the final elimination of the remnants of feudal dues, and their transformation into capitalist property relations. This went hand-in-hand with the growth of finance capital. Again, war played an important role. During the sixteenth and seventeenth centuries, Spain had presided over a mighty empire, stretching across the Americas. However, the material basis of this empire was the plunder of resources, and Spain stood at an extremely low level of production.

Towards the end of the seventeenth century, the Spanish empire began to disintegrate, its vast possessions eyed greedily by its neighbours. England, France and now-independent Holland were dragged into a series of wars over trade and plunder. England, in particular, feared that if the Americas were to fall into French hands, the French crown would enforce anti-English trade laws in the colonies more effectively than the Spanish ever could.

Technological developments also made war an increasingly-expensive business. For instance, the development of the ring-bayonet, which could be attached to a musket whilst it was fired, made the pike redundant; war became increasingly dominated by artillery. Expensive wars stretched the finances of the crown to breaking-point.

During the 16 and 17th centuries, the goldsmiths of London had been the primary source of credit to the state. In 1672, Charles II repudiated the state debt, a move which ruined the government credit. In 1694, in order to borrow the large sum of £1.2 million, the crown allowed a section of its lenders to amalgamate and form the Bank of England, granting this new institution a monopoly on government credit and issuing banknotes. This move met with considerable opposition from the London goldsmiths (who saw their business ruined), but nonetheless paved the way for the modern banking system. As Marx explains:

“At their birth the great banks, decorated with national titles, were only associations of private speculators, who placed themselves by the side of governments, and, thanks to the privileges they received, were in a position to advance money to the State. Hence the accumulation of the national debt has no more infallible measure than the successive rise in the stock of these banks, whose full development dates from the founding of the Bank of England in 1694. The Bank of England began with lending its money to the Government at 8%; at the same time it was empowered by Parliament to coin money out of the same capital, by lending it again to the public in the form of banknotes. It was allowed to use these notes for discounting bills, making advances on commodities, and for buying the precious metals. It was not long before this credit-money, made by the bank itself, became the coin in which the Bank of England made its loans to the State, and paid, on account of the State, the interest on the public debt. It was not enough that the bank gave with one hand and took back more with the other; it remained, even whilst receiving, the eternal creditor of the nation down to the last shilling advanced. Gradually it became inevitably the receptacle of the metallic hoard of the country, and the centre of gravity of all commercial credit.”[10]

Over the course of the 18th century, the state debt ballooned due to endless colonial wars. From £1.2 million in 1694, it had risen to a staggering £819 million by the end of the Napoleonic wars. This century also saw the rise of financial speculation to previously unheard-of levels. One of the first commodities to attract speculation was saltpetre, a component of gunpowder. Throughout the century, a series of bubbles ruined investors eager to make a quick profit. The most famous of these was the South Sea Bubble in 1720. As Morton explains:

“The South Sea Company began as a quite legitimate venture in slave trading and whale fishery, but its directors held out the wildest expectations and even promised to take over the whole National Debt. Shares rose from £120 to £1,020, the whole affair becoming more fraudulent as the fever of speculation rose. All sorts of bogus subsidiary companies were formed and leading members of the Whig government as well as the Prince of Wales were criminally involved. When the crash came thousands of investors were ruined and popular fury reached such a pitch that it was solemnly proposed in the House of Lords that the directors should be sewn up in sacks and thrown into the river Thames, a revival of the old Roman punishment for parricides.”[11]

This paragraph indicates the extent to which the City of London had begun to penetrate the state apparatus to defend its interests. Of course, the new class of financial oligarchs re-invested some of their vast wealth in industrial production. In other words, the growth of finance capital made possible the accumulation of capital necessary for industrial development.

Industrial capitalism and fictitious capital

From Italy in the Middle Ages, the engine of capitalist development had moved decisively to England, where the Industrial Revolution of the 19th century transformed the world. If the financiers of the 18th century had made possible this development, their 19th century counterparts transformed the nature of finance capital.

Inherent in capitalism is the constant drive on the one hand to revolutionise the productive forces, to produce more, cheaper goods than one’s competitors. On the other hand, because the profits of the capitalists are essentially the unpaid wages of their workers, the workers can never buy back the commodities they have produced; there is an excess of capital which must be invested somewhere.

Capitalism temporarily solves this contradiction by having the capitalists with excess capital invest it in a bank or financial institution; the financial institution then re-invests this capital in another part of the productive cycle. The key point is that these processes do not balance themselves out neatly; often, the drive to expand production far outstrips the available capital for investment. So, the capitalists must invest the capital they expect to realise from future production - Marx terms this fictitious capital.

The 19th century saw this process reach unprecedented levels. The sale of commodities could not keep up with production; capitalists needed capital to finance their expansion at a greater rate than they could sell their existing commodities in the market. Marx explains the process:

"In every country the majority of credit transactions takes place within the circle of industrial relations... The producer of the raw material advances it to the processing manufacturer, and receives from the latter a promise to pay on a certain day. The manufacturer, having completed his share of the work, in his turn advances his product on similar terms to another manufacturer, who has to process it further, and in this way credit stretches on and on, from one to the other, right up to the consumer. The wholesale dealer gives the retailer commodities on credit, while receiving credit from a manufacturer or commission agent. All borrow with one hand and lend with the other, sometimes money, but more frequently products. In this manner an incessant exchange of advances, which combine and intersect in all directions, takes place in industrial relations. The development of credit consists precisely in this multiplication and growth of mutual advances, and therein is the real seat of its power."[12]

Eventually, the whole productive cycle was running on credit, as capitalists invested this fictitious capital in ever expanding production. The existence of such levels of credit inevitably gave rise to speculation - why invest huge amounts of capital getting some industrial venture off the ground, when one could realise a greater rate of profit through speculation? Marx continues:

"It is the object of banking to give facilities to trade, and whatever gives facilities to trade gives facilities to speculation. Trade and speculation are in some cases so nearly allied, that it is impossible to say at what precise point trade ends and speculation begins.... Wherever there are banks, capital is more readily obtained, and at a cheaper rate. The cheapness of capital gives facilities to speculation, just in the same way as the cheapness of beef and of beer gives facilities to gluttony and drunkenness."[13]

This orgy of credit and speculation precipitated the crisis of 1847, as investors scrambled to redeem worthless bills based on commodities which had not yet been produced! Fictitious capital, which played an integral part in the expansion of productive industry, made possible the destructive speculative practices that dominate modern capitalism. But significant industrial expansion would be impossible under capitalism without fictitious capital – i.e. credit.

Another tendency inherent in capitalism is for capital to become concentrated in fewer and fewer hands. For a whole historical period, this played a progressive role - modern industry would have been impossible had not a small enough group of people accumulated sufficient capital to finance it. However, it also robbed the capitalists of their necessary role in production, as Engels explains:

“If the crises demonstrate the incapacity of the bourgeoisie for managing any longer modern productive forces, the transformation of the great establishments for production and distribution into joint-stock companies, trusts, and State property, show how unnecessary the bourgeoisie are for that purpose. All the social functions of the capitalist has no further social function than that of pocketing dividends, tearing off coupons, and gambling on the Stock Exchange, where the different capitalists despoil one another of their capital. At first, the capitalistic mode of production forces out the workers. Now, it forces out the capitalists, and reduces them, just as it reduced the workers, to the ranks of the surplus-population, although not immediately into those of the industrial reserve army.”[14]

In other words, the capitalist class began to transform itself into an oligarchy of professional investors, contributing nothing but their capital, and leaving the management of production to state functionaries and privately-employed bureaucrats. The results of this process are surely in evidence today, where the big banks and manufacturing companies are run by ‘employees’ earning seven-figure salaries, whilst the ‘owners’ are an array of hedge-funds and shadowy financial institutions that remain in the background. The industrial and financial capitalists have largely fused.


The domination of finance capital in individual countries has since been transformed into the domination of finance capital over the world. This process began to take place towards the end of the 19th century. Lenin called it imperialism, and characterised it as the highest stage of capitalism. If the development of capitalism up to this point had been characterised by the export of commodities, now it was dominated by the export of capital itself. To explain what this means, we refer to Lenin:

“The export of capital is made possible by a number of backward countries having already been drawn into world capitalist intercourse; main railways have either been or are being built in those countries, elementary conditions for industrial development have been created, etc. The need to export capital arises from the fact that in a few countries capitalism has become ‘overripe’ and (owing to the backward state of agriculture and the poverty of the masses) capital cannot find a field for ‘profitable’ investment.”[15]

So, when profit could not be realised by inward investment, the financial oligarchs of the imperialist powers invested in production in economically backward countries. Lenin describes the mechanism by which this happens:

“The most usual thing is to stipulate that part of the loan granted shall be spent on purchases in the creditor country, particularly on orders for war materials, or for ships, etc. In the course of the last two decades (1890-1910), France has very often resorted to this method. The export of capital thus becomes a means of encouraging the export of commodities.”[16]

The consequence of this development was that the world was rather rapidly divided up into ‘spheres of influence’ of the major imperialist powers. Imperialism was therefore not simply an immoral policy of this or that government, but was driven by the necessity for the financial bourgeoisie to realise returns on its investments.

Modern developments

The story of capitalist development is thus the story of the growth of finance capital, and the relentless search for profitable investment. From the beginning of the 20th century, British capitalism had entered into decline; unable to compete with the US and Germany, a chronic lack of investment lead to Britain being known as the ‘sick man of Europe’.

Capitalism is characterised by a series of crises, from which it seeks to find a temporary way out. In the 1980s, this temporary way out was the massive expansion of speculation and fictitious capital, a development known as the ‘big bang’, which mirrored similar policies pursued by the Reagan administration in the US.

The Thatcher and Reagan administrations indulged in an orgy of deregulation designed to ‘increase liquidity’ - in other words, to increase the number of things bought and sold on the market - and to stimulate speculation. The London Stock Exchange embraced electronic trading, replacing price ‘call-outs’. More importantly, 100 per cent outside ownership of member firms was legalised; vast swathes of broking and jobbing firms were bought up by American investment banks, vastly increasing the concentration of capital and the total domination of a tiny number of institutions. As the conservative Daily Telegraph, looking back at this period, wryly observes:

“Long-term relationship banking has been replaced by short-term transactional banking, often involving opportunistic financial engineering; the maximisation of profits, in pursuit of shareholder value, has meant an increasing reliance on intrinsically risky proprietary trading; and, for the traders, the annual lure of the seven-figure bonus has seen them systematically engaged in ludicrously one-way bets – one-way because they are not personally responsible for the losses (‘other people’s money’), quite unlike the old City’s salutary partnership structure.”[17]

Of course, this piece reflects a certain nostalgia for a ‘golden age’ of capitalism that never existed, and does nothing but highlight the impasse that the system has reached today. One consequence of this deregulation has been the rise of high-frequency trading, where high-powered computers trade tiny spreads, holding positions in the market for mere fractions of a second. By 2010, high-frequency trading accounted for over 70% of equity trades in the US[18]; this takes speculation to a qualitatively higher level altogether, and capitalism has become even less stable as a result. The ‘flash crash’ of May 6th, 2010, where a number of these algorithmic trading engines got caught in feedback loops and started to sell aggressively, is one of many examples.

What is to be done?

The development of capitalism, from its mercantile beginnings in southern Italy to the Industrial Revolution in England, was only possible due to the development of finance capital and the role it played investing in production. Finance capital drove the concentration of capital which lead to the development of modern industry, and later helped create the world market we see today. However, as capitalism developed, the possibilities for speculation grew, and an orgy of debt and gambling.

Which brings us back to the question of reformism. The programme of the leaders of the labour movement is one of regulating the excesses of the financial system. But, as we have seen, finance capital is an integral part of capitalism as a whole - without access to credit, the development of the productive forces would be impossible on a capitalist basis.

One demand raised within the movement is the 'Robin Hood Tax', a small tax on financial transactions. Whilst we support this demand as far as it goes - and indeed every demand for reforms that push the class struggle forward - such a tax on its own wouldn't solve anything - it would simply prevent the market from operating properly. Credit would dry up, causing even more damage to manufacturing industry. And, because the power would still be in the hands of the capitalists, they would be free to enact all sorts of measures of economic sabotage such as investments strikes, or simply move their business abroad. Finance capital is, after all, part of a global market.

Another demand calls for the separation of investment banking from high-street banking, to protect ordinary people's savings from the risk-taking of the City. Under capitalism, this would be a complete fiction: whilst separate in the formal sense, these banks would still be financed behind the scenes by the same array of hedge-funds and shadowy investment companies. The complex network of credit, the real means by which finance capital dominates the economy, makes it impossible to prevent this. In the last analysis, the risks taken by the City would still be passed onto high-street customers.

So what is to be done? Capitalism is at an impasse. When short-term speculation and gambling are more profitable than the development of the productive forces, then the system’s useful role is over. Finance capitalism is not a cancerous growth to be amputated from a healthy body - it is an integral part of the body of capitalism.

Society can only move forward when investment is on the basis of human need, not profit. We must nationalise the banks and big financial institutions under workers’ control, integrating them into a democratic plan of production. In other words, we must overthrow the system that is now a drag on human development. Only then could humanity’s vast potential ever be properly realised.






[4]; S. R. Epstein, The Rise and Decline of Italian City States, p1,

[5]; Ibid., p7

[6]; Ibid.

[7]; Ibid., p10

[8]; A. L. Morton, A People’s History of England, p60

[9]; Karl Marx, Capital;vol. I, §27,

[10]; Ibid., §31,

[11]; A. L. Morton, A People’s History of England, p250

[12]; Karl Marx, Capital vol. III, §25,

[13]; Ibid.

[14]; Friedrich Engels, Anti-Dühring, §24,

[15]; V. I. Lenin, Imperialism, the Highest Stage of Capitalism, §4,

[16]; Ibid.


[18]; Rene Carmona and Kevin Webster, High Frequency Market Making,