Britain: a Bankocracy?

In Catherine Gore’s 1854 novel The Money Lender, an aristocratic army officer is introduced to the City’s murky elite by a Jewish financier. At a dinner party of bankers, the officer learns of the global scale of the City’s political machinations: “Behold . . . These be the master hands that move the wires of kingly puppets . . . the veritable monarchs who make peace and war; the potentates who created the independence of America, and rendered France a citizen kingdom.” Without openly flaunting their worldmaking might, these financiers nevertheless “treat of kings and ministers in all quarters of the globe, as so many implements for coining in the hands of those real masters of the world, the money-mongers.”

This view of the City’s overweening power gained popularity in nineteenth-century Britain, as capitalist industrialization accelerated and was globalized under the umbrella of the British Empire — with London acting as banker to this emerging world system. Though not always accompanied by antisemitic tropes like in Gore’s novel, the notion that the City commands unrivaled influence has been a consistent strain in British political commentary ever since.

Indeed, Labour politician Harold Wilson, speaking to the House of Commons in 1960, at the height of the social democratic compromise that saw the City shackled by regulations, nonetheless decried the City’s destructive potency. The “government,” Wilson lamented, “can find no means of restraining the City,” such that “the economy as a whole” has had to be “sacrificed to an uncontrollable speculative boom concerned only with private gain.” Wittingly or not, London financiers were supposedly playing into the hands of the red enemy in the East: “Are we really to counter the Soviet industrial developments with . . . a Stock Exchange behaving like a casino run mad?”

This perspective gained momentum following Britain’s New Right turn. Hywel Williams, adviser to John Major’s government, which had faced the consequences of the 1995 Barings Bank collapse, commented on “the City of London’s hegemony over British life.” The 2008 crisis and its no-strings-attached bailouts turbocharged this sentiment. “In Britain,” the Guardian’s senior economics commentator Aditya Chakrabortty wrote in 2011, banks “retain a stranglehold on policy-making.” This isn’t simply capitalism but “bankocracy: ruled by the banks, for the banks.”

If the City’s ability to influence politics is often understood to be a relatively constant feature of British “gentlemanly capitalism,” then what apparently set Thatcher’s administrations apart was their combination of openness to such financial lobbying and an embrace of neoliberal ideology. Thatcher, after all, was the arch-neoliberal. Beholden to the free market ideas of Milton Friedman and Friedrich Hayek, with whom she personally corresponded, she became what Michael Hudson and Jeffrey Sommers term the “Queen Mother of global austerity and financialization.” This dual embrace of financier power and laissez-faire ideology, many accounts insist, underpinned her agenda of financial liberalization — unleashing the City and setting in motion the runaway train of financialization.

But this conventional wisdom is wrong. Drawing from declassified state documents, my book shows that the key UK policies that propelled financialization were not primarily driven by financial lobbying or neoliberal doctrine, nor were they part of a larger political blueprint. Instead, these liberalizations were messy, ad hoc attempts to address the political quandaries churned up by the “stagflation” crisis of the 1970s and early 1980s — itself generated by capitalism’s inherent crisis tendencies.

Boom and Bust

Following World War II, global capitalism experienced a boom unlike anything before or since. A confluence of unique conditions made possible a tremendous spike in business profitability that powered a prolonged wave of capital accumulation. Thirty years of conflict and depression had greatly lowered capital costs. After the war, proletarian workforces ballooned, as former peasants sought work in the cities and overseas populations were repatriated in the wake of decolonization. This enlarged working class — its organizations battered by interwar unemployment and fascism — was cheap and politically contained. War-torn countries were gradually reintegrated into an expanded world market, thanks to the Bretton Woods system and unilateral US aid.

As economies internationalized, they imported advanced US industrial technologies and techniques. Assembly lines whirred the world over, churning out unprecedented volumes of industrial output. This tremendous wealth generation made possible the much-longed-for postwar social compromise in many countries, characterized by full employment, strong unions, welfare provisions, and ambitious developmental projects.

However, some of the same forces that fueled the boom also undermined it. By the mid-1960s, rising labor productivity — powered by massive investments in industrial machinery — had flooded the world market with goods, pushing down prices and profitability. Faced with falling returns, businesses chose not to invest but to instead raise prices, generating both economic stagnation and inflation. This unfolding crisis was exacerbated by the 1973 oil shock, but it was fundamentally caused by the self-defeating logic of capitalist accumulation identified by Karl Marx a hundred years earlier.

Enter Britain. The British postwar boom was lackluster compared with countries like West Germany or Japan, which had rebuilt their economies after the destruction of the war to become global export powerhouses. Britain had fallen behind in the productivity race and lost its captive colonial markets. Consequently, its experience of the global crisis was more acute. British governments faced an implacable dilemma as the downturn gathered pace. The economic basis of the postwar way of life was evaporating. British social democracy creaked under the pressures of falling profitability and speculative attacks against sterling. But the boom years had created new political constituencies — particularly a powerful union movement — that refused to sacrifice their hard-won living standards. Attempts by governments to win elections through stimulus measures simply resulted in rising inflation, which provoked international investors to sell sterling, driving down its price. Governments would then rush to stem the bleeding by imposing painful economic contraction, only to be confronted in the streets by militant workers or voted out of office.

Policymakers found themselves torn between the impersonal forces of the global crisis and concrete working-class demands. “We are thus at a turning point when things could go better,” observed a Treasury official in 1979, just weeks after Thatcher’s election, “or they could go horribly wrong.” “The overriding need is for greater domestic profitability; but even today’s damaging low profitability is at risk.”

Facing this impasse, financial liberalization appeared to offer a way out.

“A Leap in the Dark”

The City of postwar years would be unrecognizable today. The largest financial institutions formed self-proclaimed “cartels” that fixed interest rates and prices for financial transactions. This oligopoly was mostly regulated in an informal manner known as the “Governor’s eyebrows,” because supposedly the Bank of England’s governor would simply raise an eyebrow in the direction of a City banker and they would amend their practices accordingly. The City was also constrained by several formal state regulations. Most important, limits were placed on international financial flows. This cozy, nationally bounded City forged an uneasy compromise with postwar social democracy. As Aled Davies notes, governments would accept the City’s “private ownership and cartelization,” and the City would help implement demand management by regulating credit creation.

This awkward settlement was destabilized in the late 1950s by the creation of the Euromarkets — a regulatory loophole that allowed London banks trading in dollars to evade UK and US financial rules. But the entire edifice was swept away by a barrage of liberalizations from 1971 to 1986. The 1971 “competition and credit control” reforms ended the banking cartel and scrapped government limits on lending. The 1978–79 abolition of exchange controls eliminated obstacles to international money flows. In 1986, the “Big Bang” of abrupt deregulation, together with the Financial Services Act, dismantled the London Stock Exchange’s anticompetitive practices, welcomed foreign banks, and established an explicit legal framework. Out with the parochial governor’s eyebrows; in with statutory regulations that Japanese and US bankers could easily interpret. These cumulative policies catalyzed the expansion and globalization of the City. In the early 1970s, UK banking sector assets amounted to less than 100 percent of GDP. By 2008, this figure stood at around 550 percent, and London was home to more foreign banks than New York or Tokyo.

These liberalizations were not designed to cater to City elites. Indeed, they endangered the guaranteed profits of many London bankers, exposing them to competition from foreign conglomerates that dwarfed them in scale and sophistication. These policies often found greater support from the Confederation of British Industry than from financial lobbies. Neither were they straightforward enactments of neoliberal dogma. First, they began in 1971, before the so-called “neoliberal revolution.” Second, they were geared to address more mundane governing problems. Far from a cunning blueprint, these policies were “a leap in the dark,” as Thatcher’s financial secretary (and future chancellor) Nigel Lawson called them.

The British liberalizations that propelled financialization were desperate, pragmatic attempts to navigate the contradictory imperatives of global capitalism and domestic politics in a moment of deep crisis. As my book explains, these policies can be broadly grouped into two camps: strategies of palliation and depoliticized discipline.

The first kind of financial liberalization looked to kick the can down the road. Faced with falling profitability and working-class militancy, these policies “bought time,” as Wolfgang Streeck observed. By fueling credit expansion or otherwise artificially manufacturing an economic upswing, governments tried to maintain their political legitimacy through palliative measures, without addressing the underlying crisis.

The abolition of exchange controls was just that. Implemented by Thatcher and her Labour predecessor James Callaghan, this liberalization endeavored to provoke investment to flow out of Britain. Why? It was hoped that this would lower sterling’s value and therefore make Britain’s exports more competitively priced on world markets. This would boost industry’s fortunes and ease the pain of the downturn. Political legitimacy would be rescued. The profitability crisis would continue to bubble away below the surface.

The second type of liberalization directly confronted the crisis. These policies saw governments seek to discipline the domestic economy in line with the nebulous dictates of world market forces, while at the same time depoliticizing these painful measures so as to avoid political backlash. Such strategies would “confine the reproduction of both capital and the working class within the limits of profitability,” in Simon Clarke’s words. They would also veil the government’s hand in this unpopular process.

The “Big Bang” was part of this playbook. Although the path to this liberalization was winding, the crucial impetus was the collapse of Thatcher’s monetarist experiment. In 1980, Thatcher launched the Medium Term Financial Strategy: a self-imposed straitjacket for policymakers. The policy would force governments to cut spending and raise interest rates until certain money supply targets were met. This would provide Thatcher the political space to raise domestic profitability by disciplining uncompetitive businesses and workers. If voters decried the resulting hardship, politicians could reply that their hands were tied — they were just following the new rules!

This plan failed. Thatcher’s “Volcker shock” quickly buckled under the weight of the worst recession since the interwar period. Facing outcry, she lowered interest rates. However, in order to rescue her government’s public image, the money supply targets had to be met somehow. With interest rates falling, this could only be achieved by massive sales of government debt to the private sector, which would soak up liquidity in the economy and reduce the money supply. Because the government sold its debt on the Stock Exchange, this institution had to be functioning at its highest capacity. But the Stock Exchange was at the time wrangling with an acrimonious legal investigation into its anticompetitive practices. Thatcher intervened — exempting it from investigation in return for its total liberalization. Huge government debt sales, now crucial for political face-saving, could then continue unhindered.

This was not a financial coup d’état. It was, in part, an attempt to patch up an earlier failed scheme to resolve the profitability crisis. And there was real uncertainty about its future impacts. “If the Big Bang goes off successfully,” Thatcher’s advisers wrote to her, “it will be seen as a showpiece for Government policy on deregulation and increased competition; if it leads to scandals and liquidations, it will be labelled the unacceptable face of unpopular capitalism.”

Governments in this period, my book argues, flip-flopped between palliation and depoliticized discipline — employing financial liberalizations in aid of these makeshift strategies of crisis governance. These actions would unintentionally inaugurate our financialized world order.

Framing Financialization

Financialization has been a thoroughly political process. But this is not evidence that it was imposed upon capitalism by nefarious external forces. Rather, financial liberalizations were slapdash attempts by embattled governments to reconcile the irreconcilable: that is, capitalism’s unending competitive imperatives and people’s real needs and demands, in an era of global downturn. My book shows that this was the case in Britain — and Greta Krippner has demonstrated that US deregulation was driven by similar pressures. Rather than placating Wall Street or enacting a coherent “Reaganomics,” US policymakers employed financial liberalizations to address intractable governing dilemmas rooted in the decline of “postwar prosperity.”

This is the banal, nonconspiratorial reality of the policies that birthed financialization. And it has implications for the Left’s strategy.

It is unclear whether our conquest of the state, to which so much energy has recently been devoted, could put the financial genie back in the bottle — at least not without generating equally objectionable side effects. Financialization was the result of politicians struggling with the real contradictions of governing capitalism. Socialists today, were they to win office, would face these same contradictions. Chief among them is that the capitalist state’s very capacity to act depends upon profitable labor exploitation within its territory. Policymakers are not dominated by conniving financiers but by this impersonal compulsion to achieve profitability, which emanates from capitalism’s marketized social relations.

Financial liberalizations represented one strategy to negotiate this ugly reality. If a leftist government reversed these liberalizations, it would need to offer an alternative plan to marry popular legitimacy with the lucrative exploitation of its citizenry. For this reason, no matter who signs the executive orders, the state cannot simply “build a new society just as well as a new railway,” as Marx once remarked. It cannot legislate for a just world when injustice sustains it. This is the confounding strategic terrain that confronts us as we seek to wrestle with capitalism’s out-of-control financial logics.

“It is my view,” Theodor Adorno wrote, that “instead of always trying to cut off every individual head of the hydra, we should pay heed to the general principle at work.” Financialization — and, we might add, inequality, rentierism, and countless other maladies — are not corruptions of capitalist development, but debris thrown off by its whirlwind logic. The challenge is a familiar one, and as daunting as ever: dismantle capitalism root and branch — and replace it with planned forms of economic life based on principles of democracy, autonomy, and sustainability.