FINANCE CAPITAL : A STUDY OF THE

LATEST PHASE OF CAPITALIST

DEVELOPMENT
Edited with an introduction by Tom Bottomore
from translations by Morris Watnick and Sam
Gordon .
Routledge & Kegan Paul; London 1981, ix + 466
pp., 22 .50 hb.

Jerry Coakley
At the outset the person on the Clapham omnibus could be forgiven
for questioning the contemporary relevance of a volume of economic
analysis whose main outline was completed in the early 1900s by a
practising doctor at the age of 28 . An initial attitude of scepticism
could easily be transformed into one of complete dismissal if one were
to take at face value Lenin's characterisation of the same doctor as
`ex-"Marxist", and now a comrade-in-arms of Kautsky and one of the
chief exponents of bourgeois, reformist policy in the Independent
Social Democratic Party of Germany" . Yet when Hilferding's
project was published in German as Das Finanzkapital in 1910 its
impact across the political spectrum of his contemporaries was
striking. Not surprisingly political `allies' such as Kautsky and Bauer
hailed Das Finanzkapital as an additional volume of Capital. But the
work of political adversaries such as Bukharin's (1918) study of
imperialism also owes a large intellectual debt to Hilferding . And,
paradoxically, Lenin's (1917) classic, Imperialism, The Highest Stage
of Capitalism is Hilferding's biggest debtor . A resolution of this
paradox is suggested in the next section .
Despite its early impact Das Finanzkapital has been allowed to
gather dust on the shelves of English-speaking Marxists . How is this
explained? The finger must point at Lenin in two respects . First,
Lenin's (1917) study of imperialism stole much of Hilferding's
thunder as far as English-speaking Marxists were concerned . Second,
Lenin's concept of finance capital is essentially a derivative from
Hilferding's, which is a more complex concept . This is not
objectionable in itself but critics of finance capital have tended to
conflate both concepts . Excuses for such conflation are now removed
by the first official English-language translation of Finance Capital
which has been long overdue . It is at last possible to reassess the
contemporary relevance of Finance Capital at a time when there is
some evidence of a renewed interest in money and the degree of
control exercised by the financial system over the rest of the
economy . 2
The aim of this article is to make a contribution towards ensuring
that Finance Capital's insights extend beyond the pole of monetary
specialists . This is all the more urgent since, in places, Finance Capital
is a difficult and uneven book which requires some dedication to read
from cover to cover.


HILFERDING'S FINANCE CAPITAL 135

Hilferding's It is important to have a clear idea of the object and scope of

Project Hilferding's project . Certainly it can hardly be said to lack ambition .
Hilferding describes his project as an attempt : ` . . .to arrive at a
scientific understanding of the economic characteristcs (my emphasis -
JC) of the latest phase of capitalist development (p21) . In other
words, the object is to bring these characteristics within the theoretical
system of classical political economy which begins with William Petty
and finds its supreme expression in Marx .
The fact that Hilferding explicitly confines his project to an exami-
nation of the economic characteristics of modern capitalism may go
some way towards explaining why a political adversary such as Lenin
could later draw so heavily on Finance Capital . But what does
Hilferding have in mind when he refers to these `economic charac-
teristics'? Here again Hilferding is quite explicit in defining them as
processes of concentration which
(i) lead to the formation of cartels and trusts and thus the elimination
of free competition
(ii) bring bank and industrial capital into an even closer relationship .
It is in this relationship that capital can assume the form of
finance capital .
These two aspects of concentration and their interplay form recurring
themes throughout Finance Capital .
How does Hilferding's project proceed? Finance Capital represents
a sometimes uneasy amalgam of theoretical and conjunctural analysis .
His theoretical analysis draws heavily from Capital and distinguishes
three main fractions of capital, industrial, commercial and bank
capital . Sometimes the first two fractions are collectively referred to
as productive capital 3 . But Hilferding takes disaggregation of capital
still further to distinguish different sectors of industrial capital such as
consumer goods industries and even individual enterprises . In the
latter respect Finance Capital must be seen as one of the precursors of
the Marxist theory of the firm . Hilferding's conjunctural analysis is
less systematic . Its focus clearly is Austria and Germany but this does
not blind Hilferding to the institutional differences of other countries
as has been alleged at times . Nonetheless his discussion of other
countries' peculiarities within the confines of one volume tends some-
times to be cursory and, therefore, unsatisfactory .
This juxtaposition of theoretical and conjunctural analysis is a
feature of the whole of Finance Capital . Hilferding himself makes a
different distinction between the theoretical and policy components
of his project . Parts I-IV he describes as the theoretical component .
These parts deal respectively with money and credit, fictitious capital,
the restriction of free competition and crises and the trade cycle . In
conclusion the policy component (Part V) traces the influence of
developments examined in the theoretical component on economic
and commercial policy .
In the following sections I discuss respectively the basis of the
power of bank capital over industrial capital and aspects of the
dynamics of finance capital .
136 CAPITAL & CLASS
The power of In 1949 Sweezy was confidently able to assert that Hilferding had
bank capital mistaken a transitional phase of capitalism for a lasting one . At issue
was the permanence or otherwise of the power enjoyed by bank
capital at the turn of the century . By contrast in the early 1980s
Hilferding's analysis of bank capital might well appear prophetic .
Before explaining why this is so it is important to stress that Hilferding
employs the concept of bank capital in its broadest sense of the
German model of universal banks . As the term itself suggests, uni-
versal banks perform all the important banking functions . More
specifically they combine the functions of commercial and investment
banking which are institutionally separate in many countries . For
example, the UK clearing and merchant banks largely mirror this
separation of functions .
In Parts I and II ofFinance Capital Hilferding outlines the three
major functions of bank capital. For him these form the basis of the
power and influence of bank capital over industrial capital under
modern capitalism . These three functions are concerned with the
roles bank capital plays in relation to money, credit and fictitious or
equity capital respectively . Let us examine these three functions as
they relate to industrial capital .
(i) Money and Payments
It is not proposed here to enter into a detailed discussion of the
functions of money . Suffice it to note that Hilferding highlights some
major developments in the form of money under modern capitalism .
In particular trade between capitalists is transacted not in terms of
cash payments but rather through the use of credit money such as bills
of exchange or cheques . Bear in mind that a cheque is simply a bill of
exchange payable on demand and drawn on a banker . Since this
credit money arises in the circulation process Hilferding dubs it
circulation credit . In bourgeois literature this is roughly equivalent to
trade credit or the `creditors' and `debtors' items in a company's
balance sheet .

One may well ask how these payments between capitalists have
anything to do with bank capital . Since the bulk of such payments
take the form of credit money a system for setting out receipts and
payments is necessary. And it is bank capital which operates such a
payments or clearing system as one of its major functions under
modern capitalism . Hilferding stresses the role of the payments system
in facilitating trade on an even wider geographical basis . Initially
credit money took the form of commercial credits (or bills) but
Hilferding noted a tendency for bank credits (such as acceptances) to
replace commercial credits as the form of credit money .
One may still wonder as to how either the payments mechanism or
the supply of bank credits could enable bank capital to influence
industrial capital . Indeed Hilferding thought that this function con-
ferred no power on bank capital . Lenin (1917) on the other hand
stressed how the operation of the payments system enables banks to
ascertain the exact financial position of other capitalists . It should be


HILFERDING'S FINANCE CAPITAL 137

pointed out that generally only domestic banks operate the payments
system in each country and that the monitoring of an enterprise's
financial position could be complicated by multi-bank relationships .

(ii) Capital Credit

Bank capital's second main function is the supply of capital credit or

bank lending in modern parlance . In this function bank capital collects
as deposits the idle money of the capitalist and non-capitalist classes
and lends it as capital credit . It is called capital credit since it involves
a transfer of capital between capitalists . In contrast, credit money is
merely a payment in the exchange of equivalents . Hilferding notes
that historically the trend has been for capital credit to replace circu-
lation credit thus reinforcing the near monopoly of bank capital in the
spheres of money and credit . 5
Hilferding contrasts the longer term relationship between banks
and enterprises implied by capital credit as compared with the essen-
tially short term nature of circulation credit . However, both his
conception and that of Lenin of the power conferred on banks by the
supply of capital credit is couched in terms of the competition for
access to credit implied by a developed credit system . They both
overlook the conditionality of capital credit . That is, bank capital
does not give blank cheques when advancing capital credit but rather
advances it subject to detailed conditions inscribed as covenants in
loan agreements which may circumscribe the activities of the enter-
prise concerned .'

(iii) Fictitious Capital

One of the insights of Finance Capital is its distinction between money

and credit on the one hand and fictitious or equity capital on the
other . Hilferding in Part II focuses on the mobilisation of capital or
the raising of equity on the stock exchange by the modern joint stock
company or corporation . He contrasts the individually owned enter-
prise with the modern corporation . In the former the industrial
capitalist or entrepreneur owns the means of production . In the
corporation the raising of equity becomes the domain of money
capitalists including bankers who become the owners of the cor-
poration . But these money capitalists are not the owners of the
corporation's means of production (except in a residual sense upon
liquidation) but of claims to dividends, Hilferding describes these
share owners as money capitalists rather than industrialists since they
can in principle convert their shares into money capital on the stock
exchange at any time .
Where is the role of banks in this process? Unlike Lenin, Hilferding
stresses the role of the banks in the raising of new or additional
equity . In this investment banking function Hilferding envisages
bank capital earning a new source of revenue which he calls pro-
moter's profits . In the modern corporation profit of enterprise is no
longer appropriated by the industrialist but rather is divided into


138 CAPITAL & CLASS

dividends paid to shareholders and promoter's profits paid to banks .

Hilferding does not mention explicitly in this context the central role
of retained profits in the corporation though he does hint at it by
referring to a competitive struggle between banks and corporations
over the appropriation of promoter's profits . The role of banks is
further enhanced in modern capitalism by the demise of the stock
exchange and the appropriation of its functions by the banks .
The weakness of this discussion is that Hilferding seems to have
overlooked the role of other financial institutions in relation to ficti-
tious capital . Many people will have heard of the institutional domi-
nation of the stock exchange which in the UK refers to the 51 % share
of the equity market held by insurance companies, pension funds and
trusts .' In this context it is worth stressing Minns (1980) finding that
bank capital exercises day-to-day control over a considerable portion
of pension fund shareholdings .
To sum up the bank capital's major functions place it in a relatively
powerful position vis-a-vis industrial capital . Both Lenin and Hilferding
stress that this can lead to interlocking directorships and shareholding
between banks and industry . An important point which only Lenin
stresses is that the power of bank capital is predicated on the combi-
nation of all the functions . Thus for example in both the US and UK
investment banking functions tend not to be the demain of the major
commercial banks, a factor which appears to limit their power as
compared with German banks for example . Finally, it seems strange
that both Lenin and Hilferding consider the relationship between
bank and industrial capital only from the viewpoint of the latter's
potential dependence on banks . Neither took account of the fact that
bank capital ultimately depends on productive capital for its profits . 8

The Dynamics One of the merits of Finance Capital is that Hilferding does not
of Finance present just a static unchanging picture of the relationship between
Capital industrial and bank capital . He deciphers both secular and cyclical
aspects in the relationship and finally the change in the relationship of
the capitalist class to the state which finance capital implies .

Secular Tendencies towards Concentration

As mentioned in the first section of Hilferding's focus in Finance

Capital is processes of concentration . However these processes are
selective rather than general and concern only industrial and bank
capital . How are such processes defined? Here it is curious that in
Part III, where concentration is explicitly explored, Hilferding's
elaboration of cartels and trusts appears confined to industry which
contrasts sharply with Lenin's (1917) account of concentration within
banking and industry . Another curious aspect of Hilferding's dis-
cussion is the catch-all nature of the concept of concentration and the
absence of any discussion of centralisation . Instead Hilferding distin-
guishes concentration of ownership of property (shares) and concen-
tration of production and convincingly argues that both processes
need not be coterminous .


HILFERDING'S FINANCE CAPITAL 139

One of the recurring themes in Finance Capital is that develop-

ments within banking and industry are mutually reinforcing and it is
by this circuitous path that Hilferding sees concentration affecting
banking . An important result of the tendencies towards concentration
in just two sectors is that other sectors tend to get squeezed . Thus
Hilferding charts the decline of the commodity exchange (Ch .9) and
the demise of commerce and trade (Ch . 13) and the appropriation of
their roles mainly by bank capital . He gives a musical chairs picture of
the roles of fractions of capital since the beginning of capitalist
production . Under early capitalism, pre-capitalist fractions like
usurer's and merchant's capital played an important role in accumu-
lation . The next stage heralded in by the industrial revolution was one
in which industrial capital subordinated bank and money-dealing
capital to its needs . And the latest or modern stage is finance capital .
Judging from history it is not clear that the thesis that merchant's
capital has been squeezed out is sustainable .
The other problem with concentration is that Hilferding envisages
no effective limits to the process . Indeed he explicitly mentions
`tendencies towards the establishment of a general cartel and . . . a
central bank' (p .234) . This seems unsatisfactory to the extent that it
fails to take account of the competition within national economies
offered by foreign enterprises resulting from the tendency towards
the export of capital which Hilferding himself identifies .

The Business Cycle and Crises

In Part IV Hilferding looks at the relationship between industrial and
bank capital during the course of the business cycle and its fluctuations
including crises . His somewhat controversial view of crises is that
disproportional relations arise in the course of the business cycle from
disturbances in the price structure (deviation of market prices from
prices of production) and these disproportionalities can lead to crisis
if the rate of profit begins to fall .
Hilferding views the development of the credit system as obscuring
disproportionalities during the business cycle . But the development
of a banking system with cheques and a payments system has implied
an elimination of the monetary crises (shortages of cash) characteristic
of the nineteenth century . The concentration of banking implies a
redistribution of power in their favour vis-a-vis commerce, industry
and the stock exchange . This development combined with the absence
of monetary crises safeguards against banking and stock exchange
crises . Finally, the development of cartels exacerbates dispropor-
tionalities but cartels can divert the main burden of a crisis to the
non-cartelised industries .
Despite the centrality of fractions of capital in Parts I - IV of
Finance Capital it is somewhat ironic that Hilferding concludes in Part
V that the phase of finance capital essentially unifies all the fractions
of capital and opposition to it both from workers, salaried employees
and a part of the petty bourgeoisie . This unification means that capital


140 CAPITAL & CLASS

is enabled to exert coordinated political pressure on the state for

support of its policies of domestic protective (cartel) tarriffs and the
export of capital . This is a disappointing conclusion but it should not
be allowed to detract from the lucidity of the analysis of fractions in
capital in Parts I- IV . In the reviewer's opinion advances in our
understanding of capital must engage with the concept of capital at
various levels of disaggregation including the enterprise .

Why `Finance A common attitude on the left is the notion that money and finance
Capital' is do not matter . Apart from supporting a position taken by neoclassical
relevant today economists such an attitude serves only to mystify an aspect of modern
capitalism which has direct and indirect implications for working
people's struggles . Hopefully Finance Capital will serve to rectify this
by raising even if not always resolving a large number of contemporary
issues relating to money and finance . One need only point to a few
obvious ones to show how an understanding of them could comple-
ment and enhance ongoing work on struggles around restructuring
and the labour process .
The first issue is that banks are beginning to intervene more
consciously in the restructuring process in the current world recession .
Such intervention has taken the form of receiverships (Laker and
Stone-Platt), wage cuts (Pan Am) and various rationalisations of
production particularly within the UK engineering sector . The second
issue is the institutional domination of shareholdings . One implication
is that such institutional holdings make small to medium companies
more vulnerable to takeover by larger companies (through dawn
raids for example) which often involves subsequent rationalisation .
Another implication is that institutions' existing predominant market
share of equity in the UK allows them less room for manoeuvre in
terms of switching existing investments or making new investments .
This is having two consequences . The first is that since the abolition of
exchange controls in 1979 the institutions have been switching to
overseas rather than UK investments, thus continuing the process of
deindustrialisation . Secondly since less scope exists for switching
holdings in the UK the likely future trend is for the institutions to take
a more interventionist stance in favour of factory closures and re-
structuring within temporarily unprofitable enterprises .
Lastly, in urging people to read Finance Capital the reviewer is
painfully aware of its exhorbitant price in hardback . The publishers
must be urged to issue a paperback version without delay .

Notes

This is a revised version of a talk on Finance Capital given at the 1981 CSE Annual Conference . I
have benefitted from comments given there and from discussions in the Open University
Financial Studies Group .
1 Lenin (1920), p .13 .
2 See for example Minns (1980) for an original study of control over UK pension fund
shareholdings and Kotz (1978) and Herman (1981) for reappraisals of the question of


HILFERDING'S FINANCE CAPITAL 141

financial control over the US economy .

3 This appears to be done as a convenience and in recognition of the fact that they both earn
the average rate of profit rather than as a contribution to the debate on productive and
unproductive capital .
4 Hence the term clearing banks in the UK .
5 In the UK the Bank of England has since August 1981 been reviving the use of circulation
credit as part of its new monetary arrangements . The Bank's holdings of credit money
(mostly commercial bills) had increased to some 11 .2 billion by March 1982 .
6 For further discussion of this point see Coakley and Harris (1982A) .
7 New Statesman 16.4 1982 .
8 For an exposition of this viewpoint see Coakley and Harris (1982B).

References
BUKHARIN N . (1918) : Imperialism and World Economy, London : Merlin, 1972 .
COAKLEY J & L . HARRIS (1928A) : Evaluating the Financial System, Socialist Economic
Review No .2, forthcoming .
COAKLEY J & L . HARRIS (1928B) : Industry, the City and The Foreign Exchanges : Theory
and Evidence, British Review of Economic Issues, forthcoming .
HERMAN, E . S . (1981) : Corporate Control, Corporate Power, NewYork: Cambridge University
Press .
KOTZ, D . (1978) : Bank Control of Large Corporations in the United States, London : University
of California Press .
LENIN, V . I . (1917/1920) : Imperialism, The Highest Stage of Capitalism, Moscow : Progress .
MINNS, R . (1980) : Pension Funds and British Capitalism, London, Heinemann .
S WEEZY, P . (1949) : The Theory of Capitalist Development, New York : Monthly Review Press.

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