| Summary: | In this thesis, I argue that the financial authorities in the United Kingdom and Germany have experienced a waning in their ability to influence the quantity and allocation of (domestic) credit money, and its domestic and international value i.e. purchasing power, since WW2. This ability is called financial power. It is then argued that post-Keynesian (PK) endogenous money theory (EMT) can be combined with Marxian analysis in order to give insight into the changing financial power relationships between state, finance sector and real economy from 1945 to 2007. In particular, the ability to influence the provision of credit is identified as a primary (but not exclusive) source of social power for those that wield it. Inspired by the work of Susan Strange1, the thesis defends the position that this financial power is derived from the ability to influence the quantity of money issued (and its allocation) and its purchasing power, which are determined by the state and market in varying proportions depending on context (Strange 1988).2 Since virtually all of modern money exists in the form of credit-money held as bank deposits, it is further posited that the focus on the political economy of the banking system is appropriate. It is argued that the state in capitalist economies exercised certain capabilities to influence credit during the Bretton Woods period (1944-1973) but that, as the thesis title suggests, was subsequently eroded. The thesis establishes empirical support for this proposition, and then provides an explanation of the phenomenon using Marx’s political economy combined with the EMT. If the state has lost financial capability, this reduces its capacity to regulate the economy and increases any democratic deficit. The growth of financial markets in recent decades (so-called financialisation) has led many such as Palley to suggest that finance sector decision-makers increasingly determine economic outcomes (Palley 2007). It is also common to explain these monetary developments with reference to the actual nature and processes of financialisation itself. Inspired by the seminal work of Andrew Kliman, it is argued that this approach provides insufficient explanation of the root causes of financialisation (1999)3. In contrast, the thesis argues that systemic drivers of capitalism rooted in production, probably best 1 The late Susan Strange was Professor of International Political Economy at Warwick University. Her theories of financial power are espoused in her States and Markets text (Strange 1988). 2 The control of existing money is also a source of financial (social) power but is not the subject of the enquiry. 3 Andrew Kliman is Emeritus Professor of Economics at Pace University, New York City, United States. understood by Marx, provide plausible explanation of the causes of financialisation and the erosion of state financial capability. The thesis first introduces the key concepts and argument and then provides a review of monetary history, monetary theory (including the EMT), Marx’s political economy and an exploration of the role of the state. The objective was to arrive at a robust modern theory of money that could be synthesised with Marx. The study of financial power then examines two research questions, within the context of case studies (from WW2 to 2007) of the United Kingdom (UK) and German financial systems (Federal Republic of West Germany [FRWG] before 1990). The first explores whether or not the capabilities of the UK and German states to determine the level of domestic credit (i.e. offshore currency is ignored), inflation (thus domestic purchasing power) and exchange rate value (international purchasing power) has been diminished. The second question considers the systemic development with respect to the changing roles and interaction between the state, private banks and non-financial businesses in the context of the growth of financial markets. The question asks whether underlying production factors, in particular Marx’s law of value, provide a plausible explanation of the erosion of state financial capability. It is concluded that this is a valid conclusion supported by theory and evidence. The interpretation of Marx that is employed is called the Temporal Single System Interpretation (TSSI) of Marx, which illustrates Marx’s law of value across periods and identifies a tendency for profit rates to fall. In particular, the method used by Kliman in his study of US corporate profitability from the 1930s is used in the German and UK case studies (Kliman 2010). The results indicate that profitability has fallen across the period, especially if Marx’s method of adjusting for inflation is adopted. The thesis then claims that the tendency for the profit rate (measured in abstract labour terms) to fall was a key underlying (albeit indirect) driver of the systemic propensity towards financialisation phenomena. I claim in the thesis that the responses of market financial agents (supported by the state) to the falling profitability have also been responsible for the erosion of state capability to influence the level of credit and the purchasing power of money, since a key feature of the financialisation era manifests a stronger role for market actors at the expense of the UK/German state. Fundamentally, these conclusions support the Marxian-inspired notion of the state as an entity that primarily exists to represent the interests of capital and capital accumulation.
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