In my next series of posts I would like to examine the role of banks and financial institutions in the United States. I hope to show that the since the beginning of proliferating finance capital (finalization) around 1980 the distinctions between the two institutions, which have always been somewhat blurry, have collapsed. I would also like to demonstrate that the merging and blurring of these two institutions is especially revealing of our current economic situation. I will begin with banks in this post and eventually situate these developments historically within the hegemonic rise of finance capital.
The intention of banks (“financial intermediaries” in economics parlance) is to channel funds from people who, if they had the knowledge required to grasp if an investment was worth risking losing their money on, would turn down loaning their money to the people (entrepreneurs/capitalists) who are leading such projects. Banks accept money (deposits) from people who are unwilling to support individual projects and lend money to people leading those projects. Depositors are promised compensation for allowing banks to manage and allocate their money (interest), and entrepreneurs/capitalists are expected to pay a certain percentage of the profits they make on their project back to the bank which loaned them the funds again, in the form of interest). The more money banks get, the more and likely to succeed projects they are able to fund - ensuring depositors can withdraw their money at their whim.
Another implication of the necessity of banks is that a certain volume of business ventures must be in progress to keep the economy growing, and, to fund these individual projects, a certain volume of money must be in the right place and the right time. Marx’s circuit of the accumulation of [money] capital is especially helpful in understanding the reason for this necessity:
M - C ...P... C’ - M’
In order to the grow the economy, accumulate capital, and remain capitalists, entrepreneurs/capitalists must possess a certain amount of money (M), lay that money out on the correct mixture of the two classes commodities needed for production (labor power and means of production, C), put that mixture through the production process (P), which generates a new set of commodities (C’) that may be sold for the original money laid out plus a profit (M’). This circuit, which is also very helpful in understanding how crises develop, begs some questions: where does the original money laid out come from? How can it possibly be at the right place and the right time to fund a specific project? The answer to both questions is: banks.
So, what qualities must banks possess to capably handle and make available extremely large stocks of money and capital assets? Economists would say that they must be able to bear risk, but I would like to clarify their role by using slightly different language. Banks must be able to “bear knowledge” - they must be capable of making decisions by knowing extensively about how their reserves of money are being routed between the two economic “genders:” borrowers and savers. Banks are able to garner and ensure the safety of deposits, and maintain their raison d'etre, by “spreading risk:” by accumulating, managing and bearing the vast body of knowledge required to correctly manage and distribute funds. Banks best at spreading risk and handling knowledge will fund the most profitable ventures and accumulate the most capital and additional knowledge.
Where individuals cannot procure the amount of information - or the amount of money - needed to know if a business investment is safe, banks take their place. I would like to demonstrate how important banks, and with financialization, financial institutions are in growing the economy by bearing knowledge and creating grids of trust in their institutional nexus. By establishing hegemonic trust in their knowledge-bearing ability they are allowed to function opaquely and circuitously accumulate money and knowledge. Opacity is the transference of economic knowledge from individuals to banks and financial institutions. Formerly a necessity to get people to invest in projects that they normally wouldn’t, increasing opacity becomes required to the functioning and growth of the economy. I will explore the implication of banking and financial institution opacity in the next post, but, as banks became more engaged in financial markets and strayed from the “real economy” opacity intensified with catastrophic circumstances.