The collapse and reconstruction of the US financial system: from JPMorgan Chase to BlackRock (II)

Original title: "The Fall and Rise of American Finance"

Original author: Scott M. Aquanno, Stephen Maher

Original translation:MicroMirror

Benjamin Braun conducted the most important study of what he called "asset management capitalism", which he believed had replaced neoliberal shareholder capitalism. However, while such an regime defines broad concentration and diversity, Braun believes that asset management companies have “no direct economic interests” in their portfolio companies. This is because, as “fee intermediaries”, they are deemed not to benefit directly from the performance of the companies they hold stakes: all returns are passed on to their clients, and they make money only from fees. Therefore, he believes that their primary interest is to maximize the management of assets and that they have little incentive to adopt costly interventions to improve the performance of portfolio companies. This distinguishes asset management capitalism from classical financial capital, where companies are mainly controlled by financiers.

However, despite the apparent lack of active control of asset managers, Braun also suggested (a bit vague) that the concentration of assets in these companies suppressed competition. Other researchers, such as Jan Fichtner, Eelke M. Heemskerk and Javier Garcia Bernardo, believe that although the Big Three are passive investors, they are not passive owners. Instead, they show that these companies have developed coordinated and centralized voting strategies in the funds they manage, allowing them to have substantial power over their portfolio companies. They believe that perhaps more importantly, these companies may exert "hidden power" behind the scenes. However, these scholars also believe that the concentration of financial power has led to the suppression of competition. As large asset managers have all competitors in a specific industry, these companies lose momentum to compete, causing prices to rise and weaken the vitality of capital.

In fact, competition among large asset managers forces them to intervene to maximize the competitiveness of their portfolio companies. Asset management companies compete with each other, as well as with all other financial institutions to attract savings. This means that they must provide the most attractive returns for their customers compared to other possible channels. Furthermore, as Braun recognizes, the fees charged by these companies are calculated as a percentage of the value of their holdings. If they are interested in maximizing their expenses, then they must also have the same interest in maximizing the value they hold. Given that they cannot trade, this directly motivates them to intervene in corporate governance. The interests of asset management companies and their clients are almost exactly the same.

The explicit implication of these works is that it is necessary to "save capitalism" by controlling finance and resuming competition. Like Braun, Fichtner and others believe that finance is parasitic, depleting industry rents, weakening competitiveness, increasing consumer prices without any contribution to production or national prosperity. Instead, new financial capital is fiercely competitive and strengthens discipline to maximize utilization and profits. Therefore, the primary political task is not to “restore competitiveness” by attacking finance, but rather the contrary: we must create spaces free from competitive pressures, where we can begin to form more cooperative and democratic forms of social, political and economic organization. Those who seek to create a more just and sustainable world must face capital itself, not just finance.

Rethinking Finance and Corporate

Financialization is rooted in the evolution of capitalism because it addresses tensions and confrontations. Since the contradictions of capitalism can never be completely resolved, it must be constantly changed to overcome the obstacles and crises they create – a process similar to Darwin’s adaptation. Class conflict is the most important, but it is by no means the only contradiction. Although the stock market crash in 1929 was surely a wave of working class struggle in the 1930s, it also reveals the profound instability of the bank-centered financial capital system. This prompted the state to separate banks from corporate governance, which in turn led to industrial companies taking on new financial functions. These companies then adapted to the challenges of increasingly complex, international and diversified management operations by reorganizing their company plans into internal financial markets.

In the 1970s, when working class radicalism squeezed corporate profits, financialization and globalization imposed class discipline, lowered labor costs, thus recovering profits and allowing accumulation to recover. The resulting financial hegemony system centers on banks and a new group of institutional investors holding a large number of stocks. These institutions are linked to a new market-based financial system that relies on complex financial transaction chains to generate credit. The collapse of this system was at the heart of the 2008 financial crisis, the worst crisis of capitalism since the 1930s. Subsequently, through a series of fierce and unprecedented interventions, the state reorganized the financial order. By providing a wide range of liquidity to stabilize the system, the state inadvertently promotes the integration of new financial capital centered on asset management companies.

By tracing the roots of contemporary financialization to the moment when classical financial capital ends, we emphasize the extent to which finance and industry are not opposed, but are fundamentally interconnected. Furthermore, we illustrate that from the early days of corporate capitalism, finance was crucial to the health, vitality and competitiveness of the industry. Finance is not a problem, but a solution to the systemic contradictions of capitalism. This description of how finance works for capitalist development is very different from many views, many of which believe that the rise of finance is a sign of recession, which only emerges in a relatively new "latest stage". Therefore, our analysis will reveal how wrong the prescriptions implicitly or explicitly contained in these works are intended to return to healthier, pre-financialized forms of capitalism. Several key challenges facing financialization theory can be extracted from our analysis:

1. Financialization is nothing new. Financialization is often considered a neoliberal phenomenon that originated in the 1980s. As Hilferding understood in the early twentieth century, the form of financialization existed from the early days of corporate capitalism. For him, the key feature of the company is that it allows the industry to "operate with monetary capital." Joint-stock companies replace personal ownership of industrial assets with non-personal ownership of circulating shares. Circulating shares are a monetary tool that can also control industrial enterprises. Control of production began to reorganize around the ownership of monetary capital, rather than directly owning fixed capital such as machines and factories. Therefore, during the classical financial capital era, banks had a concentrated pool of funds and the ability to generate credit, allowing them to play the most active role in forming and controlling companies.

After the bankruptcy of investment banks, a new form of corporate financialization emerged during the management period, which is usually regarded as the pinnacle of "pre-financialization" capitalism. In the decades after the war, industrial companies increasingly became financial institutions. Very high profits and relatively weak investors have given industry managers control over large amounts of retained earnings that they lend to financial markets to compete directly with banks. Meanwhile, these companies adapt to the challenges of internationalization, diversification and growing production scale by developing internal capital markets, where executives allocate monetary capital to portfolios they increasingly consider competitive financial assets. By the time investor power reappeared in the 1980s, this process was already going smoothly and now it has taken the form of centralized ownership of asset management companies.

2. Finance and industry are not separate. Control over capital is financial in nature: it depends on the ability to obtain sufficient amount of funds to generate profits. The economic power of capital comes first from the ability to invest directly, which determines the purpose of social production capacity. In a sense, all capitalists are financiers, facing the choice of investing in one thing or another and pursuing the most profitable opportunity. However, capital is divided into several parts: finance plays a specific role in the overall structure of accumulation, competing to revolve investments between various production sectors. Finance relies on industrial profits to earn interest, while industry cooperates with the financial system to raise investment and circulate capital. Therefore, even without integration into financial capital, finance and industry are interdependent.

Therefore, political strategies aimed at isolating finance as a reason for “bad” capitalism rather than “good” manufacturing will inevitably fail. On the one hand, capitalists instinctively understand attacks on finance as challenges to the entire capital. More fundamentally, this framework does not realize that to a large extent, the interests of finance and industry have become almost indistinguishable. It is impossible to separate the independent industrialists affected by financialization from financiers who benefit from financialization. While the company's internal restructuring transforms industrial managers into financiers, globalization makes finance more important to industrial production. Passive investment strategies that support the current form of financial capital have obvious long-term nature, which leads to a particularly close link between financiers and industrial companies.

3. Financialization does not mean the decline of capitalism. Financial growth and empowerment are not signs that capitalism is collapsing. In fact, capitalists would be very surprised to hear the news if financialization over the past few decades has been harmful to the system. Financialization is crucial to address the crisis of the 1970s, restore industrial profitability, and open up the vast low-wage labor force around the world to exploitation. Today, profits and management pay are ridiculously high. Meanwhile, investors get rich through rising stock prices and dividend payments. All of this comes at the expense of corporate investment or R&D expenditures, both of which remain at a high level. Finance continues to create conditions for American multinational corporations to remain the most dynamic and competitive in the world.

In fact, financial problems are capitalism issues. Financialization enhances the competitive discipline of industrial enterprises and provides managers with tools to pursue new profit maximization strategies. Just as centralized ownership of stocks in the 19th century allowed investment banks to organize companies, today it allowed financial institutions to play an active and direct role in controlling industrial capital and reorganizing companies. Meanwhile, the competitive redistribution of capital in the financial sector directs savings to the most productive and profitable channels. In this way, financialization promotes the formation of a dynamic, competitive and flexible global production and investment network. This exacerbates exploitation and labor discipline, which is hardly a problem for capital, but marks the success of these strategies.

4. Financialization is not a monopoly. From the perspective of restructuring around monetary capital allocation, the financialization of non-financial companies shows the serious flaw in treating large companies as "monopoly". The development of capitalism is often described as starting from the "competitive" stage and later replaced by the "monopoly" stage. This assumes the quantitative theory of competition, according to which competitiveness is a function of the number of enterprises in any particular sector. According to this view, as the number of companies decreases, concentration and concentration increases, competition will succumb to monopoly because large companies set prices and obtain monopoly profits. However, financialization means that companies are not necessarily linked to specific industries: they allocate monetary capital in different businesses, different facilities and into completely new industries in the most profitable way.

Capitalism has created a trend of centralization, centralization and financialization. Competitiveness does not come from the number of companies in the market, but from the liquidity of capital: the process of capital inflows that produce the highest returns and outflows from areas that produce lower returns. The organizations that promote this movement most effectively are the most competitive. As long as finance makes capital more liquid, reduces transaction costs, and promotes the circulation of capital between sectors and geographic space, it will make capital more competitive, rather than less competitive. The increase in capital liquidity in turn puts huge competitive pressure on efficiency and profit maximization because workers compete for jobs, state compete for investments, subcontractors compete for contracts, companies compete for development and control technology, intellectual property rights and organizational forms.

5. The state has never “retreated.” Measures formulated to deal with COVID-19 are seen as heralding the “return of the country.” This is assuming that the state has retreated during the laissez-faire neoliberal period. On the contrary, capitalism is becoming increasingly complex, prompting the increasingly deep integration of state power into the economy. This is not achieved through simple linear accumulation of functions. On the contrary, the state form emerges through a series of breakthroughs, not only the scope of its economic function, but also its qualitative form are deeply reshaped, and the relationship between the state and the economy is also redefined. During the management period, the hegemony of industrial enterprises was supported by the military-industrial complex and social projects that promoted effective demand. Neoliberal states focus their power on the Federal Reserve and the Treasury Department, two sectors that are more closely linked to the financial industry.

The differences between forms of these countries are not only a matter of degree, but also a matter of type. Neoliberal states integrate capital accumulation more directly and organically, but this does not only represent the "more" that the New Deal states do. Instead, it is a combination of institutions of different natures that emerge in the course of class struggle, reflecting and supporting financial hegemony. The integration of risk status and financial system after 2008 is more in-depth. This country fundamentally internalized the basic foundations of the market financial system formed during the neoliberal period and further integrated large banks with state power. Most importantly, it is defined as the core practice of de-risk, namely, deploying state power to absorb or transfer financial risks. The asset price inflation supported by this is crucial to the development of new financial capital.

6. Financial capital is different from neoliberalism. As Adolf Reed said, neoliberalism is "capitalism without the opposition of the working class", and that is certainly true. Others are equally right to see neoliberalism as synonymous with state policy to promote markets. The problem is not that these observations are wrong, but that they are too general as definitions. Both are compatible with more than one system of capital accumulation: while capitalist states always reproduce market dependence in some form, the failure of the working class in capital and the hands of the state certainly does not have any neoliberal characteristics. Therefore, it is difficult to determine how neoliberalism ends besides the shift in class power toward a balanced equilibrium, which (allegedly) will lead to the formation of post-war "Keynesian" capitalism.

Things will become clearer if we define the stages of capitalist development in different forms of corporate governance, state power and class hegemony. Although the failure of the working class has hardly reversed, we can still observe that neoliberal shareholder capitalism has been replaced by new financial capital dominated by asset management companies. Based on a series of new economic practices, the consolidation of risk states also indicates that a new era is coming. However, the future of this new financial capital is uncertain. Indeed, despite the call from financial capitalists and policy makers, the ongoing force supporting austerity has hindered the formulation of a coherent new policy paradigm. Whether this new class of hegemony can be consolidated, especially in the case of stock market fluctuations and interest rates rising, remains to be seen.

These arguments have developed by tracing the rise and fall of American finance from the 1880s to the present. The next chapter will focus on how early developments of the corporate and banking systems lead to the consolidation of classic forms of financial capital centered on investment banks and conclude at the end of the 1929 stock market crash. Chapter 3 reviews the subsequent management period when industrial enterprises were in a hegemonic position. It shows how industrial enterprises gradually evolved into financial institutions during this period, laying a key foundation for the neoliberal period. Chapter 4 explores how the resolution of the crisis in the 1970s led to the return of financial hegemony in the neoliberal era. As it shows, despite the new competitive challenges the formation of shadow banking systems has brought to banks, they are still at the center of this decentralized form of financial power.

The last two chapters turn to studying the new financial capital that emerged in the ashes of the 2008 crisis, showing how the new risk state formed by this crisis is increasingly integrated with the rising shadow banking system, with three major asset management companies being the main players. Chapter 5 illustrates how state efforts to respond to the crisis lead to dramatic “nationalization” of the financial system, supporting the formation of a new form of financial capital, in which a small group of asset management companies exert increasingly direct control over nearly all US listed companies. Chapter 6 examines the maturity of this system and explores the new challenges and increasingly serious contradictions it faces in the COVID-19 crisis, rising inflation and intensified market volatility. Finally, it reflects on how emerging states and interlocking forms of financial power affect urgent projects on financial democratization.

2: Classical financial capital and modern country

Finance is crucial to the emergence of larger and more competitive forms of capitalist organizations in the United States in the late 19th and early 20th centuries. In this chapter, we will show how banks can become the dominant force in the U.S. economy, not just simply providing funds and passively charging interest. Banks have been elevated to the central role of coordinating investment flows and controlling companies, which is equivalent to the integration of financial capital - financial capital and industrial capital. At the turn of the 20th century, the financial capitalist class represented by investment bankers such as JPMorgan Chase became the most powerful class in the capitalist economy.

By tracking the emergence of financial capital, we show that finance is far from a feature of the so-called "late" stage of capitalism, and is actually the core of the early development and vitality of American capitalism. Finance cannot be considered parasitic, either. The accumulation of large amounts of monetary capital in banks, and their ability to generate credit, enables banks to organize large-scale accumulations by combining isolated businesses into large industrial enterprises. But these banks' companies are not "monopolized enterprises." On the contrary, the emergence of corporate forms and the development of the financial system have reduced transaction costs, increased capital liquidity, and exacerbated competitive pressure. As a result, the highly regionalized U.S. economy is integrated into a national economy dominated by investment banks and its own and controlled companies.

The generation of financial capital involves the integration of financial capital and industrial capital, but it also depends on the close connection between capital and the country. At the heart of the U.S. economic transformation is a series of increasingly large-scale state-led projects, from building railways—one of the most ambitious initiatives ever made by capitalist countries—to the more difficult task of launching wars globally for the first time. In addition, with the expansion of capitalism, its crisis tendency is also expanding, calling for new forms of state intervention, which ultimately form permanent economic functions. As the ever-expanding national economic machinery becomes increasingly closely integrated with the circulation and accumulation of capital, state power becomes more important in building the relationship between financial and industrial capital.

In the following, we examine how the emergence of modern banking systems and industrial companies reached the formation of financial capital in the first decades of the twentieth century based on the unfinished analysis by Karl Marx in the third volume of Capital and Rudolf Shivdin’s Financial Capital. Although Marx mainly analyzed the situation in the UK, while Hifardin focused on Germany, their analysis also applies widely to the United States. In particular, the case in the United States usually follows the process of monetary capital being organized independently in the banking system, which then becomes the basis for controlling industrial capital and organizing production on a large scale by forming companies. As we will see, the resulting bank-centric network is undoubtedly a network of financial capital.

Financial capital and industrial capital

The emergence of modern banking systems and corporations has changed the capitalist mode of production and created a new interconnection between financial and industrial capital. As Marx observed, the development of capitalism led to an increasingly complex division of labor in the bourgeoisie, and therefore the "technical operations" related to finance began to "execute the entire bourgeoisie as much as possible by specific agents or capitalists, as their exclusive functions, which should be concentrated in their hands". As “a part of the industrial capital that exists in the flow process is separated in the form of monetary capital and becomes autonomous”, financial capital becomes a distinct part of capital, distinguishing it from industrial capital even if it is still organically connected to industrial capital.

Therefore, the growth of capitalism depends on the formation of an increasingly complex and specialized financial system that brings together monetary capital, generates credit, and allocates investment. Although industrial capital and financial capital can never be "separated", they are two different forms of capital: the former belongs to the field of production and the latter belongs to the field of circulation. Industrial capital is defined as a cycle in which capitalists start from money and then purchase labor and means of production. Through " productive consumption ", these commodities are moved during the labor process and the commodities are produced. The commodity was then sold, achieving a greater monetary value than the capitalist started. Marx summarized this process with the "general formula" MCM', starting and ending with currency and ending with more currencies.

However, where did this original Mcome come from? How did industrial capitalists own it? How do the goods produced by workers find the final market that completes the industrial capital cycle? All of these issues belong to the field of circulation, and they are largely related to the role of the financial system in promoting the "vein" flow of capital through capitalist society. Like industrial capitalists, financial capitalists initiate capital through a cycle that starts with money and ends with a large amount of money. But financial capitalists do not enter industrial production directly. Instead, they advance a sum of money (in the form of a loan) in order to get a return (interest). Therefore, for financial capitalists, currency "automatically" generates more currency. Marx summarized this process using the formula MM'.

Marx viewed this division from the perspective of the relationship between active industrial capitalists and negative financial capitalists. When the "operating" industrial capitalists actively organize and manage production, financial capital does not make any substantial contribution to the production process, but only pays the industrialist a sum of money to wait for its returns and interest. Therefore, financial capitalists are the owners of interest-bearing capital and make profits simply by putting money into circulation. As Marx said, interest is "a specific name, a special title, used by the capitalist who actually operates must pay part of the profits to the capital owner, rather than embezzle it himself." The financier is independent of production and "is merely the owner of capital", relying on legal ownership as the basis for claiming a part of the surplus.

However, through this process, banks occupy a key position in the accumulation structure, and assume a series of specialized functions in "interest-owned capital management": mediating financial transactions, generating credit and allocating investments between industrial capital. As Marx explained, this means that a large amount of monetary capital used for loans is concentrated in the hands of banks, so the confrontation with the industrial and commercial capitalists is the banker represented by all monetary lenders, not the personal lenders. They become the general manager of monetary capital.

The banking system thus became the central nervous system of American capitalism. It converts money into monetary capital by concentrating a small amount of idle funds into a huge pool of funds it controls, which can be loaned to "normal working capitalists" in the form of industrial credit or invested in speculative activities. But banks don’t just gather money; they also create money. One way they do this is to act as a central clearinghouse for debts and claims—revoking common debts, organizing final payments and executing transactions. When solving complex transactions between capitalists without using “real” currencies, banks create credit currency, which greatly reduces transaction costs and promotes capital flow.

In fact, credit funds come from every bank deposit: the deposited funds are both a number in the savings account and can be withdrawn or disposed of at any time by check, and also as part of the bank reserves supporting other loans. However, in the national banking system that emerged during the Civil War, such customer deposits accounted for only a small part of actual credit. What is more important for the U.S. monetary system is the role that banks play in expanding credit by creating deposits for clients (including merchants, and increasingly industrialists), by issuing loans and purchasing (or "discounts") so-called bills of exchange.

A bill of exchange is a written commitment to future payments. As long as they offset each other, these notes act as currency, as payments can be made without the need for actual currency to change hands. But in addition to this, banks also purchased these notes, providing instant cash to lenders by creating credit in the form of deposits. Then, when the bill (or debt) expires, the bank will receive payment. In this way, banks convert the bill into currency before it expires. The bank purchased the notes at a “discount” or slightly below the par value, meaning the seller of the notes accepted a little less than the full value of the debt owed, but was able to get cash immediately. Meanwhile, the bank profits from the difference between the discount rate paid for the notes and its full value after repayment. Through these practices, the credit system has been "extended, promoted and elaborated".

As the credit system develops, the banking industry mainly does not collect deposits and lends them to others, but rather the contrary: banks generate credit by creating deposits for customers (i.e. numbers in bank accounts). As Marx recognized, deposits are dominated by depositors and are therefore “in a changing state” as some withdraw their account balances while others increase their account balances. However, “the overall average will only fluctuate slightly during normal business.” Given that deposit supply is always limited, it is never possible for banks to reach the scale required for competition by issuing loans they actually own. This forces them to expand credit while holding only part of their deposits as reserves.

It is the centralization of credit creation, rather than the accumulation of fund pools, that is the basis of the US banking system. Although Marx spent most of his time discussing the issue of bank capital concentration in "Das Kapital: Volume III", he explicitly classified the discussion of "the relationship between credit and interest-bearing capital itself" into those chapters that, while often just sketches, began to explore what he understood as "the majority of bank capital", namely bills and stocks. These chapters are intended to study “As interest-bearing capital and the credit system develop, all capital seems to be duplicated, at some point even tripled.” As he saw, “except reserve funds, deposits will never exceed the credit of banks and will never exist in the form of actual deposits.” Later, he pointed out that even these reserve funds “actually boil down to” the credit generation capacity of central banks, which we will discuss below.

The centralization of bank credit creation and monetary transactions has greatly alleviated the circulation of capital and made loans have a universal social nature. Since money is an independent form of value, it is not only a universal equivalent to all commodities, but also a universal equivalent to all specific capital circuits. The transferability of monetary capital into any specific form of capital means that in the money market, "all specific forms of capital generated by their investments in a particular field of production or circulation are erased." All capitalists are "gathered together" as borrowers, and the difference is not in what specific purpose the currency they prepaid will be used for, but in their ability to repay the loan. Therefore, Marx observed that “capital does emerge as a common capital of the class under pressure of demand and supply.” Money capital has become “a centralized, organized group controlled by bankers who represent social capital.”

The concentration of monetary capital in the banking system leads to the separation of capital ownership and control: although control of monetary capital prepaid by banks is transferred to borrowers, ownership is not transferred. The loaned funds are still the property of the lender (bank). Therefore, the work of organizing and managing production can be redundant for capital owners who can passively make profits by virtue of property rights. This separation has been greatly expanded by the company because professional managers who do not necessarily own any capital of the company are hired by their owners, who now supervise production in the form of affiliated shareholders. As a result, the company greatly strengthened the “trend to separate this function of management work increasingly from owning capital, whether it is own or borrowed.”

In this way, the development of the company has led to the transformation of "actually operating capitalists into managers and managers of just other people's capital, and capital owners into mere owners, merely monetary capitalists." The transformation of industrial capitalists into "operating capitalists" marks the loss of capital ownership by the industrialist because he now "just" manages the capital of investors, whether it is bank loans or shareholder advances. At the same time, shareholders and financiers have become "pure owners" and rely on pure property rights rather than direct control of production conditions to collect a portion of the surplus. Therefore, the company has influenced the transition from personal possession to non-personal possession: now, ownership and control of means of production are not directly possessing fixed assets (factories, machines, etc.), but are established through credit relationships and holding tradable shares.

The company not only places the monetary capital of the company's shareholders under the control of non-owner managers, but also allows them to capitalize on the total monetary savings of the society as a whole by raising funds in the financial markets. The greater rational planning and risk management capabilities of companies make them particularly worthy of credit, which fuels the flames of industrial expansion and concentration. The “private capital” of individual owners has now given way to the “social capital” of bankers and company managers. This "capital socialization" gives "the absolute control of the capital and property of others, or those who can impersonate capitalists... and through this control of the labor of others." Therefore, the separation of ownership and control makes the concentration of capital far exceed the scope that individual capitalists can directly own.

The bank's monetary reserves and the improvement of the credit system are necessary conditions for the company's development. The capital owned by any particular capitalist is now “just the foundation of the credit superstructure”, which is merged with social capital through the corporate and banking systems, thus giving them control over the social labor force. Equity constitutes a credit relationship that empowers the owner to obtain a share of the company's profits paid in the form of dividends in the future. Banks not only make profits by underwriting stocks, but also become major shareholders of large companies, playing the most active role in forming large companies.

Ownership of means of production is now traded on the stock exchange. The stock market creates opportunities for further concentration and centralization through "the greatest deprivation" that "now extends from direct producers to small and medium-sized capitalists themselves." Although the origin of capitalism lies in the deprivation of workers' means of production,

... Within the capitalist system itself, this deprivation takes the form of opposition in which a few people possess social property, and credit makes these few people increasingly characterized as simple adventurers. Since ownership now exists in the form of shares, its flow and transfer are only the result of trading on the stock exchange, in which small fish are eaten by sharks and sheep are eaten by wolves.

The difference between a "wolf" and a "sheep" or a "shark" and a "fish" is the ability to control the power of the currency. This allows banks to gain substantial control over large companies and concentrate small companies on large companies through acquisitions and mergers. Since banks are the major shareholders of most large companies and can exercise control over a company with a shareholding ratio of much less than 100% or even less than 50%, the stock market allows them to further expand their control over the capital of others (i.e., small shareholders). By the end of the 19th century, banks had become the "wolf of Wall Street" and small capitalists were sheep, destined to be expropriated and merged.

Therefore, with the development of corporate capitalism, securities (i.e. stocks and bonds) have become an important part of bank capital. Marx called this form of monetary capital "virtual capital" because they have no direct connection with the production of surplus value. Unlike industrial loans, which incorporate circuits of industrial capital and repaid over time from surpluses generated in production, stocks are legal requirements for profits without clear purpose.在首次发行股票后，用于后续股票购买的资金不会直接流入生产，而是流向股票的卖家。由于此类证券本身作为商品进行交换，其价值的涨跌与基础公司资本无关。因此，两个不同的电路共存：（1）由公司管理的工业资本，以及（2）在二级市场上买卖的证券。对马克思来说，后者是“纯粹的幻觉”。