HILFERDING’S THEORY OF BANKING IN THE LIGHT OF STEUART AND SMITH

In Finance Capital Hilferding suggests that, in the early stages of capitalist development, banks engage in short-term lending for “circulation” purposes, while concerning themselves with their liquidity. As capitalist development proceeds, banks lend longer-term for “investment” purposes, and their concern shifts to securing their solvency. Consequently, banks and industrial enterprises become amalgamated into “finance capital,” developing mutual “commitment” relations, and giving a bank-based character to the financial system. The core of Hilferding’s argument resembles Smith’s analysis of banking, but in important respects his argument is reminiscent of Steuart’s earlier and opposing analysis. Hilferding was able to integrate key elements of both approaches to banking by relying on Marx’s concept of loanable money capital, as well as on Marx’s claim that the average rate of interest is normally lower than the average rate of profit. However, Hilferding’s view that financial systems spontaneously become bank-based has not stood the test of time well. This failure is probably due to underestimating the importance of state intervention in shaping the financial system.