Wall Street — How It Works and for Whom
By Doug Henwood
Verso, 1997, 372 pp.
Review by Eva Cheng
The US-based progressive periodical Left Business Observer has for years been a valuable source of information and sharp analysis of the US economy and world economic issues from the left perspective. Its main producer, Doug Henwood, provides a deeper analysis of the US financial system and its relation to the economy in Wall Street.
Wall Street — the New York Stock Exchange — is the biggest and most influential stock market in the world. It is key to understanding the world financial system. But its mechanics and precise role in capitalism are often not well understood by the left: there is much jargon to decode and many myths to expose.
Henwood has done a good job in that, laying bare who makes the US financial system tick, and how, including a run-down on the wide range of financial instruments which can appear confusing for people outside the market.
He has also put right a number of "Main Street" misconceptions about the finance markets, including the much inflated importance of the stock markets. New stock market flotations, in fact, accounted for only 4% of the capital expenditure of US non-financial institutions in the last 96 years. In the last 17 years, that figure was minus 11%, due largely to massive leverage buy-outs and buy-backs.
Henwood correctly identifies the crucial role of the credit markets in capitalism, revealing how it is keeping its money system going, as well as pumping up consumption and, in turn, production. While Washington borrows vast sums to fund its budget deficit for all sorts of anti-social expenditures, its central bank also issues massive treasury debt papers as ammunition to maintain "monetary order". The bulk of US households, meanwhile, have continued to borrow significantly since the 1980s from a small layer of rich families.
Through such private sector debts, a redistribution of income in favour of the owning class is reinforced. The public debt, on the other hand, not only provides fresh resources for the state, but its debt papers form the critical part of any capital markets into which businesses and banks can tap for funding.
However, Henwood says next to nothing about how the banking system creates deposits by extending credit, and how the whole paper money system is based solely on the trust of the state. This leaves a gap in understanding the capitalist credit system and the power relations behind it.
Henwood's elaboration on the credit markets is comparatively light. He spends a great deal of effort tackling the so-called relationship between finance (capital structure, interest rates, availability of credits, etc.) and the real economy (productive investments), focusing mainly on the stock market.
One chapter, out of seven, is devoted primarily to neo-classical theories, which basically deny there is such a relationship. That's excessive attention to the "perfect market" daydreams of a fanciful static world.
His exposition of the monetarists has more real life relevance, especially regarding how their argument about the alleged neutrality of money was used to drive up interest rates in the name of breaking inflation and with it, labour militancy.
Despite criticism of John Maynard Keynes' roots in the conservative school of classical economics, Henwood clearly appreciates Keynes' "refreshing" and dynamic approach to the anatomy of capitalism, especially his recognition of its tendencies towards polarisation, imbalances and uncertainties. Keynes argued that interest rates have a big impact on real investments and that capitalists would find it worthwhile to make new investments only if the expected return exceeded prevailing interest rates.
Wall Street is woven together in a progressive framework, right through to its conclusion. Clear Marxist formulations seem to be carefully avoided, however. Endorsements of Karl Marx's analysis are scattered throughout the book, but the treatment is fragmented and spiced with reservations.
It is not clear what readership Henwood aims to address. The book is packaged in a language which will appeal more to Wall Street liberals and armchair lefties than to Main Street activists and practising Marxists.
Despite this, Wall Street is a useful resource for left activists to develop a sharper understanding of the capitalist economy.