We know that the share of profits earned by the U.S. “financial” sector has increased steadily since World War II and particularly since the 1970s. Yet most of the scholarship exploring this phenomenon relies on a neo-classical theory of money and debt which separates the productive (or “real”) and financial sectors of the economy. It follows logically, then, that this spike in financial profits represents a variation upon—and at worse a “distortion” of—the economy’s (normal) productive functions.
That neo-classical vision of finance has long been challenged, though, by heterodox models that view finance as essential (rather than “exogenous”) to the productive process. This scholarship recognizes money as a form of debt; it argues that monetary issue (by sovereign governments and by banks) performs a credit function; and, critically, it sees all debt-issue as essential to the productive process.
What happens to our vision of “financialization” if, working from this heterodox view, we scrutinize money’s role as a debt instrument, the grounding of its value in the sovereignty of the currency-issuer (here, the United States government), and the policy changes that were essential to protecting the U.S. dollar’s value in the early 20th century. Here I argue that “financialization” has a longer history that involves the National Banking Act of 1865, the Federal Reserve Act of 1913, and the New Deal-era reforms that consolidated the Fed’s authority and ensured the banking system’s stability. Since the late 19th century, both commercial and banking interests turned increasingly to investments once considered “speculative.” Ideas about what counted as a “sound” asset for monetary issue changed radically in the late 19th and 20th centuries and this history challenges conventional renderings of the “financialization” of American capitalism.