Historical Materialism 21.

2 (2013) 149168

brill.com/hima

Derivatives, Money, Finance and Imperialism: A Response to Bryan and Rafferty

Tony Norfield

School of Oriental and African Studies, University of London tonynorfield@gmail.com

Abstract This paper contributes to the debate on the role of financial derivatives for capitalism. It responds to Bryan and Raffertys defence of their analysis and their critique of my own. The paper argues that their analysis confuses what a financial derivative does, and mixes together different kinds of derivative and non-derivative that play very different roles. After detailing these points, the paper discusses the relationship between gold, money and derivatives, rejecting their notion that derivatives are some kind of new commodity money. An important theme absent from Bryan and Raffertys analysis is the relationship of financial trading and derivatives markets to parasitism in the imperialist world economy. To illustrate this, the paper notes advantages enjoyed by the major financial powers the US and the UK that are the main centres for the origination of derivatives and for derivatives trading. Keywords derivatives, Marxist theory of money, gold, fiat currency, exchange rates, imperialism

My article Derivatives and Capitalist Markets explained how the growth of derivatives trading should be seen in the context of the capitalist crisis. The argument was that the boom in derivatives was a sign of the decrepitude of modern capitalism and I noted that, for the US and the UK especially, the financial sector was a key dimension of their economic power as imperialist countries.1 Here, I will highlight some important issues on derivatives and for financial dealing in general that illustrate the operations of the imperialist world market. These issues will also bring out the differences between my analysis of derivatives and that of Bryan and Rafferty. The response of these authors to my article2 deserves a reply in two respects. Firstly, and most importantly, one always hopes that debate will
1.Norfield 2012a, p. 129. 2.Bryan and Rafferty 2012.
Koninklijke Brill NV, Leiden, 2013 DOI: 10.1163/1569206X-12341296

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lead to a clarification of positions and a development of understanding, if not necessarily to agreement. Secondly, while Bryan and Rafferty appear to have included me in differences they have with other authors on this topic with little or no justification in some cases they do also raise specific objections to my analysis that need to be answered. In footnote 11 of my original article, my comment on their major book on the derivatives market was that by failing to place derivatives in the context of capital accumulation and crisis, they present a misleading idea of the role that derivatives play in the system.3 They have added to this misleading impression in their reply to me. Definitions, derivatives and money Bryan and Raffertys reply begins with a discussion of definitions of money and they claim that I, among others, reject their thesis largely on definitional rather than analytical grounds.4 I do not speak for other critics of Bryan and Rafferty, but my objections are based on an analysis of the role of derivatives, not on whether derivatives correspond to a tight, unchanging definition of money. They sum up their core position as follows:
Our proposition is not that derivatives are money, as if they have jumped inside some pre-given definition of money. It is that derivatives have moneyness and the conception of money needs to be loosened to take account of how financial markets are working. What do we mean by moneyness? Essentially, we mean liquidity the ability to be converted to something else with minimum loss of value or time. Cash is therefore the core measure of liquidity for goods and services, but asset markets may be different. Because derivatives involve an exposure to the performance of an underlying asset, but are unencumbered by the necessity of legal or physical ownership of the underlying asset, they are innately readily transferrable; that is, highly liquid. So liquid, indeed, that they embody moneylike attributes.5

I agree with the need to analyse how financial markets are working, rather than to get sidelined into a debate over definitions. But the problem is that their analysis of how derivatives work in relation to money is wrong quite apart from the instances where they do actually say that derivatives are money, albeit in phrases such as distinctly global money or distinctively capitalist money (as cited in my article). In the paragraph just cited, they compare the liquidity of cash to the liquidity of derivatives contracts to argue for one
3.Bryan and Rafferty 2006b. 4.Bryan and Rafferty 2012, p. 98. 5.Bryan and Rafferty 2012, p. 99.

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money-like attribute of derivatives. The time-limited character of derivatives contracts means that this is stretching the point somewhat, but I will examine that issue further below. Later, they argue that
derivatives on exchange rates and interest rates offer some inter-temporal guarantees of a unit of measure they are a store of value in a world without a stable unit of measure. They may only store value for a short time perhaps three months; or only for hundredths of a second in high-frequency electronic trades. They may also have their own vulnerabilities to crisis. But, however brief and fragile, they provide in aggregate an important, liquid store of value. That sounds like a money role.6

The previous two citations illustrate the two conceptions about financial derivatives that pervade their analysis: firstly, that derivatives involve an exposure to the performance of an underlying asset and secondly that they provide a liquid store of value. I have no objection to the first interpretation that is more or less what derivatives do. However, their analysis extends this aspect of derivatives, through the link with the term liquid, to the view that derivatives somehow store value. It is this, in particular, that I consider to be wrong, but it also appears to underpin their conception that financial derivatives are a form of money, as I discuss below. To begin with, however, I will deal with what Bryan and Rafferty call my money-theory howler. In the article, I wrote that there is no derivativecurrency unit of account, measured in pages of contract-terms, or with denominations determined by how far it is from the underlying asset-value. I agree that this statement is wrong, and it does, as they say, conflate money with money of account.7 This was a mistaken phrasing; a correct one to better express what I meant would have been that there is no derivative-currency money, with units of account measured in pages of contract-terms, etc. They declare in their reply that, [o]f course, there is no derivative currency. Good, I am glad we agree. But I must say that I did not get that impression when reading their work on derivatives! That was why I made the comment in my article. For example, part of a summary of key points in their book on derivatives says:
2. In the context of floating exchange rates, financial derivatives now anchor the global financial system in a role comparable to that played by gold when exchange rates floated freely before the First World War.

6.Bryan and Rafferty 2012, p. 100. 7.Bryan and Rafferty 2012, p. 104.

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T. Norfield / Historical Materialism 21.2 (2013) 149168 3. In performing this anchoring role, derivatives take on the characteristics of global money. They are money that transcends the conventional national system of money. 4. The foundation for derivatives-as-money is not state guarantees, but a commodity basis. The last hundred years has not seen a shift away from a commodity basis to money, but the re-discovery of a new commodity basis.8

That was one place where I found the derivative currency concept, but there are others. If all they are really saying is that derivatives have been a growing part of the mechanism for comparing, trading and hedging financial market currency values, interest rates, equity prices, etc., then that is not controversial. However, they seem to be going much further than this with their third, related notion of how derivatives commensurate different forms of capital:
... Norfield misses the key issue of derivatives and the analytical challenge they entail. By framing an exposure to the performance of an underlying asset as itself tradable, things which have not hitherto been priced relative to each other are now presented in a form where critical dimensions of their relative values can be mutually recognised. The consequence is that derivatives represent a process of continual across-capital commensuration in the active process of accumulation, while Norfield can only conceive of commensuration as a static process, in exchange: in a sense after accumulation.9

This is heady stuff, and it left me feeling that even the particles whizzing around CERNs Large Hadron Collider would appear to be pretty static compared to the continual across-capital commensuration in the active process of accumulation that derivatives seem to perform. However, the fact that in my original article I located the explosion of derivatives trading in the process of capital accumulation and crisis should give cause to question the validity of their argument that I had a static approach to these issues. In the following sections I will show that Bryan and Raffertys analysis confuses what is really going on with derivatives. Although in many places they make perfectly valid and useful points on how derivatives are used and the roles they play, they end up casting derivatives as the actors in the process, rather than seeing them far more simply, and far more accurately, as forms of financial transaction that have developed in response to volatility in capitalist markets and problems in capital accumulation more generally.

8.These are summary notes at the start of Section 2 of the book. See Bryan and Rafferty 2006b, p. 103. 9.Bryan and Rafferty 2012, pp. 1045.

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Special FX derivatives Much of Bryan and Raffertys analysis of derivatives is founded on their observation of the foreign exchange forward market, on a misunderstanding of this market and on an attempt to generalise this view to other financial transactions using derivatives. In this section I will explain why foreign exchange forwards are a special kind of derivative, one with characteristics clearly different from interest rate swaps, futures and options. In their book, and in other articles, they note how the unpredictable nature of foreign exchange rates (and interest rates) following the breakdown of the Bretton Woods system made capitalist calculations of value more troublesome.10 In the wake of this, derivatives rose to prominence by acting as a means of providing a basis for valuing assets in different countries. More than this, they claim derivatives provide a valuation method that is independent of national currencies and that they were a means of overcoming the limitations of national fiat money. For example:
Derivatives provide what nation-state fiat money could not provide on a global scale: they secure some degree of guarantee on the relative values of different monetary units.11

and
Derivatives claim to a general role as money comes not so much from their enormous daily usage, but from the role they play in commensurating a wide range of financial (and physical) assets, including diverse forms of money. They are, in this sense, behind the scenes money, ensuring that different forms of asset (and money) are commensurated not by state decree (e.g. fixed exchange rates) but by competitive force.12

This sounds intriguing, but it is wrong. The forward foreign exchange market does not provide a separate means of valuing assets compared to national currencies. It is based upon a calculated link between the current exchange rate
10. I do not underestimate the importance of this episode as a benchmark event for new forms of financial turmoil and for the growth of financial derivatives in subsequent years, but it would of course be a mistake to presume that before 1971 capitalist calculation was a simple, risk-free process. There had already been currency realignments within the Bretton Woods system among the major capitalist powers from the late 1940s and, with growing frequency, into the late 1960s. The growth of the eurodollar market and the eurobond market, developments that accentuated the process by which international capital movements more easily overcame national barriers, are also dated from the late 1950s. 11. Bryan and Rafferty 2006a, p. 87. 12. Bryan and Rafferty 2007, p. 153.

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of one national money for another and the prevailing level of money-market interest rates in each of the two currencies. Once the latter are given, so is the forward exchange rate. A company, or bank, trading in foreign exchange might deal in the forward market, so that one could argue that it is the forward rate that drives the spot rate, but there is still a determined link between spot and forward exchange rates that is given by the interest rate differential between the two currencies. For a simple example, consider that currency A is worth 100 units of currency B in the spot market, and the 1-year money market interest rate is 2% in country A and 1% in country B. In that case, the 1-year forward exchange rate is 99.13 In other words, given these interest rates (where As rate is higher than Bs), in one years time one unit of currency A will only buy 99 units of currency B, representing a 1% gap based on the interest differential. If the 1-year forward exchange rate were different, for example, higher at 99.5, then this would lead to a market arbitrage deal. In this case, it would pay a dealer to sell 100 B at the spot rate and buy one unit of A, then invest the A at 2%, and at the end of the year get 1.02 units of A, including interest. The dealer would do a forward deal at the same time as the spot deal, agreeing to sell the 1.02 units of A and to buy B back in one years time at the quoted forward rate of 99.5. This would give the dealer 1.02 99.5 = 101.49 units of B, so that the return on B is close to 1.5%, not the 1% interest rate on B in the market. This kind of trade would end up raising the spot exchange rate value of currency A compared to the forward exchange rate, and so restore the gap between the two to the 1% interest rate differential. Forward FX deals do provide a fixed future exchange rate for the parties involved, but one that is tied to the current spot rate of exchange of the two currencies and the interest rate differential on them. The forward exchange rate derivative does not overcome national currencies and interest rates, nor does it stand as a separate entity. To believe that it does is like believing that a pantomime horse is really a horse, not a costume with two individuals inside. The forward FX deal in fact generates the same values as doing the transaction now, at todays spot exchange rate, and then depositing the funds (e.g. to deposit US dollars that have just been bought with euros) at the relevant interest rate until they are required (e.g. to pay a future invoice in US dollars). That the forward deal is more convenient for capitalists lies in the fact that no funds (euros) need be advanced now, when such funds may not be available, only on the maturity of the deal. However, there is an obligation to advance the full
13.The example avoids precise calculations with day counts in order to illustrate the basic mechanism.

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funds later (and also to receive the other currency). This usually happens with forward deals, although the transaction can also be reversed before maturity, at a profit or loss compared to prevailing interest rates and exchange rates. Forward FX transactions are only modified forms of a spot transaction. In these cases, the spot exchange rate and/or the forward exchange rate is used to compare the values of the two sets of funds in different currencies, so that, for example, $130 million is exchanged for 100 million if the euro-dollar exchange rate is 1.30. But it is the exchange rate of the two fiat monies that is doing the commensurating, not the forward derivative. All the derivative is doing as Bryan and Rafferty recognise, but confuse with other issues is to fix the forward rate at a particular level consistent with the prevailing spot rate and interest rates. The reason I have gone into some detail on forward FX deals is that these are not typical of other financial derivative operations, such as interest rate swaps and options. In these latter, there is no future advance of all the funds underlying the deal at any point.14 Furthermore, the latter derivatives are normally valued on the basis of the differences between contract prices and prevailing market prices. This difference is multiplied by the notional amount of funds involved to result in a settlement sum. These notional amounts are not exchanged. Another type of FX derivative deal that is different from other derivatives, but in a similar way to FX forwards, is the FX swap. In this case, as the Bank for International Settlements explains, there is the actual exchange of two currencies (principal amount only) on a specific date at a rate agreed at the time of the conclusion of the contract (the short leg), and a reverse exchange of the same two currencies at a date further in the future at a rate (generally different from the rate applied to the short leg) agreed at the time of the contract (the long leg).15 In more normal language, one can say that this kind of deal occurs when one party to the transaction needs funds in a currency that it does not own for a particular period of time. It then buys the currency it wants, handing over the currency that it owns in exchange, but reverses the deal at an agreed time later, buying back its original currency. The two deals are usually done
14.Except in the case of actually exercising an in-the-money option, rather than closing it out at a profit. Commodity and bond futures contracts have further complications on delivery of the underlying commodity or security if the contract is not closed out, but these need not be discussed here. 15.BIS 2010a, p. 32. There is yet another currency-related derivative along these lines called a currency swap, in which, among other things, it is usually agreed to exchange principal amounts in different currencies at a pre-agreed exchange rate at maturity. The currency swaps market is only around 67% of the size of the single-interest-rate swap market, however, and I will not discuss it here.

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at exchange rates based again on the spot exchange rate and the relevant two interest rates. This kind of deal is common for capitalist companies that have business in foreign exchange. It is important to stress here that the actual funds are exchanged, since that is the whole point of the deal. This is something quite different from interest rate swaps, etc. Bryan and Rafferty refer to the recent use of large-scale liquidity swaps between major central banks. These are similar to the FX swaps just noted. They argue that these show how liquidity itself is drawing away from being defined with reference to cash or any particular stock of money, and moving towards the diversity of asset forms provided in derivative markets.16 Well, the point can be made much more simply and accurately: these are essentially just short-term collateralised loans! The US Federal Reserve lent dollars to the European Central Bank, the Bank of England, etc., and got collateral in the form of the other banks currency. Then, the other banks repaid the dollars at the agreed time, plus interest, and got their own currencies back again. These transactions were significant for illustrating the scope of the financial crisis that took place and they also show the key role of the US dollar and the powerful position of the US in the global monetary system but Bryan and Rafferty are too enthralled by foreign exchange derivatives, or perhaps the fact that foreign exchange rates are not fixed, to see that this is merely a shortterm currency loan between central banks. Foreign exchange forwards and swaps are longstanding forms of financial dealing, predating by far the breakdown of Bretton Woods in the early 1970s. Prior to 2010, the BIS used to include both spot transactions and these forms of dealing under the heading of traditional foreign exchange markets to separate them from the more evidently derivative deals such as options and currency swaps, and many central banks still make this distinction. This reflected the reality that FX spot rates, FX forwards and swaps are part of the same market, linked by the relevant money market interest rates. All that is happening in these markets is that the gap between the spot and forward exchange rate is a function of the interest rate differential between the two currencies involved. None of the rates is fixed, and all that is done is to set a particular forward FX rate today, based on the currently prevailing spot rate and interest rates. Derivatives and non-derivatives: what they do and what they do not In this section, I take issue with some other examples Bryan and Rafferty use to back up their understanding of derivatives. I will first examine interest rate
16.Bryan and Rafferty 2012, p. 103.

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swaps, then I will look at some other financial products, ones whose description as derivatives is suspect. This risks getting into a debate over definitions (this time for derivatives), but I hope instead that this discussion highlights further what is actually going on. Bryan and Rafferty claim that Derivatives, especially through swaps... establish pricing relationships that readily convert between (we use the term commensurate) different forms of asset. Derivatives blend different forms of capital into a single unit of measure.17 Elsewhere, they also make a more explicit, general claim that for any corporation, at any time and any place, derivatives present a real-time measure of asset values.18 But this is just wrong. It confuses the degree to which foreign exchange rates measure the value of assets (in other currencies) with the operations of an interest rate swap and other derivatives. Take a simple example. In an interest rate swap, a company may agree to receive a fixed 1% rate of interest on a notional sum of $50 million and to pay a variable rate of interest on the same sum over the next five years. The notional value of the swap is $50 million, but the market value of the swap will vary according to the difference between the 1% fixed rate and the variable rate. This value could be positive, negative or zero. The swap derivative is not a store of value for the $50 million, even though that is its notional amount.19 All the swap represents is a way of changing the form of interest rate exposure for the company. In this case, the company wants to have a fixed rate for its income and agrees to pay the floating rate, for example whatever six-month LIBOR happens to be every six months for the next five years. Derivatives such as interest rate swaps can be used to hedge against moves in financial market prices, but that does not make them a store of value. As explained in my original article, all derivatives have a time limit to expiry. During its life, the derivative will be valued in relation to the difference between the contract price and the price in the market, perhaps in a complex manner. On expiry, this difference value, plus or minus, is fixed. After expiry, this function is no longer performed. Bryan and Rafferty obscure this by appealing to derivatives in aggregate, presumably to assert that another derivative will come along and take up the role of store of value when the first one has expired.20 However, this only admits the fact that the derivative is not a store of value. Even during its fleeting existence in the realm of financial
17.Bryan and Rafferty 2006b, p. 12. 18.Bryan and Rafferty 2006b, p. 5. 19.I leave out of account amortising swaps and step up swaps, where the principal is reduced or increased according to an agreed, predetermined formula. 20.Bryan and Rafferty 2012, p. 104.

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market transactions, the market value of the derivative contract does not store anything other than a calculation of the difference between the contract price and the relevant market price, multiplied by the notional value of the contract. It does not store the value of the underlying asset, financial security, etc. Bryan and Rafferty flip between this erroneous store of value concept and a (slightly) more correct one that derivatives measure the performance of an underlying asset something that can be done because they are a difference measure. Turning to some other financial products, Bryan and Rafferty argue that these show both a blurring of the concepts of money, commodity and capital, and the way that derivatives can become a store of value in a world without a stable unit of measure.21 There are, indeed, financial products like convertible bonds that blur the categories of debt and equity, etc., and some may also have features related to options. But it is a bit odd of them to include preference shares in their list of examples, since these are not derivatives at all, only a type of equity security. Collateralised debt obligations (CDOs) and mortgage-backed securities (MBS), also cited by Bryan and Rafferty, are another problem. These are very similar to normal bond securities, rather than being derivatives. With CDOs, the only difference is that the interest and principal payments they offer might be based on the returns from other securities (the fact that CDOs may be divided up into different tranches with different degrees of credit risk is a separate issue). This makes them a derivative only in this respect, because the CDO is still basically a bond in its payment structure, though one whose credit risk will depend on the risk associated with getting the returns from the other underlying securities. A normal bond, by contrast, is one where the credit risk is on the company or country that floated the bond and which is responsible for the interest and principal payments. The CDO is nevertheless not a derivative security in the way that swaps, options and futures are. In the latter cases, the value of the derivative security is a function of the difference between the contract price(s) and market price(s), which could then result in a positive, zero or negative market value. A CDO is only worth zero if all the underlying assets have defaulted and there is no prospect of recovering any funds. With mortgage-backed securities (MBS) they are even closer to a regular bond, since the payments on the MBS are usually made up directly from a range of mortgage interest and principal receipts. In my original article, I was cautious about labelling securities such as CDOs and MBS as derivatives for this reason and left their status unclear. On further
21.Bryan and Rafferty 2012, p. 100.

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consideration, I would not put these securities under the heading of derivatives except where they also have other features, as in so-called synthetic CDOs. This essentially non-derivative status of MBS is the reason the US Federal Reserve could purchase MBS from the private sector in an effort to provide liquidity to the financial markets. These purchases cannot be described as the Federal Reserve buying derivatives, as Bryan and Rafferty claim. They are the Federal Reserves, and other central banks, purchases of bond securities, as the BIS article to which they refer notes.22 Money, gold, derivatives and value theory In this section, I will discuss my conception of global money and its relationship to financial derivatives. This will introduce some other aspects of derivatives and imperialist finance to which Bryan and Raffertys analysis pays little attention. I will not comment on their implicit attribution to me of views I do not hold; for example, that a core definition of money is as a means of exchange.23 The issue I will focus on is what is global money, and whether derivatives have taken over the previous role of gold in some fashion. Gold has an intrinsic value as a commodity because it is a product of social labour. Its physical characteristics have made it suitable for acting in the role of money, but the degree to which it does this depends especially on the role of the state in organising the monetary system. Golds actual use as money has long been restricted within nation states, but it has more often been used for dealings between them when payment by national fiat monies is unacceptable.24 Despite its own intrinsically changing value, gold was seen as a stable measure of value, at least compared to fiat money that could be undermined by state authorities. However, this did not mean that only gold was used in exchanges between countries. Even in the classical Gold Standard period of the nineteenth
22.They refer to Chen, Filardo, He and Zhu 2011, after stating that the worlds leading central banks now have massive holdings of a range of securities and derivatives on their books, all in the name of managing market liquidity and securing forms of monetary stability (Bryan and Rafferty 2012, p. 102). However, Chen et al. do not refer to central banks buying derivatives, but buying bond-type securities (Chen, Filardo, He and Zhu 2011, p. 235). One might argue that the Federal Reserves Maiden Lane assets, resulting from the demise of Bear Stearns and AIG, are derivatives, but they are also made up from mortgages, loans and various MBS and CDOs. 23.They spend half a page discussing in their Reply to Tony Norfield how for some analysts the core definition of money is a means of exchange and that this is a mistake (Bryan and Rafferty 2012, pp. 99100). However, there is nothing in my article to suggest that I hold such a view, and I reject this and other examples of guilt by association as a way of debating. 24.See, for example, Frances demands in the late 1960s for payments in gold from the US, rather than France being willing to accept increased dollar balances.

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century and up to 1914, Britain managed a gold-sterling standard. Then, the pound sterling was promoted to be as good as gold, so a bill on London was seen to be as good as actually having the shiny yellow metal. In fact the bill was even better, being readily exchangeable in financial transactions and offering an interest yield. This worked for as long as there was international confidence in British economic strength and policy, things that would maintain the value of sterling in relation to gold. This position, of course, came under pressure during the First World War and in the inter-war crisis. In the post-1945 period until the 1960s, with the US clearly the dominant economic power, the US dollar also became as good as gold. The Bretton Woods system had the US dollar as its foundation, with other currencies values being fixed in relation to the dollar and only the US dollar being exchangeable into gold by the US central bank, and then only on request from foreign central banks.25 The dollar, like sterling before, was a fiat currency. But governments and capitalists worldwide accepted its role of having a claim on value produced, not simply in the national arena. It was through the 1960s, however, that the dollars role was undermined by the recovery of rival powers to the US. Although none of these was individually a significant challenge to US economic power, together they ended up owning far more dollar assets in their reserves than the US had in terms of gold.26 Through the 1960s, the Bretton Woods equation that one troy ounce of gold was worth $35 was slowly undermined. It was broken completely by 1971. We should look upon the dollars value, or any other fiat currencys value, both pre- and post-1971, as the degree to which it represents a claim on social labour. This cannot be represented directly as a certain amount of socially necessary labour time, but only in the form of an exchange value. The exchange value with gold is neither a unique nor a necessary reference point. The fiat currencys value is clearly contingent upon a range of different factors. Within the national sphere, the dollars value will be judged in terms of its purchasing power, its exchange-value with a myriad of commodities. Internationally, the extent of its claim on resources will also depend on its ability to be used as a means of purchase for commodities, or to be exchanged at a particular rate for the monies of other countries. This is affected by the rules each country has for exchanging national monies, rules greatly influenced by the dominant power(s) in global financial markets. Fluctuations in the dollars exchange rate, or the exchange rates between third currencies, obviously disrupt capitalist
25.See Eichengreen 2011 for a useful and concise summary of international monetary developments. 26.This imbalance first occurred in 1960 (cf. Eichengreen 2011, p. 50).

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calculations for international deals. This is the uncertainty (among others) that derivatives can address. Bryan and Raffertys analysis of derivatives is based around these developments, and they argue that there has been a problem ever since the decline of gold as global money, because the use of national currencies (even under the Bretton Woods system) could not rule out exchange rate instability:
Our argument is that, following the decline of gold as global money, capital has gravitated towards an alternative basis to the global financial system, and it shows this tendency for one basic reason: national currencies...cannot meet the requirements of both domestic monetary policy and global monetary stability. The threat of exchange rate instability is on going. Accordingly, products emerged (financial derivatives) to deliver what pure exchange processes could not. By forming a network of anchors, derivatives are permitting capital and commodities to flow as if there were a single anchor.27

Later in their book, elaborating on this point, they argue:

They are not therefore a fixed single anchor, but a flexible series of many small floating anchors. Critically, they can perform this function because they exist at the intersection of money and commodities: derivatives themselves are money (they perform a money function in pricing) and commodities (they are traded products) at the same time. ... Derivatives, in their anchoring function for global finance, play the role of a commodity money. While commodity money is usually associated with emphasising the commodity characteristics of money (gold); derivatives also highlight the monetary characteristics of all commodities.28

But here, and elsewhere, they are mixing up two things: the role of gold as a measure of value and the inherent instability of exchange processes. Derivatives can provide a temporary fix for an exchange rate or interest rate what they call an anchor, or, more accurately, a floating anchor essentially by providing a form of future price insurance based on todays prices. However, that does not mean (as I showed above) that the derivative measures or stores asset values. Nor does it mean that derivatives play the role of commodity money in place of gold. Here, Bryan and Rafferty get themselves caught on a barnacle with their anchoring metaphor: Financial derivatives are produced (as contracts) and offered on the market as products of the labour of financial

27.Bryan and Rafferty 2006b, p. 106. 28.Bryan and Rafferty 2006b, pp. 1312.

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institutions and operatives that stitch up the deals.29 Possibly in deference to a Marxist view of commodities as products of social labour, Bryan and Rafferty want to extend the status of commodity to derivatives by arguing that labour is expended on their production. However, here they commit what one might call a value-theory howler. Capital operating in the sphere of circulation may offer all kinds of financial services to companies or individuals, as products that it sells. Such products may even be derivatives, used as a means to limit interest rate or exchange rate risk. However, such capitalist operations can only exchange one form of existing value for another, they cannot produce any new value or transfer value from the resources they use. They are simply a cost to the overall capitalist commodity system, even if paying that cost may be beneficial to the capitalists who are in the productive sphere of the economy. All the costs to make the products and the revenues the financial sector gains from them represent a deduction from the total surplus value that the capitalist system produces. This makes the financial sector a burden on society as a whole, although it can still be very profitable for individual companies, and also for countries, as I will discuss in the next section. The financial sector can assist the production of value, and the raising of productivity levels, but these things are actually done by the productive sector of the economy. These points are made to summarise the role of the financial sector from the point of view of capital investment and accumulation.30 But how can we understand what Bryan and Rafferty call the commodities produced by this unproductive financial services sector, in particular those things called derivatives? To say the least, these would be weird commodities. Their costs of production are irrelevant to their value, which remains zero in terms of any value transferred or created.31 FX forward and swap deals do imply an actual transfer of funds, as noted earlier, but the commodity value of this deal is only a difference measure based on changes in market prices (and the value of the transferred funds is determined by the value represented by the fiat currency, not by the value of the derivative). In the case of interest rate swaps, etc., as discussed before, there is no direct transfer of funds, and the derivative commodity money could have a positive or negative value, not
29. Bryan and Rafferty 2006b, p. 153. 30. See Norfield 2013 for a discussion of these issues related to capitalist profitability and the role of finance for imperialism. 31. Of course, financial companies will pay attention to their costs and to their volume of dealing, and it is also true that a more efficient dealing operation will tend to be more profitable. However, an ability to appropriate a portion of value produced elsewhere does not make this activity productive.

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based on anything to do with the amount of sweat from the brow of derivatives traders. The world of derivatives is full of wonder and torment, but Bryan and Rafferty too often try to render it sublime through a mystifying mode of expression, as Marx once wrote.32 Finance, imperialism, parasitism and derivatives The biggest problem with Bryan and Raffertys view of derivatives, however, is that it pushes into the background the role of the US dollar and the role of finance for the major imperialist powers. While derivatives have obviously not replaced national money, they argue that they have effectively transcended the national basis of contemporary money.33 The point I would stress by contrast is that a small group of major powers have privileged positions in the global financial markets, something that greatly modifies for them what Bryan and Rafferty call the new, more dynamic (and ruthless) edge to capitalist competition that comes from derivatives. Here I would single out the US and the UK, which can use their positions at the centre of the global financial system as a means of appropriating value from other countries. Two examples will illustrate this point. As a way of introducing these, first note that simple models of exchange rate determination usually focus on some version of purchasing power parity, based on the idea that relative productivity and price competitiveness set the fundamental value for one currency versus another. If the value of one currency is too high, a trade deficit results, and the supply-demand balance for the currency turns negative, so reducing its value in the market, and vice versa. However, the total picture for the demand/ supply of a currency is quite different in reality. It has less to do with the valueproductivity of national capitals and much more to do with their position in the global economy. I do not want to go too far in making this point. A country will need to have some position of economic strength in order then to be able to gain power in international economic relations. However, the examples I give next indicate how financial strength can bring its own rewards for particular imperialist countries. My first example is for the US. Aside from trade flows, the determination of the US dollars value is impacted significantly by the demand for and supply of dollars driven by the flows of finance. For all currencies, banking flows, together with direct and portfolio investment flows, can easily be more important influences on the exchange rate than trade in goods and services.
32.Marx 1974, Chapter 24, p. 397. 33.Bryan and Rafferty 2006b, p. 136.

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However, if a country is a major financial power like the US, it can attract flows of foreign funds into its equity and bond markets, or can benefit in other ways from countries keeping assets denominated in US dollars. Although by the 1970s US economic strength had clearly declined compared to other major countries and the dollar had devalued, this did not lead to a lasting setback for US financial strength. The ensuing financial turmoil actually boosted the role of the US dollar in global markets, given the inability of any other country to offer an alternative world money. The dollar remains by far the major global currency for international trade deals and financial flows, with dollar-based asset markets being the largest and most liquid for international investors. There were various attempts by continental West-European powers to build an alternative system to protect them against what they saw as US-based risks, and also to gain some of the US advantages, culminating with the euro project. China has much more recently been building up the international role of the renminbi. However, China is starting from a minuscule position. In 2010, the US dollar was on one side of 85% of all foreign exchange deals, compared to just 39% for the euro and a mere 1% for the renminbi.34 This is how the US was in the position to do the FX swaps that Bryan and Rafferty cited. It was a case of central banks outside the US having a desperate demand for US dollars to prop up their banks and companies international liquidity positions. This had nothing to do with derivatives per se. Aside from the power accrued from this role of essentially being in charge of global liquidity, the US of course gains a great deal of value from it. In 2011, the US gained a net $235bn in 2011 from foreign investment income, more than double the amount in 2007, based on its ability to pay close to zero interest rates on US government debt owned by foreigners.35 This ability is founded on the role of the US dollar as the main global currency. Having a net foreign investment income is extraordinary, given that the US is a big net debtor country, but this is because it earns much more than a near-zero rate of return from its foreign investments, especially from its direct investments abroad. Notably, the UK is the only other country in the world with a net investment earnings surplus despite having a net debt position. Britain manages this feat helped by its ability to attract low-cost funds via the banking system,36 given that the UK is the location of the worlds biggest international banking centre. This is another sign of the economic privileges accruing to those powers dominant in finance.
34.BIS 2010a, Table B4, p. 12. 35.Net foreign investment income figures calculated from BEA 2012, lines 13 and 30 in Table 1, p. 59. 36.See Norfield 2011 for a discussion of this mechanism.

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My second example is a different aspect of privilege in value appropriation: financial services. A question Bryan and Rafferty do not ask is why more than half of the global derivatives market is based in the UK (principally London) and the US (principally New York and Chicago) if derivatives have transcended national money systems. Take foreign exchange: the UK is the base location for global dealing, having 37% of the total turnover; the US has 18%.37 London has by far the biggest share of the global FX market in spot, forward, swaps and options transactions. The bulk of UK-based trading is in currencies other than sterling, so the dealing has indeed gone beyond the national money system. But this perspective overlooks one critical role that British imperialism plays: it is the broker for global capitalism. Britain takes a cut from the value of more than a third of foreign exchange deals in the world economy. It is even more dominant in the so-called over-the-counter (OTC) interest rate derivatives market, made up of direct deals between banks and their customers, accounting for 47% of turnover in 2010, while the US had 24%. Evident advantages for the UK economy are the large earnings from financial services trading. Net financial services earnings amounted to nearly 40bn in 2011, covering almost 40% of the UKs 100bn trade deficit in goods in that year.38 The UK has the second biggest surplus on financial services in the world, usually just behind that of the US. If insurance services are added to the reckoning on this account, then the UK surplus is the highest. These net foreign revenues are a measure of what value is deducted from the world economy by financial operations based in Britain. US politicians have been angered by the way that trading derivatives in London has led to big financial scandals hitting their own pockets, from the collapse of AIG in 2008 to the 2012 loss of over $6 billion by JP Morgans London Whale. However, this overlooks the fact that an Anglo-American partnership designed this system, with at least implicit government support and approval, and it has been mutually beneficial to both powers.39 While the US is top dog in world finance, the UK is top leech. Both countries have exceptional positions in their ability to appropriate surplus value from the rest of the world via the financial system. It is a big mistake to look upon the growth of financial markets, and certainly the derivatives markets, as something that occurs as a transnational phenomenon outside of the interests of these major imperialist powers and outside of their political influence,
37.Figures quoted here and below are from BIS 2010a and 2010b. See Norfield 2012b for a review of the location-based statistics for global finance. 38.ONS 2012, Table 3.6. 39.Helleiner 1996 gives a valuable analysis of the evolution of the modern financial system, but in my view he greatly underestimates its contemporary importance for British imperialism.

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though that is not to say that they can control these markets. As I noted in my original article, it is no wonder that these powers have done so little to curb the financial sector, despite the unprecedented financial crisis! Derivatives, imperial economic power and the crisis In this section I will briefly discuss the relationship between derivatives and the capitalist crisis. Bryan and Rafferty say that in my original article my agenda was that an understanding of derivatives be placed at the service of theories of crisis and the falling-rate-of-profit tendency.40 That is true, but it is not the whole story. My principal aim was to show how derivatives were one expression of parasitism under contemporary imperialism, exemplified by Anglo-American finance. But to do this I also felt it was important to understand the dynamic behind the growth of derivatives trading. In my view, that dynamic could only be explained by problems of capital accumulation and crisis, underpinning which was a crisis of profitability. It is worth spelling out where I did indicate the link with profitability to show that there is no analytical leap here, as Bryan and Rafferty claim. In my derivatives article I drew attention to the way in which trading of these financial instruments boomed in response to low yields on financial assets and pressures on bank profitability. I also argued that these low yields were related, although not in a straightforward manner, to low profitability on productive capital investment. The logic was that one would expect lower profitability on productive investment to lead to lower dividend yields and equity price increases, together with lower bond yields, although there may be exceptions to this. In terms of empirical evidence supporting this view, two relevant facts were noted: yields had been falling (in both nominal and real, inflation-adjusted terms) and profitability was weak in the late 1990s and early 2000s. Citations from reports of a number of asset managers documented the falling yields; a chart with a measure of the US rate of profit illustrated the relevant trend. The causal links from low profitability and low yields to the propensity for increased financial trading (and speculation) with derivatives should be clear, though it is true that such trading is not only driven by low yields. However, one important feature of global capitalism that developed through the first decade of the twenty-first century was not included in the
40. Bryan and Rafferty 2012, p. 107.

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previous logic.41 This is how increased exports from China and other low-wage countries to the US and other rich, consuming countries helped produce the Greenspan conundrum, whereby long-term US Treasury yields were lower than previous economic/financial relationships would have suggested. In addition to anything directly resulting from the question of low profitability on productive investment that I noted before, this also helped reduce bond yields in major countries. This happened in two related ways. Firstly, cheap imports had helped lower US (and other countries) inflation rates, and, given the common central bank policy of focusing on inflation, this helped to reduce nominal yields. Secondly, a counterpart to the Asian trade surpluses with the US and other countries was their large-scale purchases of major country bonds a means by which they tried to stabilise their exchange rates. The end result was lower yields on US Treasuries and in other major government bond markets. For the US, this effect was documented in an important article published by the Federal Reserve.42 These developments show how a combination of economic power control of supply chains, etc. and financial power the role of the US dollar as a reserve currency can combine both to give an imperialist power many privileges and also to sow the seeds of the next crisis. Conclusion I did not plan to write about derivatives markets any further after my original article in Historical Materialism, except to the extent that this would assist my research into finance and contemporary imperialism. I look upon derivatives markets as being essentially rather dull from a theoretical perspective, once the basic relationships have been grasped, despite the exponential growth of trading in these markets and their role in the crisis. However, my motivation for spending extra time on this issue has been to throw more light on financial transactions, ones that are important but which, not surprisingly, remain a mystery to many people who might otherwise have a good knowledge of the global crisis that engulfs us all. My differences with Bryan and Raffertys analysis of the financial derivatives market are many. However they deserve credit for highlighting the importance
41. I noted that trade with China and other countries could have boosted US profitability beyond what otherwise it would have been (Norfield 2012a, p. 115), but I did not examine this issue in any more detail. 42.See Warnock and Warnock 2005.

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of these markets that Marxist theory had previously ignored, and for stressing that contemporary forms of capitalist finance must be addressed, and not just dismissed as speculation or in other ways that avoid a serious analysis. Nevertheless, the key message from my original article, and from this reprise, is that one cannot understand financial markets today, or indeed the crisis, except by situating developments in the context of contemporary imperialism. References
BEA 2012, Survey of Current Business, US Bureau of Economic Analysis, July. BIS 2010a, Triennial Central Bank Survey: Report on Global Foreign Exchange Market Activity in 2010, Bank for International Settlements, December. 2010b, Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity in 2010 (Final Results), Bank for International Settlements, December, available at: <http:// www.bis.org/publ/rpfxf10t.htm>. Bryan, Dick and Michael Rafferty 2006a, Money in Capitalism or Capitalist Money?, Historical Materialism, 14, 1: 7595. 2006b, Capitalism with Derivatives: A Political Economy of Financial Derivatives, Capital and Class, Basingstoke: Palgrave Macmillan. 2007, Financial Derivatives and the Theory of Money, Economy and Society, 36, 1: 13458. 2012, Why We Need to Understand Derivatives in Relation to Money: A Reply to Tony Norfield, Historical Materialism, 20, 3: 97109. Chen, Qianying, Andrew Filardo, Dong He and Feng Zhu 2011, International Spillovers of Central Bank Balance Sheet Policies, BIS papers No. 66, available at: <http://www.bis.org/publ/bppdf/ bispap66p.pdf>. Eichengreen, Barry 2011, Exorbitant Privilege: The Rise and Fall of the Dollar, Oxford: Oxford University Press. Helleiner, Eric 1996, States and the Reemergence of Global Finance: From Bretton Woods to the 1990s, Ithaca: Cornell University Press. Marx, Karl 1974 [1894], Capital, Volume 3, London: Lawrence & Wishart. Norfield, Tony 2011, The Economics of British Imperialism, Economics of Imperialism, 22 May, available at: <http://economicsofimperialism.blogspot.co.uk/2011/05/economics-of-britishimperialism.html>. 2012a, Derivatives and Capitalist Markets: The Speculative Heart of Capital, Historical Materialism, 20, 1: 10332. 2012b, The City of London: Parasite of the World Economy, Economics of Imperialism, 3 October, available at: <http://economicsofimperialism.blogspot.co.uk/2012/10/the-city-oflondon-parasite-of-world.html>. 2013, Value Theory and Finance, Research in Political Economy, 28: 16195. ONS 2012, The Pink Book, July, available at: <http://www.ons.gov.uk/ons/rel/bop/united-kingdombalance-of-payments/2012/index.html>. Warnock, Francis E. and Veronica C. Warnock 2005, International Capital Flows and US Interest Rates, Board of Governors of the Federal Reserve System, International Finance Discussion Papers, Number 840, September 2005.