The growth of American finance over the past half-century has been phenomenal. Representing only 10% to 15% of total profits in the US economy in the 1950s and 1960s, financial sector profits rose to account for 30% in the mid-1980s and 40% in 2001. Despite a record loss in profits during the recent financial crisis, US finance quickly recovered, bringing its profit share of the economy back to well above 30% by 2010. What explains this remarkable transformation of the US economy? My dissertation investigates three critical shifts in the 1970s that dismantled restrictive postwar financial regimes and paved the way for the rise of finance in the US: (1) the rise of global finance, (2) the change in US monetary policy, and (3) the expansion of unregulated financial markets in the US.
During the summer of 2014, with the support of the Social Sciences Division at the University of Chicago, I could finish writing the third chapter of my dissertation. This chapter analyzes the second shift: the change in US monetary policy. While the US employed easy monetary policies in postwar years, it suddenly changed its course by implementing extreme austerity measures in the late 1970s and early 1980s. High and volatile interest rates following these policy measures heightened economic uncertainty, encouraging short-term speculation at the expense of long-term industrial investment. This chapter explores the puzzle—why did the US government adopt contractionary policies in the late 1970s? Through extensive archival work, I find that large industrial firms, along with financiers, persuaded the US government to bring austerity to the economy in the late 1970s. A postwar coalition between big industry and organized labor advocated an economic regime that placed industrial expansion above financial interests, against financiers’ warning of inflationary pressures. The coalition, however, unraveled in the 1970s, as the industrialists sought to compensate for declining profitability by increasing overseas operations and reducing labor costs. Now, industrialists promoted tight budgets and a decreased money supply because a strong dollar helped them to remain competitive in international business. They also expected that a sharp recession resulting from the implementation of contractionary policies would bring down labor costs. Industrial capital deserted labor and formed an alliance with financiers by the late 1970s, successfully guiding US macroeconomic policies toward austerity in the late 1970s and early 1980s.
Along with other chapters of my dissertation, this chapter emphasizes the (capitalist) class dynamics in contemporary financial transformations and provides a new approach that emphasizes the role of large industrial firms. Analysts have overlooked the role of industrial firms in this transition by emphasizing either converging interests among capitalists or diverging interests between industrialists and financiers. The former approach obviates the need to delve into the subset, while the latter downplays the positive role of the industrialists in the process. In challenging these views, I argue that distinctive sectoral goals, but shared means, among capitalists lead to financial transformation.