The growth of multinational finance increased the instability of the system, but did not cause it. Enhanced instability in turn encouraged productive firms to seek speculative profits in a way that further boosted the financial sector and added still more to the instability.
A prime example of this was the rise of the derivatives markets. Their original function was to provide a sort of insurance against sudden changes in interest or exchange rates. This was an extension of the long established practice of buying and selling "forward"-agreeing now on a price to be paid at some specified point in the future for some commodity. Now derivatives developed into elaborate systems of payments for options to buy and sell currencies or to lend or borrow money at various rates at different times in the future. In doing so, they provided productive firms with some protection against their calculations of future competitiveness and profitability being upset by sudden changes in various markets-and became an integral part of normal business for many companies.18 But that was not the end of the matter. The derivatives that provided that protection could themselves be bought and sold, and it was then possible to gamble on changes that would take place in their prices if exchange or interest rates went up or down. Hedge funds, working with money provided by rich individuals putting in a few million dollars each, found they could make very large profits by borrowing in order to make such bets, assuming (as every poor gambler does) that they were bound to win.
The reliance on derivatives was not the only way in which the boundaries between productive capital and the financial sector were eroded. Many industrial concerns began to look to finance as a way of profit making. In the 1990s both Ford and General Motors turned towards financial activities such as "leasing, insurances, car rental", so that "during the boom 1995-98 a third of the [Ford] group's profit accrued from services" .19 The Economist has told of the US's currently biggest manufacturing firm, General Electric, that its "profits grew with the sort of predictable consistency . . . made possible by . . . making good any unexpected shortfall with last-minute sales of assets held by the firm's notoriously opaque finance arm, GE Capital," which was responsible for "40 percent of GE's revenue". 20
284
The New Age of Global Instability