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Everyone Wants to Be a Bank

A new book explains how finance took over the U.S. economy, disempowered workers, and undermined democracy.

Tim Boyle/Getty Images

In 2011, when I lived in Milwaukee, the only job I held for more than a couple days was working the lunch rush at a gyro cart downtown. I was paid $60 a day plus tips, all in cash. One day, in an attempt to feel a little less adrift in life, I opened a checking account at a chain bank across the street from my workplace and received a debit card. Yet I rarely used the checking account or debit card, and the balance often hovered around $10.

Oxford University Press, 240 pp., $29.95

Months later, I bought a hot dog at a gas station and, on a whim, used my debit card. As I left the store, I realized I had forgotten to buy gum, so I went back in and bought that with the card too. Weeks later, I received my account statement in the mail: -$125. Turns out, the hot dog had caused me to overdraft my account, incurring a $30 fine. Then the gum incurred a second overdraft for an additional $30 fee. Both of these fees, unpaid, each caused a second $30 charge. The fees felt arbitrary and capricious, but they are common. Almost everyone I knew had some story of unfortunate banking fees. The next night, I unceremoniously tossed my debit card into a box of mementos.

What I didn’t know at the time was that charging fees on accounts (and other “noninterest income” like wealth management, market making, securitization, mortgage and loan processing, credit card service, and arranging mergers and acquisitions) was big business for banks. It was so substantial that right before the 2008 crash, JP Morgan Chase was making almost $94 billion from noninterest income and just $52 billion from its interest income. This was all part of a tidal shift in banking that began three decades earlier, as sociologists Ken-Hou Lin and Megan Tobias Neely explain in their brilliant new book Divested: Inequality in the Age of Finance. “Account fees for maintenance, transfer, overdraft, and minimum balances,” they write, “flourished in the 1980s, becoming banks’ major source of revenue.”

Before the 1980s, banking was a sleepy, hierarchical business that played a minor role in the economy. Banks arranged financing for individuals and businesses; they took deposits and handed out loans. They were intermediaries, servants to economic life. Their profits came from interest income: the difference between how much they paid depositors in interest and how much they charged borrowers. But after the 1980s, regulatory changes legalized new sources of revenue, and banking became one of the most profitable sectors of the economy. Soon, banking was running the show.

Today, Divested explains, “instead of serving the economy, finance now imposes its own logic, preferences, and practices throughout the economy as well as other parts of the society.” This is the condition of “financialization,” an often slippery term that has exploded into the popular lexicon post-2008. Divested helpfully defines it as “the wide-ranging reversal of the role of finance from a secondary supportive activity to a principal driver of the economy.” Before the 1980s, finance earned around 15 percent of corporate profits; in 2002 it earned a high of 43 percent. And this growth has not been without consequence: The main argument of Divested is that financialization is the “fundamental cause of the growing economic inequality in the United States.” For the authors, the rise of finance is profoundly implicated in—or maybe the primary reason for—the tidal redistribution of resources upward in the last 50 years.

How did banking become so central to the U.S. economy? Amid the devastation of World War II, in 1944 delegates from the Allied nations gathered in Bretton Woods, New Hampshire. Their aim was to sketch out a global economic system that could aid postwar recovery, among other things. The conference established that the U.S. dollar would effectively be the global reserve currency, pegged to the price of gold. The United States then lent Europe $12 billion with the Marshall plan, which began an unceasing flood of dollars into the global economy. As the authors point out, at that moment the dollar became the biggest U.S. export, a fact still true to this day. This has far-reaching consequences for banks: “The export of dollars also created a global market for dollar-denominated financial products such as treasury securities; agency, municipal, and corporate bonds; and mortgage-backed securities.” In other words, after Bretton Woods, banking and finance started to become big business. Quietly, banking became America’s greatest industry.

In 1971, Richard Nixon untethered the dollar from the gold standard, a decision that might have undermined the dollar’s global supremacy. Desperate to maintain power and influence, Nixon convinced Saudi Arabia and other oil-producing countries to trade oil in dollars, in exchange for protection and aid. “Just as the dollar was about to lose its reserve status,” Divested explains, “it was rescued by a strong global military presence and willingness to maintain trade deficits.” The new international financial agreement was that the U.S. would protect oil markets and profits for the U.S. banks that served those markets, even if it came at the expense of workers and the domestic economy.

In the late 1970s, the industrial crisis struck in the U.S. No one agrees why it happened, and the authors of Divested are refreshingly honest about this. Trade deficits surely made it cheaper to import goods, and U.S. industrial production, once buoyed by world war and the reconstruction of Europe, began to decline along with (or because of) increased global competition. It could have been excessive labor power, or possibly it was the ascendant financial sector. Banks, positioning themselves in the middle of transactions, began to charge higher and higher fees, sucking useful capital out of the economy and putting it into the pockets of bankers.

Whatever the reason for the U.S. industrial crisis, the Reagan administration’s response was, like Nixon’s, to prioritize the financial sector. The government allowed interest rates to rise astronomically, a steroidal injection for the financial sector but a crushing blow to domestic businesses, many of which struggled to borrow under these conditions. For Reagan, Divested explains, “maintaining the ‘competitiveness’ of U.S. financial institutions in international capital markets became a national priority.” Foreign investment, filtered through the financial sector, would fund the U.S. economy, or at least make it look like something was happening. To aid this, Reagan’s administration began a wave of regulatory changes that rolled back the New Deal–era restrictions on banking. Banks were freed to merge and sell risky, bizarre, and fanciful new products (think consolidated debt obligations and credit default swaps). As Divested shows, Reagan’s innovationdeficit spending on the back of foreign investmentis the same tactic that both Barack Obama and Donald Trump have used to deliver a healthy-looking economy. They all knew the stakes: The United States is a bank, and a bank’s business is selling money.

Banking became so liberalized and profitable, companies that had once produced or sold goods transformed themselves into banks. Most famously, Jack Welch grew General Electric’s financial arm, GE Capital, while downsizing the rest of the firm. GE Capital was so big that, in 2008, only four banks in the U.S. were larger. It also became normal for stores to offer credit. As the authors show, in 2016, Kohl’s revenue on its credit card was 35 percent of profits. Macy’s was almost 40 percent. “The importance of this credit card business is so high,” they point out, “that Macy’s is perhaps more appropriately described, not as a retail, but as a credit card and real estate company.”

The authors add that “instead of targeting the consumers of their manufacturing or retail products to raise profits and reward workers, these firms extend their financial arms into leasing, lending, and mortgage markets to raise profits and reward shareholders.” The imperatives of finance reorient the business to focus on capital markets instead of customers or workers, which is why corporate tax cuts are not spent on new equipment and higher wages but are instead often plowed back into the market through stock buybacks. Banking is profitable, and everyone wants to be a bank.

The authors of Divested want to make the argument that financialization has caused inequality, by dissolving the connective tissue that once bound capital to labor. The New Deal era established a tacit agreement between workers and management, often called the capital-labor accord: that management would have total dominion over the workings of the firm, and the workers’ compensation would rise with productivity, among other benefits. But the quiet ascendancy of finance allowed management to shred this accord.

First of all, finance as an industry requires few workers. It employs just 6 percent of the workforce and can make up to a quarter of the country’s economic activity, much more if you include “nonbank banks” like the former GE Capital. For companies that aren’t technically banks, such as Macy’s, if they make their money servicing debt, the working people of the business are much less important and have less bargaining power. Once, shabby stores and disgruntled workers might have been a bad look for a department store; now they are, at most, a secondary problem.

Another, bigger problem is that the profusion of exotic financial tools (like junk bonds and structured investment vehicles) has created an environment with radical levels of liquidity. This allows owners of companies to easily suck the capital out of their firms (through downsizing, cost-cutting, automation, offshoring, and benefit reduction) and dump it either into other companies or, uselessly, back into equity markets. Private equity firms are the paradigmatic example. These entities are both the Platonic ideal and Frankenstein’s monster of financialization and a New Dealer’s nightmare: highly secretive, almost completely unregulated banks that don’t just lend to companies but also own them. Their unregulated liquidity is the knife that minces the capital-labor accord. Workers have little leverage when financial capital is so dramatically free.

Workers also stand no chance because finance dominates the political process. “In the last 20 years,” the book explains, “the financial sector spent more money in campaign contributions and lobbying” than health care, energy, or trade unions. It spent over $400 million in 2016, compared to less than $100 million for the other three. It really is no wonder, then, that both political parties chose to bail out banks at the expense of workers in 2009 and why the recent House hearing for the Stop Wall Street Looting Act found lawmakers either breathlessly defending private equity or helplessly shrugging.

The financial services industry’s involvement in politics is important because it alters explanations for inequality that rely on a narrative of a few bad actors. “It feels tidy,” Divested notes, “to attribute the prevalence of new employment practices or inequality in general to changing social norms and excessive ‘corporate greed,’ yet such an account leaves the question of what socioeconomic conditions promote ‘corporate greed’ but constrain ‘labor greed’ unexplored.” Politics alters norms and has the ability to constrain labor, as it has continued to do for the last half-century.

Financialization was a deliberate choice on the part of government: to become bank to the world, often at the expense of workers and, to some degree, most businesses. The government guarantees the soundness of its currency with a global military presence and focuses maniacally on the movements of the stock markets, where financial engineering could articulate true and, in the case of firms like Enron, totally invented and false profits. The financial crisis has deepened the problem. As economic historian Jonathan Levy once explained, after 2008, the Federal Reserve lent heavily to foreign central banks to prop up the trillion-dollar global credit market, and “global finance became even more dependent on the U.S. dollar.”

We’re left with dwindling worker power and an economy that does only a little for a lot of people. What Divested makes abundantly apparent is that lending is our most consequential national industry, and if it continues unfettered, not only will manufacturing remain fallow, but workers will remain squeezed. We live in a completely globalized economy, one in which the U.S. made the deliberate choice to be the bank and the police. The consequences are now clear.

*An earlier version of this article located Bretton Woods in Vermont. It is in New Hampshire.