Understanding the Space of Flows: Towards a Political Economy of (Financial) Networks

Felix Stalder, PhD Student,
Faculty of Information Studies, University of Toronto

supervised by Andrew Clement,
Faculty of Information Studies, University of Toronto

March 1997

Note: This text has exploratory character. Non-commercial use is encouraged. Commercial use only with my written consent. I appreciate feedback. F.S.

Table of Contents

1. Introduction

2. Political economy of communication and the concept of spatialization
2.1. Political economy
2.2. The political economy of communication
2.3. Spatialization

3. Financial markets as a space of flows: foreign exchange
3.1. The emergence of a market
3.2 The dynamics of the network: The EMU crisis

4. Conclusion
4.1. Outlook

5. Bibliography

1. Introduction

The title of this paper--Understading the Space of Flows: Towards a Political Economy of (Financial) Networks--needs further explanation in order to define the scope of my research and clarify the origins and direction of my interests in these matters.

My interests are in computer-based communication networks--the space of flows--, political economy and finance, in decreasing order of importance. This means that I treat political economy as the toolbox to study such networks, a toolbox from which I pick quite freely the specific analytical concepts that can enhance the comprehension of networks, whereas finance serves purely as the field for such an analysis. In this sense I will touch upon the tools and the field only insofar as they provide a perspective and evidence for an understanding of the nature and the impact of networks. I do not claim to be a specialist in political or in financial economy, and I use both areas not as a means to their ends, but exclusively to gain insight into the workings of networks and their relevance for society.

Why political economy as a starting point to develop analytical tools and why financial economy as a field for gathering evidence?

Political economy, in a broad definition, aims at studying social dynamics and its processes "whereby social change is located in the historical interaction of the economic, political, cultural, and ideological moments of social life." (Clement; Williams, 1989 p.7) Such a broad view, especially in its "non-reductionist" version (Mosco, 1996), can ensure that the analysis of the workings and the impact of a specific technological setting--computer-based communication networks--does not degenerate into a simplified and misleading technological determinism. Features of a conceptual framework will be developed in the first section of this paper.

Computer networks as such are simply open, multi-centered communication structures, or more precisely, they are "the circulatory system which provides the mechanism for moving data and messages from one computer to another" (Martin, 1995 p.74). In order to analyze such structures, one has to examine their forms of appearance. Financial networks are a particularly interesting form of networks.

As Karl Marx wrote in 1857, money is form without content, "as the most superficial (in the sense of driven out onto the surface) and the most abstract form of the entire production process [money circulation] is in itself quite without content. ... The proper place of money is necessarily displaced." ( Karl Marx, Grundrisse, quoted in Spivak, 1987 p.32)

The circulation of money therefore offers, as I hope to demonstrate, a unique view on the medium of its circulation: the global computer network. It seems of little surprise that this displaced property was among the first to have been transferred into this strange new place, electronic space, while other areas of social life are just beginning to follow that lead. The seemingly weird world of global finance can provide insight into mechanisms that shape the dynamics of the emerging "network society" (Castells, 1996) because of their history of more than twenty years of being embedded in computer networks.

While major elements of this "network society" are yet to find their forms--which are far from being predetermined--, speculations into the future are somewhat futile. Financial networks, in contrast, offer a rich basis of historical evidence on which to ground an analysis. This analysis, at its best, can help to reveal the patterns which will affect other social spheres.

However, the aspirations of this paper are far more limited. In the second section I will sketch the origins of financial networks and describe their workings based on a small case study, the crisis of the European Monetary System (EMS).

The last section will interpret the findings of the first section in the light of the conceptual framework developed below. In this sense, it is the "conclusion" of this paper, even though its results can be no more than preliminary and the basis of further investigation.

2. Political economy of communication and the concept of spatialization

In the following I will outline some basic features of political economy as it applies to communication studies and focus the concept of spatialization. As a guide through this vast field I take Vincent Mosco's excellent book: The Political Economy of Communication: Rethinking and Renewal (1996).

2.1. Political economy

Political economy has its roots in the classical theories of the English Enlightenment (Smith, Hume, Ricardo, Mill) which were developed to explain, justify and promote the rise of industrial capitalism by combining economic, political and moral considerations into large-scale theories. This breadth of scope is also characteristic for the following critique of that process (Karl Marx, Friedrich Engels). Since that time, political economy has been a heterogeneous endeavour with little agreement on single method or specified theory. Political economy can be best understood

"as the study of the social relations, particularly the power relations, that mutually constitute the production, distribution and consumption of resources. ... [It] tends to concentrate on a specific set of social relations organized around the power or ability to control other people, processes, and things, even in the face of resistance." (Mosco, 1996 ,p.24)

What discerns political economy from neighbouring disciplines (e.g. economy, political science) is an aim to make the "social totality" (ibid. p.29) the scope of the analysis. In the (Neo-)Marxist reading, this commitment to the social totality means "first and foremost ... understanding the connection between the political and the economic" (ibid. p.31). This specific definition of what consitutes the most essential relationship within the social totality profoundly influenced the history of the discipline and shaped a large number of political economy studies. I will return to this at a later point in this section.

Another unique characteristic of political economy in general is the lively tradition of moral philosophy, going back to Adam Smith's first book The Theory of Moral Sentiments and to the works of Karl Marx. Political economy has never perceived itself as a purely theoretical or academic discipline, the moment of action and concrete political struggle has always been made important (e.g. Adorno, Horckheimer, Marcuse, and more currently, Habermas) by "combining a sense of the descriptive and the prescriptive." (Mosco, 1996 p.25) In this sense, political economy is always concerned with "links between intellectual inquiry and political action and thus of the role of the intellectual of our time." (Garnham, 1990 p.1)

At the core of the field today we find an intersection of several lines of critique of the neoclassical economy. However, the perspectives that meet in this intersection vary widely. A conservative one, the 'public choice theory', analyzes all aspects of society with a concept of market efficiency. The basic model of this school is the "homo economicus". In the words of one of its leading proponents, James Buchanen,

"individuals are modeled as being so as to maximize utilities subject to the constraints they face. ... Individuals must be modeled as seeking to further their own self-interest, narrowly defined in terms of measured net wealth positions, as expected or predicted." (Buchanen, 1986, p.24)

Institutional theories, most prominently the works of John Kenneth Galbraith, point at the importance of the economic structure as a driving force of the development. They argue that pure market forces do not exist and focus on the 'corporate techno-structure', a combination of bureaucracy and technology, that enables the corporation to develop new markets.

The Marxist critique emphasizes the mode of production, capital accumulation and the resulting conflicts as major driving forces of the development.

More recently two additional lines of critique have have expanded the political economy. Feminists point vigorously at blind spots in the economic theories that neglects major areas of economics because of its gender-bias. Environmentalists are addressing irrationalities in the neoclassical theories, because they can not differentiate between positive and negative economic activity which leads, for instance, to conceptualizing a giant oil spill as a positive factor of economic growth (Mosco, 1996 p.63).

2.2. The political economy of communication

For more than 50 years political economy has been a major perspective in communications studies so Vincent Mosco can speak convincingly of an actual Political Economy of Communication (PEofC). Mosco describes the PEofC as a conglomerate of interrelated interests in the business of communication, the role of the state in shaping this industry, and in the connection between corporate and public sector (see, Babe, 1993; 1995). Traditionally the questions have been framed in regard to power, defined on an institutional, class or cultural basis (Schiller, 1982; 1984, Gandy, 1993). Mosco sees new questions emerging from the borders of the discipline, mainly from cultural and feminist studies. These questions center around problems of production-discourse-reception (Baudrillard, 1981; Harvey, 1989), power in regard to gender and race (for a feminist approach, Massey, 1994), structural change within and across communication industries (Mosco, 1989; Garnham, 1990; Smith, 1991; McChesney, 1993) and individual, corporate, and public communication (Gandy, 1993).

Mosco aims at combining the different approaches in order to develop a PEofC that is "inclusive" and "non-reductionist". This means particularly two things. First, the awareness that social life can not be explained completely through theory and second, there can be no single correct approach that defines the PEofC. To keep his approach open and flexible, Mosco eschews the concept of causality because it

"excessively constrains social analysis. Use of the term 'causality' channels thinking into identifying how a thing, viewed as a singular entity (or things viewed as a set of entities) acts directly to transform the state of another thing or things, also seen as a singular whole or wholes. The term makes it considerably more difficult to think about how things work their component parts into one another." (Mosco, 1996 p.137)

To avoid such a reductionism, Mosco develops a concept of "mutual constitution" and "multiple determination" (ibid, p.5)1. Mutual constitution points at the relationship between theory and reality as interrelated and multiple determination at interdependence in complex systems. Such a concept has considerable advantages over a schematic approach that tries to identify the influence of an independent variable upon a dependent variable. Instead of using oversimplifying linear relationships, Mosco focuses on the importance of processes and their internal dynamics in a highly integrated society. "Suggesting interactions among elements that are themselves in the process of formation and definition, the term constitutions foregrounds the process of becoming within all elements of the social field. No thing is fully formed or clearly defined, but one can specify process at work within and between them that define the nature of the constitutive processes and the relationships among the elements." (ibid, pp.137-138)

For Neomarxists such as Mosco, one of the central tasks of the PEofC is to show how "communication and culture are material practices, how labor and language are mutually constitutive, how communication and information are dialectical instances of the same social activity." (ibid. pp.45-46)

To apply such a complex theoretical approach to the study of communications, Mosco defines three entry points: Commodification, Spatialization, and Structuration.

These entry points, through which Mosco suggests a rethinking of the PEofC, "are insertions into the social field that provide a substantive focus for thinking about characteristic social practices without suggesting that they provide the essential definition that capture the totality of the field." (ibid. p.10)

In the remainder of this first section, I will follow Mosco's second entry point--spatialization--but with a focus different than he suggests.

2.3. Spatialization

The concept of spatialization has been developed in the late works of the French theoretician of every-day life, Henri Lefebvre, who argued that "we have passed from the production of things in space to the production of space itself. This passage from production in space to production of space occurred because of the growth of productive forces themselves and of the direct intervention of knowledge in material production." (Lefebvre, 1979, p.285, emphasis in the original)

While quoting Lefebvre as the source of inspiration, Mosco develops a slightly different concept. In his reading, spatialization signifies "the process of overcoming the constraints of space and time in social life." (Mosco, 1996, p.172) This different reading is underpinned by two considerations. First, questions of the reorganization of time-space relationships are essential to the study of communication processes, since all communication technologies rework time, space or both components of communication. Second, new communicative possibilities are central to the process of spatialization within all spheres of social life.

In its practical application, the concept of spatialization is mainly used to capture the changing structure of the communication industries in terms of their specific form of integration. Integration is measured along the fundamental spatial variables: horizontal and vertical.

Horizontal integration means cross-media ownership. Cross-media ownership occurs when one company buys another one that does something different, e.g. a newspaper buys a radio station. The result of such a strategies is conglomerate ownership.

Vertical integration describes the process of one company taking control over another which is within its original line of business, e.g. MCA's purchase of Cineplex-Odeon. Such a structure is intended to minimize market uncertainty by controlling the whole line of business.

While both forms of spatialization describe rather single-directed processes towards increasing concentration of ownership and market control, new forms of temporary concentration have emerged in the form of 'strategic alliances' challenging the traditional concepts. Related questions figure most prominently in the debate about 'Post-Fordism' and 'flexible accumulation' (for an assessment of the Post-Fordism debate see Webster, 1995, for a discussion of flexible accumulation see Lash; Urry 1987, 1994, and Harvey, 1989).

The two examples mentioned above--newspaper and cinema--already indicate that the concept of spatialization has mainly been applied to describe the characteristics of traditional media with a strong focus on mass/broadcast media (Garnham, 1990; Smith, 1991; McChesney, 1993; Melody, 1994)2. The emphasis on the structure of ownership and the related consequences of this 'possession of the means of production', especially in regard to the policy process reflects what Mosco accounts to be the central commitment of the politically economy: "understanding the connection between the political and the economic." (Mosco, 1996 p.31)

These questions focus mainly on control over space and its related organizational dynamics. When applied to networks this approach leads to an analysis of the topology by bringing questions of distribution, ownership, access and concentration of infrastructure into the foreground (Hepworth, 1989).

However, they are of limited help to describe the dynamics within networks, to come to terms with the dynamic creation of spaces and their specific reality.

While personally following the notion outlined above, Mosco mentions also a different interpretation of spatialization. Two seemingly independent approaches are concerned with the creation of space. One has been most influentially developed by Harold Innis, who was interested in how the use of media shapes the relation of time and space by accelerating the rise of specific forms of political and social organizations, according to the inherent 'bias' either towards time or space of each medium of communication (Innis, 1950; 1951). This approach has been greatly expanded in the works of Marshall McLuhan, who focussed on media as the central influence on all aspects of social life (McLuhan, 1964).

The second approach Mosco identifies is connected with Henri Lefebvre, as mentioned above. Even though he did not pay special interest in communicational processes, he conceptualizes space as "permeated with social relations; it is not only supported by social relations, but it also is producing and produced by social relations." (Lefebvre, 1979 p.286) In his view, transition in the use of space is related to economic transitions, to something he labels " the economy of flows" where flows describe a generally increased mobility of material, labour, energy, and information (ibid.). While Lefebvre remains somewhat vague about the direct relationships between space and economy (for a critique see Gregory, 1994 pp.348-416), David Harvey is more explicit. He sees at the base of the 'time-space compression' the changes in the economy, mainly in the nature of money:

"None of the shifts in the experience of time and space would make sense or have the impact they do without the radical shift in the manner in which value gets represented as money. ... The breakdown [of the gold standard] in part occurred because of the shifting dimensionalities of time and space generated out of capital accumulation. ... Since 1973, money has been dematerialized in the sense that it no longer has a formal or tangible link to precious metal ... or any other tangible commodity. Nor does it rely exclusively upon productive activity in a particular space. The world has to come to rely, for the first time in its history, upon immaterial forms of money. ... The effect is to render the spaces that underpin the determination of value as unstable as value itself. This problem is compounded by the way that speculative shifts bypass actual economic power and performance, and then trigger self-fulfilling expectations." (Harvey, 1989 pp.296-297)

Harvey focuses on the shift in the experience of space between Modernity and Postmodernity, a 'sea-change' he dates somewhere around 19733. Unfortunately, while proposing a somewhat problematic single date, he remains unclear in many aspects, such as who's experience shifted, on what concept of space is the notion of a shift based, and, assuming that shift actually occurred, what a new, more appropriate concept of space might be.

This is, however, a crucial problem for a political economy aimed at understanding how influential dynamics arise. Bruno Latour points to the problem when he states:

"Most of the difficulties we have in understanding science and technology proceeds from our belief that time and space exist independently in an unshakable frame of reference inside which events and place would occur. This belief makes it impossible to understand how different spaces and different times may be produced inside the networks built to mobilize, cumulate and recombine the world." (Latour,1987, p.288, quoted in Graham,1996, p.55)

In the following I want to probe the field for a concept of space that relates to the reality within networks. The discussion about new or additional concepts of space is currently most vivid in geography and urban studies, where a paradigm shift (for a discussion of this shift see Graham, 1994, p.1-75) is occurring precisely to capture the changing realities in cities accelerated by the increased importance of communication networks (Sassen, 1994, 1996, Brunn, Leinbach, 1991, Mitchell, 1995, andCastells, 1989; 1996).

Brunn, Leinbach develop the idea of two different types of location: 'relative' and 'absolute' location, where relative defines a location in regard to the access it allows (proximity) and absolute defines it in regard to geography (physical location) (Brunn, Leinbach, 1991, p.xvii).

These two forms of location are connected over network topology which shows strong features of centralization in form of nodes that are usually within traditional urban centers (Sassen, 1994). But from within the networks, this topology is invisible and unimportant. As William Mitchell observes, networks have a topology: it is possible to draw a map and define the nodes and the main connections. But a network "is fundamentally and profoundly antispatial." (Mitchell, 1995 p.8)

The impression that networks are antispacial arises from a concept of space as the Cartesian stage, as the fixed ground upon which life unfolds (Graham, 1996 p.54). This does, as Bruno Latour remarks, seriously restrict our thinking. If we want to understand what is happening inside networks we have to understand them as real and not only as metaphorical spaces. This may seem like academic shadow boxing, insisting on minuscule semantic differences, but it is not.

If we think about networks as real spaces, spaces that have distinct properties, then we can start to examine their features and characteristics. We can ask "what operations does [a specific type of] space permit or deny? ... Cyberspace itself is neither a hardware system, nor a simulation or sensorium production system, nor a software graphics program or a 'application'. It is a place, a mode of being." (Benedikt, 1991 p.126; p.132) With the notion of a "mode of being" Benedikt stresses the point that people behave differently in a network space, because this space offers new possibilities and constraints, much as people behave differently when they are scuba diving, not because they are different people but because they are in a different environment.

Marshall McLuhan saw it very clearly when he remarked in 1969 that "new media are not bridges between man and nature: they are nature." (quoted in McLuhan; Zingrone, 1995 p.272) The material of this "nature" are the connections between the different elements that build the environment or space, most notably the social relation that are enabled and formed through these connections. In an explicit attempt to make space a category for the political economy, Doreen Massey develops a definition whereby the social relations are the basis of space:

"Space is constructed out of interrelations, as the simultaneous coexistence of social interrelations. ... What makes a particular view of these social relations specifically spatial is their simultaneity." (Massey, 1992 p.80)

The occurrence of simultaneous interaction is the basis of any kind of space that has a social or cultural meaning. The specific character of these interactions, what defines the quality of such a space, is the medium in which these interactions are embedded. It is the specific environment that determines the scope of interactions. For instance, while in physical space every location is unique. A thing can be only at one place at a given time. In a network space differences are based on accessibility. Everything that is accessible is at the same place: here.

Harvey's concept of a time-space compression brings the effects of a new 'condition' to the foreground, grasping a new experience of existing spaces. It is, however, slightly misleading to understand the inner side of networks, a space in which localities are not brought closer to each other (by compressing the distances) but one inc which localitiy is transcended by converging all connected locations into a single space. This space networks is additional to the existing places and characterized by its placelessness. The same is true for time. For example, inside networks time is not simply compressed but it is transformed into a malleable category that can be stretched, suspended and reversed. I will return to these points later with a concrete example.

Manuel Castells develops a concept where he contrast the "space of places" with the "space of flows". He conceptualizes society as increasingly constructed around flows: flows of information, capital, signs, organizational interaction and so on. By flows he understands

"purposeful, repetitive, programmable sequences of exchange and interaction between physically disjointed positions held by social actors in the economic, political and symbolic structures of society. ... The material support of the dominant processes of our society will be the ensemble of elements supporting such flows, and making materially possible their articulation in simultaneous time. ... The space of flows is the material organization of time-sharing social practices that work through flows." (Castells,1996 p.412)

While the space of flows is not placeless, the topology of the networks is rooted in a local infrastructure, its structural logic is placeless: what happens inside a network can not be reduced to its physical places. However, the patterns and properties of the interactions in networks are no less real and no less influenced by their environment than the ones in physical spaces. The interesting questions evolving are how these two distinct and real configurations of spaces (flows and places) interact and how do their nature and history mutually constitute each other?

The following section will sketch the emergence of one example of a "space of flows", the international currency markets and try to determine some of its properties. To do so, I will describe a moment when the currency markets effected a crisis in the organizational systems of the space of places, the nation state, by hampering the plans for the European Monetary Union (EMU).

3. Financial Markets as a Space of Flows: Foreign Exchange


Foreign exchange markets are among the most abstract, and in many ways most esoteric, inventions of capitalism. They feed upon themselves in the sense that their input is the same as their output--currencies--and the underlying assets are not specific commodities but are themselves abstract constructs: whole countries or rather national economies. All segments of financial markets are highly interrelated what makes it somewhat problematic to view them as an entity. The more appropriate model seems to be that of a node, where different strings come together building a structure that has its own characteristics--the patterns in the space of flows--that are defined by and are defining the interrelations of the strings. In order to understand the basics of their workings and the specific role of the technology in their development one has to situate them in a broad historical socio-economic context, unwinding the different threads. I will do this in a very brief form in the first part of this section.

3.1. The emergence of a market

It was a strange congregation which originated a market that was to become the largest or, as the financial jargon goes, the "deepest" market in the global economy over the course of some 30 years. By the late 1950s, the financial establishments of Eastern Europe, the Arabic countries, Italy and Great Britain all faced the same problem: they had to find ways to mobilize capital outside of the then tightly controled of the government issuing the currency. Different independent developments had brought them to that state.

Eastern Europe

In the context of the rapidly deteriorating East-West relations in the late 1940s and early 1950s the communist governments--obliged to hold US $ to conduct trade with western countries--began to fear for the security of their US $ assets in the USA. The rise of McCarthyism seemed to make the danger of seizure for political reason ever more likely5. Advised by British bankers, they transferred their US $ to a Soviet-owned bank in Paris, the Banque commercial pour l' Europe du Nord6. The first Eurodollars7 were created.

The Arabic countries, Italy and the British bankers

With the rising heat in the Near East, the Arabic countries began to develop similar concerns, especially in the wake of the Suez War in 1956. Egypt began to shift its assets out of the USA. In Italy a rigid lending-rate structure motivated aggressive banks to seek markets outside the lira to offer their customers better credits consitions. In 1957 as a reaction to the British balance of payments crisis resulting from a massive outflow of capital, the Bank of England prohibited banks from doing Sterling financing of third country trade, that is basically all trade not involving British importer or exporter. Subsequently, the British bankers started to use US $ as prime currency for financing international trade.

The US $ became the preferred international currency for several reasons. The USA had emerged from World War II as the dominant power in the Western world superseding the British Empire as the world economic leader. Furthermore, the US $ was used as the anchor currency in the Bretton Woods system that regulated the international post-war economy on the basis of the gold standard.

With all elements in place--supply (politically uncontrolled but trusted US $), demand (industry seeking to circumvent national restrictions to finance its expanding volume), and a mediator (the European banking system led by the British)--a self-accelerating growth of the eurocurrency market began: in 1964 about US $ 14 billion were tied into that market, in 1985 the market comprised about US $ 1.7trillion: an average growth rate of more than 57% per year. The first Eurobond was written in 1963, the rate of issuance slowly rose to 310 in 1980 and exploded to more than 1300 only five years later (Hepworth, 1989 p.164). Such a tremendous growth would have been impossible if it would have not been feeding on and accelerating broader economic and technological developments.

Postwar context

The USA began to pour massive amounts of US $ into foreign countries after World War II, some as part of the efforts restructuring Europe (Marshall Plan), some as payments for their over-sea troops, more and more US $ left the USA and not all of them returned in form contracts to US firms. In the shadow of the political expansion of the USA as the dominant power in the Western hemisphere, large US companies started to convert into multinationals powering the political-military hegemony with an economic dominance: the "Pax Americana" was being established.

The industry-driven commercial expansion provided the initial input and incentive to develop a global financial infrastructure to enable and accelerate multinational production and international trade. An indicator of this growth of the financial infrastructure is the expansion of US banks from 1960, when only 8 banks had foreign branches to 1978, when more than 100 US banks had 761 foreign branches (Hamelink, 1984 p.61).

The beginnings of the financial markets were rather slow, mainly because new applications had to be developed and communications channels were cumbersome, seriously limiting the scope of workable applications.

The telecommunications infrastructure just started to reach a global level in the 1950s when the first transatlantic telephone cable was laid. It could carry 36 very expensive conversations at one time. By 1976 the sixth cable was laid carrying some 4000 conversations at once and not before 1988 the first fiber-optic cable was laid that could carry 40'000 conversations at once (Wriston, 1992 p.42-44). At the same time satellite communication had been established providing everyone (who can pay for it) with abundant communication channels.

End of the post-war period

The economic stability of the post-war period prepared the bed in which the seeds of its disruption could sprout. During the course of the 1960s, the international economy grew increasingly dynamic, posing serious strains upon the Bretton Woods system that regulated the post-war economy by fixing currency exchange rates based on the convertibility of the US $ into gold. In the late 60s, a series of crises undermined the viability of the system and on August 15, 1971 Richard Nixon ended the convertibility of the US $ and through this the gold standard for the Western economy.

Not much happened immediately. Nevertheless David Harvey points to this time as the "sea change" marking the shift between modernity and postmodernity:

"The breakdown of money as a secure means of representing value has itself created a crisis of representation in advanced capitalism. It has also been reinforced by, and added its considerable weight to, the problems of time-space compression. ... The rapidity with witch the currency markets fluctuate across the world's spaces, the extraordinary power of money capital flow in what is now the global stock and financial market, and the volatility of what the purchasing power of money might represent, define, as it were, a high point of that highly problematic intersection of money, time, and space as interlocking elements of social power in the political economy of postmodernity." (Harvey, 1989 p.298)

In a less dramatic approach, the sociologists Scott Lash and John Urry point at the same phenomenon--the separation of financial and productive economy, the removal of the sign from the object--as a mark of differentiation between what they call "organized" and "disorganized capitalism", a concept that has great similarity to the distinction between Fordism and Post-Fordism (Lash; Urry, 1987; 1994). With the disruption of the connection between the idea, money, and the material, gold, the overthrow of matter--according to a popularization by George Gilder, the single most important event of the 20th century (Gilder, 1989)--found a very concrete expression.

It is a somewhat futile discussion whether we have witnessed, are witnessing or will witness a decisive break in the historical development constituting a distinct new condition, a debate ongoing ever since Daniel Bell published his seminal book The Coming of the Post-Industrial Society (Bell, 1973) announcing a new era (for recent contributions see Webster, 1994; 1995). By pointing to the end of the gold standard I do not want to enter that debate. I simply want to describe an early, easily visible consequence of the development that provided the basis for its own acceleration and in this course emerged as one of the prime factors shaping the direction of future processes. It is, in this sense, neither an end nor a beginning but an important turning point in the continuous flows of history.

The rise of networks

The year 1973 has been very important because two years after the end of the gold standard, the Bretton Woods system finally broke down and the exchange rates began to float freely. In the same year, another sea change occurred which, in the long run, gave the first one its real significance. The financial markets moved from telex and telephone to computer networks as prime means of communication. Reuters, the news agency that had started as a courier for financial information in 1849 (Read, 1992), launched its monitor screen service, "the forerunner that led to a worldwide surge in financial trading." (Fallon, 1994 p.31) Only six years later the network connected some 250,000 screens world-wide. Today, Reuters is not only the single most important news agency for the financial markets, but it also provides the tools to work the markets by connecting the dealers world-wide in a way that allows them to conduct their business within the Reuters network. An aggressive expansion policy, through vertical integration and pioneering into new services, made Reuters one of the backbones of the global financial markets, creating its highly integrated computer-network environment.

During the early 1970s a large number of new network-based services changed the structure of the financial markets. For the currency markets, especially for Eurodollars, the most important is CHIPS (The Clearinghouse Interbank Payment System). Founded in 1970 by a group of the largest New York City commercial banks to effectively communicate among themselves, CHIPS expanded gradually in the 1970s and 1980s to include other commercial banks and financial institutions. The purpose of the CHIPS, and similar systems such as SWIFT (Society of Worldwide Interbank Financial Telecommunications, founded 1973) is twofold: it serves at the same time as the means of communication, passing authenticated messages back and forth and it has the function of a clearinghouse which guarantees for the execution of the deals arranged over that network (from the webpage of the Federal Reserve Bank of NY ).

At the same time, the institutions working in these markets had to spend massive amounts of money in infrastructure to be able to make use of the new, increasingly global features of the markets. In 1981 the 10 largest US investment banks spentUS $ 2 billion and in 1995 17 billion on new technologies (Lowell, Farrell, 1996, p.41 ).

The process of technological innovation, economic expansion and political deregulation that enabled the rapid growth of the financial markets at an increased pace since the late 1950s is highly interrelated and can not be reduced to a cause-effect relationship. The different strings that are woven into a node are "mutually constitutive" and, as Marshall McLuhan observed, "today effects and causes merge because they almost coincide in time and space in the new information environment." (McLuhan; Barrington, 1972 p.6) Mutual constitution as a conceptual tool points at the changing interrelations among its elements. The twin-events of freeing money from the drag-weight of material reality and the explosion of computer networks to handle the new type of pure information are central in the emergence of a new dynamic in the multiple determination of reality. Computer networks play a crucial role in understanding the character of newly dominant social practices because they provide their environment and therefore shape the character of the interrelations that they embed.

While globalization is the catchword in the current debate, there is widespread agreement that despite a growing integration a real globalization has not yet arrived except in some parts of the capital markets. In the economic sense, the conditions for a truly global (and not just international) market are:

- every player has access to the same information

- every player uses the same skills and techniques

- risks are assessed the same way

- the infrastructure needed is in place in every national market

- all participants view the market as global, instead of international

- there are no (national) restrictions

- no government is able to control pricing (Lowell; Farrell, 1996 pp.36/37)

Following this definition, a global market is achieved when all geographic differences in its workings are eliminated. In this regard globalization does not mean the time-space compression or the shrinking of distances but the eliminating of local components by transferring the place of action into a placeless space, into the space of flows.

The incentive to develop and exploit such a new space was, from the very beginning, very simple and shared by all participants: profit. Profit that would have otherwise been impossible to gain. In this sense it is the continuity of the old principle of capitalism. However, it triggered a development that had never been imagined and even less determined by any single group or institution which reworks the conditions under which capitalism operates significantly. The dynamic under which the dominant social practices, the financial markets, now operate reflect the constraints and opportunities of the new environment.

The remainder of this sections sketches the dynamics of this environment by analyzing in the utmost brevity the currency market during the events of the crisis of the EMU in 1992/1993.

3.2 The dynamics of the network: The EMU crisis

After the end of the gold standard, the European countries developed a number of policies to align their currencies and stabilize exchange rates. The European economies--in contrast to the US--were highly interrelated, and volatile exchange rates made the inner-European trade more unpredictable, further disadvantaging the small national economies compared to the large scale national economy of the main competitor, the USA. Furthermore, the historical experience of hyperinflation and the rise of fascism made exchange rates politically more sensitive (Wyplosz, 1994 p.68). A set of interlocking agreements tried to achieve stability during the 1970s. "But there was no turning back the clock. The ongoing development of the financial markets, powered by advances in telecommunications and information processing technologies, hampered efforts to contain international financial flows." (Eichengreen, 1996 p.137)

Discoordination and lack of political made it relatively easy for the financial markets to force changes in the exchange rates that were not intended by the political system. In 1979 France initiated the European Monetary System (EMS) to address that deficit (ibid. pp.152-160).

The purpose of the EMS was to establish a solid framework regulating the governments' cooperation in order to maintain control over the exchange rates. Fixed but adjustable exchange rates were agreed with a band of 2 1/4 % against the ECU for the strong and a band of 6% for the weaker currencies (during a transition period). The rates were adjusted first every 8 months and later every 12 months and between 1987 and 1992 they remained unchanged (see Gibson, 1996 pp.175-208). Almost 10 years after its introductions it seemed reasonable to note as "the most important single feature of the EMS":

"A self-fulfilling speculative crisis can not take place unless the markets can commit larger sums of money than governments can mobilize. The markets must be able to swallow their reserves. That can not happen in the EMS, infinite amounts by drawing on reciprocal credit facilities." (Kenen, Peter (1988). Managing Exchange Rates. London: Royal Institute of International Affairs p.55, quoted in Eichengreen, 1996 p.162 n36)

These hopes did not stand the test of time, too much was changing in the late 1980s and early 90s. However, as late as December 1991 the spirits were still high (Eichengreen, 1996 p.171). The economic problems of the 80s, when the ghost of "Eurosclerosis" made its way through the media and the minds of politicians, lent a strong impetus to an intensification of the integration process. A single market was envisioned to bring down the serious structural unemployment rates throughout Europe. An integral part of the creation of a single market was the creation of a single currency, a policy formulated in the Delors Report (1989) and adopted in the Maastricht Treaty in 1991. A precondition of a single currency was the removal of the capital controls, a process that took place during the whole decade and was influenced by various forces8 (ibid. p.168).

While this dynamic was well aligned with stability of exchange rates, the markets developed rapidly in an other direction. First of all, they grew, not only in size but also in volume, that is the amount of money in relation to the velocity in which it moves: in 1969 the daily turnover was about US $ 20 billion/day, rising to 300 billion/day in 1986, reaching 650 billion/day in 1989 and 900 billion/day in 1992. While it took more than 17 years to gain the first 350 billion/day, this volume was added subsequently every 3 years (Fallon, 1994, p.31; Valdez, 1993, p.126). In the early 1990s the market transactions of one day reached the size of the combined reserves of the most important central banks that were about US $ 800 billion (Walter, 1991, p.199).

In this situation of more powerful and less politically controlled financial markets, the adjustment of exchange rates became more and more difficult because every hint in that direction would have triggered massive movements in the capital markets whereas the whole system was designed to avoid exactly that. In this sense the stability of the EMS was not a sign of its strength but of its weakness (Eichengreen 1996; Gibson, 1996).

The shifting powers put the increasingly inflexible system under more pressure. The German unification started to seriously burden the German and the European economy. In spite the signing of the Maastricht Treaty in December 1991 which set the time table on the way to a single currency, the political will of the signatories to maintain an unified policy began to shrink. The French wanted a different policy to fight their unemployment rate. The signs were rising that the political will to maintain the stability of the system was weakening. A promising prospect for the financial markets which live off volatility. The speculators were waiting and observing the developind situation, and more importantly, themselves.

The events9

The first cracks in the system appeared at its periphery. Finland's economy suffered from the collapse of the Soviet Union which had been one of its main trading partners. As result the Bank of Finland trying to align its currency to the EMS, had to change its policy and devalue its currency on November 14, 1991. The effects spilled over to Sweden. In order to maintain its currency within the EMS range (of which both countries were not members) the Swedish Riksbank had to raise some critical interest rates.

The Danish referendum (June 2, 1992) rejected the Maastricht Treaty and initiated the first episode of instability. The Italian lira quickly fell towards the bottom within the EMS and other currencies followed gradually 10. The insecurity about the future of the Maastricht Treaty rose during the following months as the polls for the French referendum showed a rising tendency to reject the treaty as well. Meanwhile, on August 26, the British £ fell to its assigned EMS floor, forcing a massive intervention of central banks. On September 8 the Finnish marrka came under pressure and the subsequently, as in November 1991, the Swedish krona.

The Italian lira was the main target in the first wave of the crisis. In spite of massive support, it had to be revalued on September 13. The first realignment with the EMS in 5 years raised the expectations that others would follow. The pressure on the British £ rose and despite intervention by the Bank of England, British membership in the EMS was suspended on September 16. On that one day the Bank of England spent about US $ 15-20billion, half of its foreign exchange reserves, trying in vain to stabilize its currency (Economist, September 19, 1992, p.89). The same night, Italy announced that is was unable to maintain further stability and was allowed to leave the EMS letting the lira float.

Subsequently the pressure rose on the Danish krone, the Irish £ and the French franc. The French raised their interest rates to defend their currency. The Bank of France and the German Bundesbank spent in this week (ending September 23) more than US $ 32 billion to defend stability.

Sweden, after having raised its critical interest rates to a previously unimaginable rate of 500% (from 17.5%) in September, devalued its currency on November 19. The political support for a tight fiscal policy was impossible to maintain. In the six days before the devaluation Sweden lost US $ 26 billion. This amounted to more than 10% of its GNP or US $ 3.500 per resident! (All numbers, unless otherwise noted, are from the Bank of International Settlement's Annual Reports.)

The crisis continued during the first half of 1993, one currency after the other was attacksx and either defended or devalued. The last wave occurred in June, when the French franc came under attack, despite its healthy economy. Massive sales of French francs led to unprecedented volumes of intervention. Nevertheless the system could not be stabilized and at the end of July the band of the exchange rates in the EMS was widened form 2.25 to 15%. This "face-saving step" (Eichengreen, 1994, p.98) acknowledged de facto that it was impossible to politically determine the value of a currency.

The method employed

While the historical circumstances were unique (as they always are) the actual methods employed were surprisingly orthodox and, in a nutshell, they produced a self-fulfilling prophecy. The main strategy was to "sell short". The simple way to do this is to borrow money in a currency that is expected to devalue, for example the lira in early September 1992, and convert it into a stable currency, German marks at this point. After the borrowed currency drops, the strong currency is converted back into the now devalued currency, the borrowed sum is paid back and the difference generates the profit.

In effect this means that the speculators sell currencies they do not yet own in the anticipation that the exchange rate will fall. The central banks hve to buy the currencies they still own in order to stabilize their price. They can do that only as long as they and their allies, the other central banks, retain enough money and are willing to spend it. If they run out of money or political will, they would have to devaluate the currency to stop further selling, the speculators now could buy the cheaper currency to pay back their debt and make the profit.

Early September 1992 the mark was worth 765 lire. A couple of weeks later, after the speculative attack was over, the mark was worth 980 lire. A speculator who employed the "sell short" method would have made a profit of 28% of the borrowed sum. But the actual profit could be much higher. A speculator with a substantial credit line can borrow up to 1:20 of the invested sum. This means it was possible to speculate with US $ 1 billion by actually investing only US $ 50 million. In the case of the Italian lira speculation, this 50 million would have yielded a profit of 560%, or 258 million11 (Jaffe; Machan, 1992 p.41).

While it is important for market participants to understand the larger economic picture, it is more important, from a speculative point of view, to see what the others do, to interpret the intrinsic patterns of the market itself. When in September, 1993, large institutions, such as multi-national corporations and mutual funds, started to realign their currency portfolios, the speculators picked up immediately the rising trading volume of the weaker currencies and, knowing how much money the central banks had to spend, a figure that determines how long they can withstand an attack, it was relatively easy to speculate. It is difficult to say what actually triggers the crisis at a specific point, what transforms long complex processes that have built up over years into processes that are measured by the minute. The power to switch lies, evidently, within the networks and their expectations and not within the political and economic events that are supposed to be reflected. What may be interpreted as business as usual can, under the right circumstances, provoke a crisis. Once the crisis has started, it can accelerate itself. From the vantage point of inside the networks crisis are welcomed and prepared: As a spokesman of the Quantum Fund said: "When the Italian finally devalued the lira ... it was almost like we had been preparing for an exam for six month and now were finally taking our test." (Jaffe; Machan,1992 p.41) And they passed it with an A+.

What makes this specially noteworthy is the fact that the financial markets live off volatility and the higher the market volatility the deeper the political crisis. Until the 1980s the central banks, and with them the governments, had two major factors at hand to gain influence: legal control mechanism and volume. Although never airtight, capital controls provided the central banks with the time and the room to execute political guidelines (Wyplosz, 1994 p.68). However, during the 1980s these controls were removed.

The advantage of volume was also lost at the end of the 1980s. Now the markets were able to mobilize more money than all European Central Banks together, at September 16, 1992, they outweighed or, to use some more jargon, "swallowed" some US $ 15-20 billion invested by the Bank of England. Being able to move such massive amounts of money, currency speculation can become a self-fulfilling prophecy (Shelton, 1994 p.208).

Evidently, a power shift had occurred, a new dynamic had definitely established itself as a major force of power, in the classical sense of Max Weber who defined power as "the possibility of imposing one's will upon the behavior of other persons." (Weber, 1954 p.323)

4. Conclusion

On the surface, the political economy, "the connection between the political and the economic" (Mosco, 1996 p.31), seems to be quite evident. The sheer market power, freed from any political restrictions, has overwhelmed the combined efforts of the political system to achieve a long-term goal. While the markets triumph, the representatives of politics are left behind, raging in anger and confused. Michael Sapin, then French Minister of Finance, offered insight how deep the humiliating of politicians was when he gloomily announced: "During the French Revolution such speculators were known as agioteurs, and they were beheaded." Raymond Barre, another high-rank French politician, demonstrated the general ignorance of the real dynamics of the events by reducing the complexity to a handy conspiracy. He said: "I am not among those who see plots everywhere. It is not at all my temperament. But I really think there is a will in a certain number of economic circles not to promote - in fact to do everything to prevent - the creation of a European monetary and economic union and in consequence to blow the European monetary system." (both quotes in Shelton, 1994 p.7)

In the immediate aftermath of the events, there was lots of talk about the "Anglo-Saxon plot" (Economist, August 7, 1993, p.23) conspiring against the EMU because it would reduce the volatility of the currency markets and therefore hamper the profits of the speculators. Such efforts to explain the events miss completely the real dynamics that achieved such a dramatic effect. They view markets similar to companies or governments that are aiming at controlling a fixed territory over a long time for a corporate goal, in the case of the company this goal is corporate profit, in the case of the government it is, hopefully, the common welfare of its citizens. While this is the logic of the space of place, the dynamics of the space of flows are different.

Their structural logic is placeless (Castells, 1996). Within the markets there is fierce competition, money is made against each other and not in corporation among the participants. The strategies employed to achieve an individual goal within the networks may be very different. However, what is communicated to the outside is only one result, the integrated effect of all actions, the price that goes up or down. Because the logic of the space of flows is placeless, there is no room for differences. The financial networks can express only one opinion, one price at one time, because it has only one place, the space of flows12.

In the events of the EMS crisis the two spaces interrelated in a very explosive manner, the currency markets acting according to the constraints and possibility offered by the environment, the global computer networks.

Networks are deeply self-reflexive. They are primarily influenced by their own actions. As the Economist observed, the views of one of the most influential speculators, Mr. Soros "have attracted at least as much attention as those of the head of the Bundesbank", the financial institution presenting the single most important economy in Europe (Economist, August 7, 1993 p.66). This tendency makes them prone for self-accelerating processes that can be read as self-fulfilling prophecies. Its internal processes are not built on a linear cause-effect logic, but on patterns of immediate feedback. In the words of George Soros,

"buyers and sellers in financial markets seek to discount a future that depends on their own decisions. The shape of the supply and demand curves cannot be taken as given because both of them incorporate expectations about events that are shaped by those expectations. There is a two-way feedback mechanism between the market participants' thinking and the situation they think about -- 'reflexivity'." (Soros, 1997)

Powered by the sheer volume that can be moved, this can override any other logic.

The placelessness of the space gives movement a special character, allowing it, under the right conditions, to mobilize huge quantities in very short time. Movement is, most of all, concentration or deconcentration. The velocity and the volume of this concentration defines the meaning of the movement. The power of a speculative attack lies in its suddenness, which, in turn, is accelerated by the reflexivity of the environment. Time is an elastic category in such a context. A self-fulfilling prophecy bends time similar to H.G. Well's time machine. The speculators can, by going to the future ("selling short"), influence the conditions of the arrival of that future. Their actions merge future into present and while speculating along the continuous flow of time. This is what Manuel Castells calls the "timeless time":

"Timeless time, the dominant temporality in our society, occurs when the characteristics of a given context, namely, the informational paradigm and the network society, induce systemic perturbation in the sequential order of phenomena performed in that context. ... Timeless time belongs to the space of flows, while time discipline, biological time, and socially determined sequencing characterize places around the world, materially structuring and destructuring our segmented societies. .... The space of flows disolves time by disordering the sequence of events and making them simultaneous, thus installing society in an eternal ephemerality." (Castells, Manuel, 1996 pp.464-467)

Time, like everything in the space of flows, is man-made. Not only in the sense of 'socially constructed' as culturally determined but in a more radical sense time is a variable that can be individually molded in many ways, converging past and future into a constant present.

The elements in networks are primarily determined by their relation to each other and not by their 'intrinsic' properties. While the economic situation in Finland and Sweden prepared the ground for their currency crisis in 1991/92 many of the dealers who made significant amounts of money out of that situation are said not to have been able to distinguish between Finland and Sweden (Eichengreen, 1996). The important thing for them was not the absolute condition of the economy but the relative patterns of the moments of the indicators on their screens.

The paramount importance of relationships to determine fluid meaning and action links back to the self-referentiality of the networks because the relations are, most of all, to other elements within the networks. A currency can only be overvalued if another is undervalued and the reaction to such a situation is a change in their relative concentration of money in each other: flows arise between differences.

The disruption of the linear relationship of cause and effect, the importance of reflexivity, and the relationality of all elements to each other and to time shape the central dynamics of the space of flows.

4.1. Outlook

But did anything really happen? By November 1996 Italy had joined the EMU again (Economist, 30.11.96) and the time table still was set to achieve the single currency by 1999, with EU officials fiercely insisting on the validity of the treaties and the press being sceptical about it (Economist, 15.2.1997). In retrospect the crisis seems somewhat unreal.

For a political economy the question arises what is the actual, long-term quality of the interrelation between the economic space embedded in computer networks and the public space organized in public institutions?

For the promoters of the free market, the relationship is simple and positive. The networks, as environment based on instantaneous feedback or reflexivity, are the ultimate form of democracy because every action is translated directly into effects and not distorted by representation or slowed down by bureaucratic processes. In the words of Walter Wriston, former CEO of Citicorp.:

"The global market has produced what amounts to a giant vote-counting machine that conducts a running tally of what the world thinks of a government's diplomatic, fiscal, and monetary policy. That opinion is immediately reflected in the value a market places on a country's currency." (Wriston, 1992 p.9)

This is echoed in statements of politicans, such as the Karl Lammers, a high-rank adviser to the German Bundeskanzler, who said: "The welfare state today is no longer a guarantee for social justice .... . Politics have to orient themselves on the international realities. And the expression of this reality are the expectations (!) of the financial markets." (Cassen 1996, translation F.S.)

The slogan of such a democracy would adequately be: One dollar, one vote. This is, evidently, not a democracy but an oligopoly. This would be, in the words of Manuel Castells, the "commodified democracy of profit making" (Castells, 1996 p.472). It undermines the basic element of an inclusive democracy: equal rights based on citizenship. If citizenship is the right to demand accountability of the government then there is a new form of it emerging: economic citizenship.

"But this economic citizenship does not belong to citizens. It belongs to firms and markets, particularly the global financial markets, and it is located not in individuals, but in global economic actors. The fact of being global gives these actors power of individual governments." (Sassen, 1996, p.38).

The understanding of the space of flows can help to redefine a policy that can strengthen the democratic notion of citizenship in contrast to a rising global and economic one. In this process the political economy of communication could take an important role.

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1 This term is directly related to Lukacs' and Althusser's term "over-determination" but avoids their utterly complex language (Mosco, 1996 pp.2-9).

2 It can serve as an additional indicator for the prominence of this notion that Mosco devotes 31 pages to it, out of 38 pages that deal with the concept of spatialization.

3 With respect to architecture the end of modernism has been dated as 3.32pm 15 July 1972, when the Pruitt-Igoe housing development in St. Louis (a prize-winning version of LeCorbusier's 'machine for modern living') was dynamited as an uninhabitable environment for the low-income people it housed (Harvey, 1989 p.39). The question of periodizations is also addressed below in the section "End of the post-war period".

4 Unless otherwise noted, I rely on: Lowell, Farrell (1996); Houthakker, Williamson (1996), Eichengreen (1996), Millan (1995); Shelton (1994); Valdez (1993); Sarver (1988)

5 The seizure of foreign assets is a rarely used but nevertheless possible weapon in case of a political conflict. In April, 1982, Margaret Thatcher employed it against Argentina in the context of the Falkland crisis.

6 This policy tied well into Soviet plans to increase the (trade) relationships with Western Europe as a means of possibly destabilizing the transatlantic partnership.

7 The so-called cable code, the name under which the Soviet-owned bank communicated in the financial networks was EUROBANK, hence its US $ became the Eurodollars. Subsequently all currencies held outside the country of their denomination became Eurocurrencies independent of their actual 'physical' location so that US $ deposited in Tokyo are also called Eurodollars. The geographical reference in the name is a pure convention.

8 There were also strong ideological forces pushing a financial deregulation. Only five month in her new office, Margaret Thatcher terminated the exchange controls for the British £ (Sarver, 1988 p.30).

9 Unless otherwise noted, I rely on Eichengreen (1994, 1996).

10 The connection between the Danish referendum and the Italian lira was that the referendum weakened the trust in the system and that effect was felt first at the weakest part of the system, the Italian lira.

11 This is, evidently, a simplified model. In the actual events more complex speculation employed combining different methods (futures, swaps) and integrated speculations in different markets (e.g. exchange and stock). The biggest winner of the crisis was the Quantum Fund by George Soros which gained about US $ 1.5 billion during the events of September 1993. Other speculators, such as the Citicorp, gained about US $ 200 million in that month (Jaffe; Machan, 1992). This is exceptional even in the context of the average US $ 500 million/year that Citicorp made in the early 1990s with currency speculation (Valdez, 1993, p.126).

12 In neoclassical economy this is valued as "market efficiency".

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