Financial capital

• 1. Introduction

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  Financial capital never touches a shovel, a sewing machine, or a factory floor, but it pays for all three. Gravediggers rely on shovels. Tailors rely on sewing machines. Factories run on machinery and tooling. Economists call these examples real capital, the physical goods that help produce other goods and services. Financial capital sits one step back from all of it. It is the economic resource, measured in money, that entrepreneurs and businesses use to acquire that equipment. It also pays for whatever services a business needs, across sectors from retail to corporate finance to investment banking.

  That money arrives from one of two directions. It can be internal retained earnings the business already built up. Or it can be funds from lenders and investors. They expect that money to buy real capital equipment or services, producing new goods and services in turn. On paper, that looks like a tidy accounting definition. Once International Financial Reporting Standards, market traders, and political theorists each start asking what should count as capital and who should control it, the definition pulls in several directions at once. The rest of this documentary follows those threads.

• 2. Measuring Capital Under IFRS

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  The International Financial Reporting Standards, or IFRS, require accountants to pick a concept of capital maintenance before they can calculate profit at all. Under a financial concept, capital equals the net assets or equity of the business, whether tracked in nominal monetary units or in units of constant purchasing power. Under a physical concept, capital instead means the productive or operating capacity of the business, measured in physical units such as output per day.

  IFRS recognizes three distinct versions of this choice. In the nominal financial version, capital is synonymous with net assets and equity, and profit is only earned once nominal money equity rises. In the purchasing-power financial version, capital is the invested purchasing power itself, and profit only counts once that purchasing power grows. In the physical version, capital is the entity's productive or operating capacity, and profit is earned only when that physical output capacity increases.

  Current cost, not historical cost, is what the physical concept of capital demands as its measurement basis. That is a bigger accounting task than simply tallying what was originally paid for an asset. The choice already hints at questions the business itself must answer next: which pools of capital it holds, and what each one is for.

• 3. Business Categories Of Capital

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  Productive capital, signaling capital, and regulatory capital: these are the three functional buckets academics and practitioners use to sort financial capital. Productive capital covers the assets a business needs for its daily operations. Signaling capital exists to show shareholders and the market how financially strong a company is. Regulatory capital is the capital financial institutions and other businesses must maintain to satisfy mandatory capital requirements.

  Fixed capital is money a firm spends on assets meant to stay in the business permanently and help it turn a profit. How much fixed capital a business needs depends on several things: the nature of the business, its size, its stage of development, how much capital the owners have invested, and the location of the area it operates in.

  Buying stock, paying expenses, and financing credit: this is what working capital funds, keeping a business running day to day. A long list of factors decides how much of it a business needs. Size and stage of development matter, along with the time production takes and the rate of stock turnover. Buying and selling terms play a role, as do seasonal swings in consumption and in the product itself. Profit level, growth and expansion plans, and the production cycle all factor in. So do the general nature of the business, the business cycle, business policies, and the debt ratio.

  That debt ratio sits right next to a bigger question every business faces: how much of its capital should come from its own owners, and how much should be borrowed.

• 4. Funding Timelines

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  Above 7 years is the threshold for long-term financing, the slowest but often largest way a business can raise capital. Long-term options include share capital, mortgage loans, retained profit, venture capital, debentures, and project finance.

  Between 2 and 7 years counts as medium-term financing, covering term loans, revenue-based financing, leasing, and hire purchase agreements.

  Under 2 years is short-term financing, the fastest category, running through bank overdrafts, trade credit, deferred expenses, and factoring.

  Shares, debentures, long-term loans secured with a mortgage bond, reserve funds, and Euro Bonds: these are the instruments traded when long-term funds change hands on the capital market.

  Commercial paper, credit on open account, bank overdrafts, short-term loans, bills of exchange, and factoring of debtors: financial institutions use these to lend out short-term savings on the money market.

  Two of those instruments, shares and debentures, look similar on a balance sheet but put their holders in very different positions.

• 5. Owners And Creditors

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  Shareholders are effectively owners of a business; debenture-holders are simply its creditors. Shareholders may vote at Annual General Meetings, also called Annual Shareholder Meetings, and stand for election as directors, rights debenture-holders do not have. Shareholders receive profit as dividends, while debenture-holders receive a fixed rate of interest. If a business makes no profit, its shareholders receive no dividend, but its debenture-holders are still paid interest regardless. If the firm dissolves, its debenture-holders are paid before its shareholders.

  Savings or inheritance are two of the ways an owner or entrepreneur might build up own capital, sometimes called owners' equity, the private capital that shareholders and partners contribute to a business. That ownership interest usually takes the form of preferred shares. Several types exist. Preference shares can serve as a hybrid source of finance, alongside ordinary preference shares, cumulative preference shares, and participating preference shares. Ordinary shares, bonus shares, and founders' shares round out the list. These generally rank ahead of common shares, so preference shareholders get paid before equity shareholders do.

  Institutions and other people are the usual source of borrowed capital, which must typically be repaid with interest. It includes debentures such as redeemable debentures, irredeemable debentures, debentures to bearer, and ordinary debentures, along with bonds, deposits, and loans. Weighing debt against equity produces a ratio businesses have to manage carefully. Leaning too far toward debt can lift profit, but it also raises the risk of the business becoming insolvent.

  That same balance sheet, once it is turned into a tradable contract, becomes something else entirely: a financial instrument.

• 6. Instruments And Valuation

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  Medium of exchange, standard of deferred payment, unit of account, or store of value: a financial instrument can serve any of these four roles once a contract bundles capital assets together. Wampum, shells, and tally sticks are examples of indigenous forms of money; modern fiat money belongs in the same category. All of them are only a symbolic storage of value, unlike commodity money, which stores value for real.

  Perceived expected return and risk are what capital market players use to price a financial instrument under normal conditions. Its unit-of-account function comes into question when valuations of complex financial instruments swing drastically depending on timing. Three different conventions try to reconcile this: book value, mark-to-market, and mark-to-future.

  Deferred payment on a financial instrument typically carries a higher interest rate than the standard rates banks pay, or that a central bank charges on its own money. Fixed-income instruments are the ones with reliable payment schedules tied to a uniform interest rate. A variable-rate instrument, such as many consumer mortgages, instead tracks the standard deferred-payment rate the central bank sets through its prime rate, plus some fixed percentage on top. Other instruments, such as U.S. Social Security or other pensions, are indexed to the rate of inflation instead, giving them a reliable stream of value.

  None of this happens in a vacuum; every one of these instruments eventually needs a market willing to issue and trade it.

• 7. Markets And Trust

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  State military fiat, credit, or precious metals resources: these are the three things that can back a financial instrument once it starts trading. Credit in this sense means the social capital held by banks and their depositors. Governments generally keep close control over the supply of these instruments and usually require institutions that grant credit to hold some reserve.

  National currency instruments get traded against each other on the money market. That trading exposes differences in two things: how likely debt is to be collected, and how well a given currency stores value, both as assigned by the traders themselves.

  Bond markets and reinsurance markets are where financial capital moves when it takes a form other than money. Trust varies here too, resting on the social capital, not just the credit, of the bond-issuers, insurers, and others who issue and trade these instruments.

  Boycotts and embargoes are the kind of political factors that shape commodity markets, alongside weather affecting food crops, an example of natural capital at work. Stock markets lean on trust instead. Trust in corporate leaders counts as individual capital. Trust from consumers counts as social capital, sometimes called brand capital in some analyses. Internal organizational efficiency counts too, covering instructional capital and infrastructural capital. Some enterprises even issue instruments that track just one division or brand. Financial futures, short selling, and financial options belong to these markets too, typically pure bets on outcomes rather than direct claims on any underlying asset.

  Those same bets on outcomes rest on something bigger than any single market: a whole political economy that decides what money and capital are for in the first place.

• 8. Capital In Political Economy

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  Human capital and labor are what financial capital and money get measured against, a relationship built into central bank policy and the regulations that govern financial instruments. That relationship always sits inside a political economy, whether feudalist, socialist, capitalist, green, anarchist, or something else. The way a society manages its money supply and regulates financial capital reflects that society's own value system, since it determines how labor gets allocated.

  Rules for expanding or shrinking the money supply, based on perceived inflation or on measuring well-being, reflect those same values. If keeping financial capital a stable store of value matters most, controlling inflation becomes essential, since any monetary inflation reduces the value of financial capital relative to every other type. If the medium-of-exchange function matters more instead, new money can be issued more freely, regardless of its effect on inflation or well-being.

  Socialism, capitalism, feudalism, and anarchism each take a markedly different view of what role financial capital should play in social life, proposing their own political restrictions in response. Financial capitalism produces profit from manipulating financial capital itself. Industrial capitalism instead produces its profit from manufacturing goods.

  Marxist theory commonly frames finance capital's role as the determining and ruling class interest within capitalist society, especially in its later stages. That framing turns an accounting definition into a political claim: whoever controls financial capital, in this view, shapes the direction of the whole economic system, a question this documentary leaves for the listener to weigh.