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What Makes the World Go Round?

The Cash Nexus: Money and Power in the Modern World, 1700-2000

by Niall Ferguson
Basic Books, 552 pp., $30.00


In 1987 the historian Paul Kennedy published a controversial book called The Rise and Fall of the Great Powers: Economic Change and Military Conflict from 1500 to 2000. Its message was that the United States was suffering from imperial “overstretch.” Its economy was no longer large or dynamic enough to support its strategic commitments. It had to accept a lesser role in a “multipolar” world. This message was embedded in a grand historical-geopolitical narrative. Kennedy discerned a long-run correlation between economic and military power. This gave rise to a historic pattern of “rise and fall,” in which successive dominant powers were drained of economic vitality by the cost of fending off their challengers.

Kennedy was exceptionally unlucky in his timing. Four years after his book’s publication, the bipolar world had vanished, as he predicted. But this was because the Soviet Union, not the United States, had crashed. In the post-Communist world, the United States remains undisputed “top dog.” It has a power and authority, unique in history, to shape the political and economic organization of the planet. How it approaches this task will largely determine what our new century will be like.

This is the background to Niall Ferguson’s new book. At one level it is a belated response to Kennedy: today, the US, in Ferguson’s view, suffers not from “overstretch” but “understretch”—its economic resources are more than sufficient for global responsibilities, but rather than use its power constructively, America under President Bush has committed itself to an illusory quest for security behind a celestial Maginot line. Ferguson sees this as the symptom of “a deep-rooted insularity which is the very reverse of what the world needs from its wealthiest power.” He writes: “Far from retreating like some giant snail behind an electronic shell, the United States should be devoting a larger percentage of its vast resources to making the world safe for capitalism and democracy,” if necessary by imposing democracy on “rogue states” by force. Unfortunately, “the leaders of the one state with the economic resources to make the world a better place lack the guts to do it.”

At another level, Ferguson’s book is a historical exploration of the sources of Kennedy’s “mistake.” Like most historians of his generation, Kennedy is an economic determinist. He believes that economic change is the motor of history. But history, Ferguson argues, gives no warrant for this assertion. On the contrary, the central conclusion of The Cash Nexus is that “money does not make the world go round.” Rather, it has been political events—above all, wars—that have shaped the institutions of modern economic life. Sex, violence, and power are “individually or together capable of over-riding money.”

Ferguson is one of the most technically accomplished historians writing today. His intelligence, energy, imagination, and trenchancy are his own; but he is also the product of a revolution in the writing of history, based on good language training, word processors, computerized databases, lavish research grants, and teams of research assistants. These aids have greatly increased the power and range of historical explanation, and the ambitions of the ablest young historians.

Hitherto, most professional historians have been miniaturists, eschewing the large canvas for detailed studies of particular episodes or periods, usually within the confines of national history. Indeed, particularism has been extolled as history’s special virtue, allowing a detailed exploration of context and imaginative understanding of mentalité. (Neo-Marxist historians were the main exception to this rule, ideology being an adequate substitute for facts.) I doubt whether history will ever become a great generalizing discipline. Its role is essentially skeptical, puncturing the generalizations of economists, political scientists, and sociologists. And this is one of its main functions in Ferguson’s book. However, as the frontiers of what can be known by a single person are enlarged, history’s power to discern patterns over time and space is correspondingly enhanced.

One sign of its extension of range is that historians have at last started to take economics seriously. The older generation of historians were almost completely ignorant of economics. This cut them off from full understanding of economic facts. Ferguson has pressed economics into the service of history. Two influences from the “dismal science” have shaped his historical outlook. The first is the theory and history of public finance, a product of his study of the international bond market while working on a history of the Rothschilds.1 The main conclusion of that long work was that though money and power are inextricably linked—public finance being the buckle that binds them—it is power that usually determines what happens to money. The classical, and horrendous, demonstration of this was the First World War.

A second influence on Ferguson has been the economic historian and Nobel Prize winner Douglass North. North picked out institutional innovation, particularly the development of efficient property rights, which channel individual effort into value-adding activities, as the cause of economic growth. “Efficient economic organization is the key to growth; the development of an efficient economic organization in Western Europe accounts for the rise of the West.”2 Ferguson extends North’s thesis by arguing that effective economic institutions were first developed to serve the revenue-raising needs of warrior states. “Institutions,” he writes, “that initially existed to serve the state by financing war also fostered the development of the economy as a whole.”


The Cash Nexus is organized around three discussions: a historical survey of the state’s revenue-raising capacity, an analysis of the politics of public debts, and the implication of these findings for foreign policy today.

In the beginning,” Ferguson writes, “was war.” This is the foundation of his argument. War is a permanent feature of the human condition, though its frequency and intensity have varied considerably over time. He cites the calculation of the political scientist Jack Levy that the great powers have been involved in wars for 75 percent of the time from 1495 to 1975. France was the most bellicose, followed by Austria, Spain, and England. The “average yearly amount of war” was highest in the sixteenth century and lowest in the nineteenth and twentieth centuries. (The twentieth century had two of the most savage wars in human history, but they were compressed into much shorter periods than earlier great power wars.) This might suggest that war is fading away. Developed states are welfare, not warfare, states.

But it is a peculiarly liberal and democratic illusion, Ferguson contends, to believe that war (or more precisely the use, or threatened use, of force) now plays only a marginal role in human affairs; an illusion bred by the fact that the price of exerting power has gone down enormously. Measured by “bangs per buck,” the most modern military technology has never been cheaper. And a small group of nations headed by the United States (the so-called “international community”) have such overwhelming military superiority that they can impose their will on others at little military risk to themselves. In this respect the Pax Americana of today resem-bles the Pax Britannica of the nineteenth century, with Operation Desert Storm “as a latter-day Omdurman.”

The competitive struggle of nations gives the edge not to the states with the largest resources but to the states that can most efficiently mobilize resources for their foreign policy goals. The institutions for mobilizing resources are a parliament, a tax bureaucracy, a national debt, and a central bank. Ferguson argues that the superior development of this financial “square of power” in eighteenth-century Britain gave it not only a decisive military advantage over its main rival, France, but also a faster rate of economic growth.

Parliament is one of the building blocks of the “square of power.” The consensual basis of English taxation, finally confirmed by the Glorious Revolution of 1688, certainly gave the British monarchy the advantage over its French rival. But in general the results of parliamentary control over taxation have been ambiguous. In the eighteenth century they strengthened the state’s war-making power; in the twentieth century democratic control has transformed the warfare state into the welfare state. It all depends on the political constitution. If there are more direct taxpayers than voters the pressure will be to limit direct taxes and rely on regressive expenditure taxes; if more people have the vote than pay direct taxes, it will be to increase direct taxes and to redistribute the proceeds of any given tax from warfare to welfare. The implication of this “law” is that as the constitutional momentum shifts from “taxation without representation to representation without direct taxation,” the tax burden will go up and the proportion of taxes spent on defense will go down.

The facts fit the theory tolerably well. The growth of the welfare state coincided with the great expansion in the ratio of voters to direct taxpayers at the end of the nineteenth century. Even today “British democracy enfranchises more than eighteen million people who do not pay income tax….” The situation is similar in the United States. Ferguson implies that what keeps taxes relatively low in the United States is the low voter turnout in elections, especially by the poor. “In 1990 just over 61 million Americans voted; nearly 114 million…paid income tax. Millions of Americans today are liable to taxation without representation; unlike their colonial forebears, however, their disenfranchisement is largely voluntary.”

More important for the superior taxing capacity of Britain’s Hanoverian state was the centralization of tax collection in a paid bureaucracy rather than in reliance on tax farming—leasing out tax collection to private agents—and the sale of offices. This enabled Britain to raise 12.4 percent of GNP in taxes in 1788 compared to France’s 6.8 percent. However, since democratization also coincides with the growth of public employment, “the bureaucracy, which to begin with optimized the state’s revenue raising power, becomes itself an expense.” Ferguson sums up this section of the argument as follows: “The processes of parliamentarization and bureaucratization were first made necessary by the cost of war. But in the twentieth century they developed a momentum of their own, increasingly diverting resources away from military towards civilian employment and redistributive transfers.”

A successful warrior state needs to be able not only to tax efficiently, but to borrow cheaply. The two are connected: a government with secure tax revenues will be able to borrow more money, less expensively, than one without. In a hundred dense pages, ranging over three centuries, Ferguson succeeds brilliantly in laying bare the essential connections between economics and politics in the development of financial institutions, instruments, and policies. The discussion encompasses the history of central banks, bond markets, stock markets, exchange rates, interest rates, and fiscal philosophy. This is the most original part of the book.

The main mover in the story is the national debt. In Ferguson’s reading, attention to its sustainability and its effect on private sector activity explains the fiscal history of the modern world, and much of its general history too.

  1. 1

    The House of Rothschild: Vol. One: Money’s Prophets, 1798–1848; Vol. Two: The World’s Banker, 1849–1999 (Viking, 1998, 1999). See my review in The New York Review, December 16, 1999.

  2. 2

    Douglass North and R.P. Thomas, The Rise of the Western World (Cambridge University Press, 1973), pp. 1–2.

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