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.

Ferguson traces the origins of modern debt finance to a series of financial innovations in England, starting with the establishment of the Bank of England in 1694, including the adoption of the gold standard in 1717, and culminating, in 1751, with the birth of “consols”—the consolidated debt of the British government in the form of liquid, but perpetual, bonds, redeemable at par. The effect of these innovations was to increase the size of sustainable public debt. Undertaken for warlike motives, they not only enabled Britain to beat France in a long struggle for mastery culminating in the Napoleonic wars, but they also stimulated the growth of commerce. The key point here is that the proliferation of tradable public debt instruments “effectively created the private market for private sector bonds and shares” by spreading risk. Moreover, “the emergence of the bondholders as an influential lobby within parliament reduced the risk of default by the British state and thereby increased the state’s capacity to borrow cheaply.”

In making this argument, Ferguson contradicts Adam Smith, who in his Wealth of Nations famously argued that there is a trade-off between “defence” and “opulence,” just as Paul Kennedy did nearly two hundred years later. No such trade-off can readily be discerned in Hanoverian England. It was a brilliant war machine, commercial center, and “first industrial nation” all in one. Succeeding generations paid off its huge public debt out of the proceeds of the economic growth it had helped to create, running much of the world on the cheap, and creating the conditions of confidence which enabled long-term nineteenth-century British—and world—interest rates to be lower than at any other time in history. Britain’s eighteenth-century Hanoverian monarchy, which laid the basis for the Pax Britannica, is Ferguson’s implicit model for successful state performance.

In a section of the book headed “Economic Politics,” Ferguson denies, contrary to much received wisdom, that economic events invariably determine election results: electoral behavior “appears stochastic and unpredictable.” More interesting is his suggestion that the struggle over the financing of the national debt between bondholders, businessmen, and workers has been much more important for the shaping of modern economic policy than the classical Marxist conflict between capitalists and workers.

Public debt represents a transfer from present to future. Government borrows now and promises to pay back later. Holders of government debt (rentiers) expect to be paid back in “full value” dollars or pounds, i.e., they support policies of “sound money.” Businessmen, who have to pay the extra taxes to pay back the debt, welcome debt reduction through (mild) inflation. Workers favor debt default (or a levy on capital) plus a progressive income tax to finance social services.

In the nineteenth century bondholder interests predominated, with the financial system of the day geared to making the world safe for the rentier, even though, in Britain, rentiers represented less than 1 percent of the population. Between the two world wars there was a change: in Britain and the United States bondholders secured a deflation of prices in the early 1920s, largely because their numbers had been greatly swelled by the issue of war bonds. France, Italy, and Germany chose the path of debt reduction through inflation and default. After World War II, the struggle over distribution of sacrifice was settled in favor of the coalition between business and labor. Rising prices eroded the real cost of public debt, while the proceeds of progressive taxes went to provide universal welfare, which bound together the classes. The great loser was the bondholder, who ended up paying the biggest “stealth tax” in history. With bond yields allowing for inflation negative for every postwar decade up to the 1980s, the “euthanasia of the rentier” of which Keynes dreamed seemed at hand. Powerful money illusion or institutional inertia “must have been at work to persuade investors to stick with gilts and treasuries into the inflationary 1970s.”

In the 1980s, the politics changed again. A high proportion of the rising costs of welfare transfers and subsidies to public employees had been financed by borrowing—this time not from a tiny elite of the wealthy, but from the much more widely distributed investors in pension funds and unit trusts. The growing proportion of the population that held bonds indirectly through institutions by the late 1970s might explain, Ferguson suggests, the decision of governments to liquidate inflation and the “return to positive real rates of interest in the 1980s and 1990s.”

The liberalization of capital movements also strengthened the bondholder’s position. The international bond market is a “daily opinion poll” of an unrepresentative sample. “A fall in the price of a government’s bonds can be interpreted as a ‘vote’ by the market against its fiscal policy, or against any policy which the market sees as increasing the likelihood of default, inflation or depreciation.”

Ferguson suggests that a new phase of the distributional struggle has opened, this time between the generations. What the government owes today should rightly include all the pensions it has promised to pay out in the future. As populations age, the ratio of future claimants to present taxpayers grows. Fiscal policy should be adjusted now to pay for the growing stock of pre-programmed debt—either by raising taxes or by reducing entitlements. But “only two or three of the world’s developed economies have generationally balanced fiscal policies.” As the Harvard economist Robert Barro puts it, “Members of the current generations [can] die in a state of insolvency by leaving debts to their descendants.” Large-scale immigration would bring in a new supply of workers who would relieve the problem by contributing to the pensions of the retired, but this is politically unattractive. Ferguson believes that governments with serious generational imbalances—like most countries in the European Union—will seek to inflate away their debt obligations. So the present triumph of the bondholder is likely to prove transitory.

There is much that is suggestive in this account, also something to criticize. Ferguson ignores the fact that business profits, and not just bond yields, were being squeezed in the 1970s—which approximates much more closely to the traditional Marxist scenario. Inflation becomes bad for business if organized labor is in a position to force wages to rise ahead of profits. What turned the politics of the 1980s “Thatcherite” or “Reaganite” was the coincidence of business and bondholder interests in weakening the power of labor unions.

Ferguson’s prediction of a looming struggle between generations is also too gloomy. It assumes that “retirement” will continue to start from the age of sixty or sixty-five. But there is no reason why, as people live longer, they should not go on working and thus “paying for” their retirement pensions till seventy or later. More importantly, it is not clear how the whole section “Economic Politics” relates to Ferguson’s central thesis of the “primacy of politics.” Any conception of politics that has a struggle for class (or generational) income shares at its core is much more obviously an economic theory of politics than a political theory of economics.

The book’s final discussion, on “global power,” may be read as challenging the liberal utopianism of writers like Francis Fukuyama, who see the world converging “automatically” on the norms of market capitalism and democracy. Ferguson reminds the reader that the last great experiment in globalization, in the late nineteenth century, driven by a similar belief that the world had become a giant market in which major wars among states could not occur, collapsed into World War I. He points out, rightly, that the conditions of stability, legitimacy, and pacification which the investors and analysts of that day attributed to the global financial system were in fact the results of the political arrangements that made that system possible—notably the hegemonic role played by Britain and the freedom of migration, which served to reduce the inequalities arising from bondholder dominance. Today, the United States has less financial leverage than did Great Britain in the nineteenth century—it imports, not exports, capital. And mass migration is no longer available—to anything like the same extent—to reduce global inequality.

Ferguson robustly challenges three contemporary “liberal” pieties. The first is the belief that financial markets are inherently stable. He discounts the possibility of another Great Depression. (“A second Great Depression would,” he writes, “if financial history were to repeat itself exactly, take the Dow down from over 10,631 (where it stood on 26 September 2000) to around 1,275 by July 2003.”) But he predicts that political events will continue to generate cycles of “boom and bust.”

Secondly, he points out that today’s global economy still lacks a monetary regime to succeed the international gold standard and the Bretton Woods system. Inflation, he thinks, will discredit the EMU and its euro currency: “For no monetary union can long endure when the mobility of labour is so hampered by cultural barriers and regulation; and, perhaps more importantly, when the fiscal policies of its member states are so out of kilter.”

Finally, Ferguson attacks the fashionable thesis that economic growth protects itself against political relapses by universalizing democracy. First of all, there are lots of exceptions to the “rule” that economic growth leads to democracy. Nor is democracy a cru-cial determinant of economic success. At low levels of political rights, the expansion of such rights stimulates economic growth. However, “further democratization may retard growth because of the heightened concern with social programs and income redistribution.” Finally, it is not clear that democracy makes wars less likely. If it leads to “Balkanization,” as now seems to be happening, it will increase political instability. “The politics of ethnicity,” Ferguson writes, “may have fewer ideological rivals at the dawn of the twenty-first century than a hundred years ago.”

All of this leads up to the conclusion that power will continue to shape history, for better or worse. Capitalism and democracy depend on the “institutional foundations of law and order. The proper role of an imperial America is to establish these institutions where they are lacking, if necessary—as in Germany and Japan in 1945—by military force.”


Ferguson is a brave and ambitious historian, and deserves praise for chancing his arm so boldly and leaving so many hostages to fortune. My major criticism is that the accumulation of facts constantly threatens to overwhelm the argument. The big picture emerges too rarely from a dense thicket of illustrations and digressions. Ferguson clearly enjoys displaying his database for its own sake, rather than as a help to developing his themes.

This is a great shame, for underneath the pile of facts lies a powerful and unfashionable thesis. Ferguson is a Hobbesian: he believes that it is power that keeps chaos at bay. Money, disciplined by power, can be beneficent. Emancipated from power (though not from politics) by woolly liberal ideology, it is a force for disintegration. Thus he analyzes the special virtues and vices of different political constitutions in the tradition of Plato, Aristotle, Montesquieu, and Tocqueville. Like the classical political theorists he sees democracy as the decadent form of constitutionalism. Had the British in the twentieth century spent more on defense and less on welfare, both world wars, as well as Britain’s own economic decline, might have been averted.

The Cash Nexus offers an important corrective to the naive story of economic growth. Like Keynes, Ferguson puts money at the center of his economic narrative. Money is the peculiar province of government. Policy and institutions influence the cost of money, and this, as much as the “real” forces of productivity and thrift, determines the progress of wealth.

Ferguson makes creative use of Douglass North’s “institutional economics,” but leaves the main question arising from this approach unanswered. Why are successful institutional innovations—the ones that bring both power and wealth to those who adopt them—not universally reproduced? Why do some societies learn quickly from others and others much more slowly? Economists talk about “informational asymmetries.” But information is filtered through belief systems (“cosmologies” as they are called by Deepak Lal3), and cosmologies change more slowly than economic facts.

This fact alone should make one profoundly skeptical about the fashionable “liberal” view that the logic of globalization is forcing all countries to converge on the “Western norms” of free markets, democracy, the rule of law, and respect for human rights. It is doing no such thing. The quality of political leadership and institution-building will determine both how far globalization will go and whether the process will be relatively consensual or lead to violent conflicts. Present frictions between the US and Europe, while troubling, are as nothing compared to the challenge of integrating China, Russia, India, the Middle East, much of Latin America, and most of Africa into a global system which they can disrupt but not dominate.

David Calleo in his review in The New York Times Book Review4 criticized Ferguson for painting too rosy a picture of the prospects for US hegemony. Calleo agrees with Paul Kennedy that “a more plural world is taking form beneath the surface.” Ferguson’s advice to the United States “implies opposition by force to the rise of anyone else—truly monumental overstretch that would make the geopolitical mistakes of the twentieth century seem minor.” In fact, Ferguson’s position is more nuanced than Calleo implies. He does not advocate the suppression of rising powers by force, only the elimination of rogue states to make the world safe for the rest.

However, Calleo has a point. Ferguson’s analogy between the present tasks of the United States and the low-cost colonial wars fought by Britain in the nineteenth century is not as illuminating as it seems. Non-European countries are much more assertive today than they were in the nineteenth century, and have access to much more dangerous weapons. Moreover, nineteenth-century colonial powers were prepared to accept casualties for the sake of empire or civilization, or whatever, and there is no comparable willingness by the United States and its allies to do so. Further, as both the Gulf War and Kosovo showed, air power is no substitute for ground power when it comes to enforcing a political settlement on a defeated or cowed adversary.

Ferguson is not, in fact, an advocate of the United States “doing what it wants.” As we have seen, he is hostile to President Bush’s antimissile defense plans. He would like the United States to be an “active” hegemon, in the sense of taking a lead in large, constructive schemes for world governance. His approach is closer to that of the State Department “multilateralists” than that of the Pentagon’s “unilateralists.” His book may be interpreted as a warning against the danger of the United States tiring too rapidly of its world role. The warning would have made more impact had it been stated more clearly.

This Issue

August 9, 2001