The Cash Nexus: Money and Politics in Modern History, 1700-2000

by Niall Ferguson

  Chapter 13 explores the relationship between ethnicity and economics, and asks whether the world is destined to be ‘united’ by supra-national institutions or ‘untied’ by national self-determination.

  The last chapter in the book brings the argument back to where it began – with war – by relating military power to financial power. Here a distinction is drawn between economic resources and the fiscal institutions needed to harness those resources for political ends. Their more sophisticated financial institutions – particularly the four corners of the square – do appear to give parliamentary regimes greater potential strength than dictatorships. However, democratic states have generally tended to lack the political will to make full use of their strength. In the absence of an urgent external threat, democratic regimes prefer to shift their resources away from their military forces, using the fiscal system increasingly to achieve domestic redistribution (the welfare state, rather than the warfare state). This tendency of democracies to demilitarize lays them open to challenges from productively inferior but, in the short run, destructively superior autocracies. In this sense, the decline of British power – and the present fragility of American power – may have more to do with ‘understretch’ than ‘overstretch’.

  Let me try to simplify my argument by suggesting that each of the chapters offers an answer to an examination-style question:

  How far are modern states the products of war?

  Is there an optimal ‘mix’ of taxation?

  What is the relationship between parliamentarization and bureaucratization?

  Are government debts a source of weakness or strength?

  Why have large government debts so often led to defaults and inflations?

  What determines the interest rates governments pay when they borrow?

  Are distributional conflicts best understood in terms of class or generations?

  Does economic prosperity lead to government popularity?

  How should political parties be funded?

  What are the implications of the globalization of finance?

  How far can exchange rate systems or monetary unions increase international financial stability?

  Does economic growth lead to democratization and/or vice versa?

  Is the world becoming more politically fragmented or more integrated?

  Are democratic powers vulnerable to military understretch?

  Another way of putting this last question might be: Why can’t the United States today be more like the United Kingdom a hundred years ago? For one of the central conclusions of the book is that allowing economic globalization to proceed in the absence of a guiding imperial hand is risky, and may one day be judged a foolish abdication of responsibility.

  In answering all these questions, The Cash Nexus seeks to challenge the economic determinist models of history, both old and new. The nexus between economics and politics is the key to understanding the modern world. But the idea that there is a simple causal link from one to the other – in particular, from capitalism to democracy – is mistaken. One version of the relationship does indeed produce the happy outcome of the capitalist democracy: the double helix of Western development. But like DNA, the cash nexus is capable of mutation. Sometimes democracy can stifle economic growth. Sometimes an economic crisis can undermine a dictatorship. Sometimes democracy can prosper even as the economy flounders. Sometimes growth can strengthen an authoritarian ruler.

  The biological analogy should not be pursued too far. Unlike the natural world – because of the complication of human consciousness – the human world we know as history has hardly any linear causal relationships. As Carlyle said: ‘Acted history … is an ever-living, ever-working Chaos of Being, wherein shape after shape bodies itself forth from innumerable elements. And this Chaos … is what the historian will depict, and scientifically gauge!’39 I remain persuaded that history is a chaotic process, in the scientists’ sense of ‘stochastic behaviour in a deterministic system’.40 The causal connections between the economic and political world do exist; but they are so complex and so numerous that any attempt to reduce them to a model with reliable predictive power seems doomed to fail. I should emphasize that the ‘square of power’ introduced in Figure 1 is not a model in this sense. It offers no predictions, merely a simplified version of the institutional structures described in the book, within which all modern history has been made, but made by individuals with free will and bloody-mindedness. It was in the eighteenth century that the British state developed the peculiar institutional combination of bureaucracy, parliament, debt and bank that enabled Britain at once to empire-build and to industrialize. But the extent and duration of British power depended on how these institutions were used or abused by fallible men and, latterly, women. As so often, Samuel Johnson put it nicely when he warned against the

  almost … universal error of historians to suppose it politically, as it is physically true, that every effect has a proportionate cause. In the inanimate action of matter upon matter, the motion produced can be but equal to the force of the moving power; but the operations of life, whether private or publick admit no such laws. The caprices of voluntary agents laugh at calculation.41

  The word ‘nexus’ derives from the Latin nectere, to bind. It seemed an ideal title for this book, which originated, strange to say, as a study of the history of the international bond market. I came to realize in the course of my research, however, that the bond between creditor and debtor was only one of many bonds I needed to consider; and that in many ways the bond market was interesting precisely because it concerned itself with these other bonds as well: above all, the usually implicit contractual bonds between ruler and ruled, the elected and the electors, but also the bonds – more often (though not always) contractual – between states. A weakening of those bonds has almost always manifested itself in a weakening of the bond market, because political uncertainty loosens the bond of confidence between creditor and debtor.

  If the reader takes only one thing from this book, then I hope it is the realization that, even in such dry-as-dust entities as bond yields, Carlyle’s ‘ever-working Chaos of Being’ may be discerned.

  In these complicated times … Cash Payment is the sole nexus between man and man … Cash Payment the sole nexus; and there are so many things which cash will not pay! Cash is a great miracle; yet it has not all power in Heaven, nor even on Earth….

  THOMAS CARLYLE, Chartism (1840)

  The Gospel of Mammonism … has also its corresponding Heaven. For there is one Reality among so many Phantasms; about one thing we are entirely in earnest: The making of money…. We have profoundly forgotten everywhere that Cash-payment is not the sole relation of human beings.

  THOMAS CARLYLE, Past and Present (1843)

  The bourgeoisie … has left remaining no other nexus between man and man than naked self-interest, than callous ‘cash payment’.

  MARX AND ENGELS, The Communist Manifesto (1848)

  We are told by men of science that all the venture of mariners on the sea, all that counter-marching of tribes and races that confounds all history with its dust and rumour, sprang from nothing more abstruse than the laws of supply and demand, and a certain natural instinct for cheap rations. To any one thinking deeply, this will seem a dull and pitiful explanation.

  ROBERT LOUIS STEVENSON, ‘Will o’ the Mill’ (1878)

  SECTION ONE

  SPENDING AND TAXING

  1

  The Rise and Fall of the Warfare State

  Ring out the narrowing lust of gold;

  Ring out the thousand wars of old.

  TENNYSON, In Memoriam A.H.H.

  In the beginning was war. From the very earliest days of recorded history until the very recent past, war has been the motor of financial change.1 ‘War is the father of all things,’ as Herodotus said; and among those things during the Peloponnesian War was an increase in Athenian expenditure, and consequently a need for higher taxes and other sources of revenue. It was war wh
ich, with a powerful symbolism, caused the golden statue of Athena to be melted down and coined.2

  It is a truth – almost – universally acknowledged. ‘Nervos belli, pecuniam infinitam’: ‘The sinews of war [are] unlimited money,’ declared Cicero in his Fifth Philippic, a view echoed by Rabelais in Gargantua: ‘The strength of a war waged without monetary reserves is as fleeting as a breath.’ ‘What Your Majesty needs’, Marshal Tribulzio told Louis XII before his invasion of Italy in 1499, ‘is money, more money, money all the time.’3 The early sixteenth-century writer Robert de Balsac agreed: ‘Most important of all, success in war depends on having enough money to provide whatever the enterprise needs.’4 ‘Your majesty is the greatest prince in Christendom,’ the Emperor Charles V was told by his sister Mary, ‘but you cannot undertake a war in the name of all Christendom until you have the means to carry it through to certain victory.’5 Writing a century later, Cardinal Richelieu echoed her words: ‘Gold and money are among the chief and most necessary sources of the state’s power … a poor prince would not be able to undertake glorious action.’6

  It goes without saying that money at the immediate disposal of the state treasury is usually more limited than the costs of war; and the history of finance is largely the history of attempts to close that gap. Only in the recent past has this relationship between war and finance grown weak. After many centuries during which the cost of warfare was the biggest influence on state budgets, that role was usurped in the second half of the twentieth century by the cost of welfare. No doubt this is a great change for the better: though idleness is no virtue, it is morally preferable to pay men for doing nothing than to pay them for killing one another. But the remarkable extent and novelty of this change are not well understood. It is no exaggeration to speak today of the demilitarization of the West – and, indeed, of large areas of the rest of the world.

  A common error is to suppose that, over the long run, there has been a linear or exponential upward trend in the cost of war.7 In absolute terms, of course, the price of military hardware and the level of defence budgets have risen more or less inexorably since the beginning of written records. In relative terms, however, the patterns are more complicated. We need to relate military expenditure to the scale and frequency of war; to the size of armies in relation to total populations; to the destructiveness of military technology (‘bangs per buck’); and above all to total economic output. Allowing for changes in population, technology, prices and output, the costs of war have in fact fluctuated quite widely throughout history. These fluctuations have been the driving force of financial innovation.

  THE INTENSITY OF WAR

  It is no part of this chapter to explain why wars happen, though the question will be returned to later. Let us for the moment simply acknowledge that they do, and often. How often is a matter for debate.

  There have been several attempts to quantify the frequency of military conflict, each based on a somewhat different definition of war and covering periods of varying lengths. P. A. Sorokin counted 97 wars in the period 1819–1925,8 compared with Quincy Wright’s total of 112 between 1800 and 1945.9 Wright confined himself to what he called ‘wars of modern civilization … involving members of the family of nations … which were recognized as states of war in the legal sense or which involved over 50,000 troops’; whereas L. F. Richardson, counting all the ‘deadly quarrels’ he could find, arrived at the much higher figure of 289 for the period 1819–1949.10 Luard’s survey of all ‘organized large-scale fighting sustained over a significant period and involving at least one sovereign state’ arrives at an even higher total of 410 for the period 1815–1984.11 However, the ‘Correlates of War’ project based at the University of Michigan adopts a narrower definition which excludes most minor colonial wars, as well as wars involving countries with populations of less than 500,000, and wars in which total battle-deaths were less than 1,000 per annum. For the period 1816 to 1992, their database lists 210 interstate wars and 151 civil wars.12 The lowest figure of all for the modern period is Levy’s – 31 – but his survey considers only wars that involved one or more of the great powers.13

  It is possible to take an even longer view, though for extra-European conflicts the evidence becomes more patchy the further back one goes, and even the most ambitious attempts avoid the ancient and medieval periods. On the basis of his relatively broad definition of what constitutes a war, Luard arrives at a total of over 1,000 for the period 1400 to 1984.14 Levy, by contrast, counts just 119 great-power wars in the period 1495 to 1975. Even on the basis of the latter’s narrower definition, the perennial nature of war is striking:

  The Great Powers have been involved in interstate wars for nearly 75 per cent of the 481 years [from 1495 to 1975]… On average a new war begins every four years and a Great Power war [i.e. a war involving more than one great power] every seven or eight years…. In the typical [median] year … slightly over one war involving the Great Powers … is under way …15

  No twenty-five-year period since 1495 has been entirely without war.

  It is possible to bring this audit of war up to the present. The Stockholm International Peace Research Institute (SIPRI) estimates that there were 103 ‘armed conflicts’ between 1989 and 1997, of which six were interstate conflicts.16 In 1999 there were some 27 major armed conflicts in progress, though only two were between sovereign states (between India and Pakistan and between Eritrea and Ethiopia).17 Adopting Levy’s criteria for wars involving at least one great power, there have been six since Vietnam (the last war considered in his survey): the Sino-Russian War (1969), the Sino-Vietnamese War (1979), the Soviet-Afghan War (1979–89), the Falklands War (1982), the Gulf War (1990–91) and the Kosovo War (1999).18

  Has war grown more or less frequent over time? Some would say less so.19 Counting only wars involving one or more great powers, there was at least one war underway in ninety-five of the years of the sixteenth century and in ninety-four of the years in the seventeenth; but the figure falls to seventy-eight for the eighteenth and forty for the nineteenth, and rises to barely more than fifty for the twentieth. Put differently, the ‘average yearly amount of war’ was highest in the sixteenth century and lowest in the nineteenth and twentieth centuries.20 However, using a broader definition of war, Luard lists 281 wars for the period 1400–1559, falling to 162 (1559–1648) and 145 (1648–1789), but then rising to 270 (1789–1917) before returning to 163 between 1917 and 1984. Adding together all the wars covered by the Correlates of War database – including wars that did not involve a major power, as well as civil wars – provides further evidence of modern bellicosity. It is striking that there has not been a single year since 1816 without at least one war going on in the world. Only in Europe has war grown less frequent since 1945. The percentage of wars that took place in Europe falls steadily from more than 80 per cent in Luard’s first sub-period (1400–1559) to just 9 per cent in his last (1917–84).21

  Which of the great powers has been the most belligerent? On the basis of a slightly modified and extended version of Levy’s dataset, the answer would appear to be France, which has participated in some 50 of 125 major wars since 1495. Austria is not far behind (47), followed by another former Habsburg realm, Spain (44) and, in fourth place, England (43).22 According to Luard’s larger list of wars, however, the most warlike states in the years 1400 to 1559 were the Habsburg and Ottoman Empires. Between 1559 and 1648 Spain and Sweden led the field, waging war in 83 of those years. France was certainly the leading warmonger from 1648 until 1789 (80 out of 141 years) and again, with respect to European wars, from 1789 until 1917 (32 out of 128 years). However, Britain was more often involved in wars outside Europe between 1815 and 1914 (71 out of 99 years). There were 72 separate British military campaigns in the course of Queen Victoria’s reign – more than one for every year of the so-called pax britannica.23

  Simply counting raw numbers of wars can only tell us so much, of course. For example, eighteenth-century wars lasted longer24 and involved more
powers than wars in previous or subsequent centuries: in that sense, the average war was, perhaps surprisingly, a bigger affair in the Age of Enlightenment than the average war before or since. Even in terms of ‘severity’ (total battle deaths), the average eighteenth-century war ranks above the average twentieth-century war, to say nothing of the wars of all other centuries. Only in terms of ‘concentration’ (battle deaths per nation-year) was the average twentieth-century war bigger. This reflects the fact that the great-power wars of the twentieth century were more compressed than those of the period before 1815, whereas the periods of peace between the great powers were significantly longer. While the average length of war declined from eight years in the eighteenth century to four and a half in the twentieth, the number of battles in each year of war rose steeply.25

  Almost as remarkable in this long-term perspective was the comparative peacefulness of the century between 1816 and 1913. Although there were around a hundred colonial wars in the period – the majority fought by Britain, France or Russia – the scale of these wars tended to be small because of the technological superiority of the imperial powers. Also on a relatively small scale were the numerous wars of national independence.26 At the same time, the great powers kept war between themselves to an historical minimum.27 Apart from the Crimean War, the great-power clashes of the period 1854–71 seldom lasted longer than a few weeks. The late twentieth century saw a return to this pattern: the war against Iraq in the Gulf lasted eighty-five days; the war against Serbia over Kosovo a mere seventy-eight. If there has been a discernible trend over the past two or three centuries, then, it has been the increasing concentration or intensity of war.