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

by Niall Ferguson

  In ancien régime France, the range of people who invested in the debt of the crown was probably wider: the class of rentier was said to include ‘nobles and bourgeois, bishops and ecclesiastics, office holders and state servants, merchants and artisans, male and female servants’.14 However, most of these had no institutional form of political ‘voice’ – which helps to explain the frequency of default in eighteenth-century France. At the same time, it may also explain the reluctance of the revolutionary National Assembly – where they were represented – to default overtly on the long-term debt of the crown; instead attention focused on other liabilities, such as venal offices and short-term advances from tax farmers. Yet attempts by Necker to convert the short-term debt into something like a modern long-term debt by turning the Caisse d’Escompte into a proper public bank foundered in the face of venomous attacks on ‘plutocracy’ (plutonarchie) by mainly aristocratic deputies. ‘I have never been able to understand’, declared the comte de Custine, ‘the necessity … of having a court banker and several fiscal agents to make payments … and to provide funds.’ They were ‘bloodsuckers on the body politic … with fortunes made by the sweat and blood of the people’. ‘Let us fear capital,’ urged Mirabeau, ‘which has long had a habit of seeking opportunities for fortune in the needs of the State.’15 This revolutionary critique of ‘parasitical’ finance had its roots in the work of the philosophes. Both Montesquieu and Hume had disapproved of public debts because they increased the size of an idle rentier class.16 By the eve of the Revolution ‘Anti-Finance’ had become a slogan of the Parisian pamphleteers.

  Although the British system of public debt after 1688 is generally considered an institutional triumph compared with what happened in France,17 it provoked a very similar ‘anti-financial’ critique of its distributional consequences after the Napoleonic Wars. In his Rural Rides, which he began in 1822 and published in 1830, William Cobbett portrayed English agriculture groaning under the burden of the debt incurred during the Napoleonic Wars. Dismissive of contemporary economists like Ricardo (himself a retired stockbroker) who defended the government’s wartime reliance on loans, Cobbett directed his fire at the social and political consequences of the debt. Its political purpose, he argued, had been ‘to crush liberty in France and to keep down the reformers in England’;18 but its principal effect after the war was redistributive. ‘A national debt, and all the taxation and gambling belonging to it, have a natural tendency to draw wealth into great masses … for the gain of a few.’ ‘The Debt, the blessed Debt’ was ‘hanging round the neck of this nation like a millstone’. The funds were a ‘vortex’, sucking money from the poor to new plutocracy. And the government’s decision to return to the gold standard could only make matters worse by increasing the burden in real terms. Astutely, Cobbett saw the proliferation of government pensions during and after the war as the link between the old élite and the new. It was these pensions – the ‘Dead Weight’ on the budget – that reconciled the aristocracy to the growing power of the bondholders. Only too late were the landowning ‘jolterheads’ coming to appreciate that they too would lose out as their rents declined. There must, declared Cobbett, be ‘a struggle between the land and the funds’. Otherwise, estate by estate, the country would fall into the hands of ‘those who have had borrowed from them the money to uphold this monster of a system … the loan-jobbers, stock-jobbers … Jews and the whole tribe of tax-eaters’.19

  Like most Radicals, Cobbett saw electoral reform rather than revolution as the necessary remedy. After all, ‘the House [of Commons] made all the loans which constitute the debt: the House contracted for the Dead Weight: the House put a stop to gold-payments in 1797: the House unanimously passed Peel’s Bill [to return to gold]’.20 Reform of the Commons would dilute the power of both the ‘Old Corruption’ of royal patronage and the new corruption of the fundholders and pensioners. Cobbett was also (like Carlyle) a romantic conservative at heart, regretting the decline of rural life in the South East as the ‘Great Wen’ of London sprawled inexorably outwards. Yet there are still detectable traces of his analysis in much early socialism. Cobbett himself had identified a causal link between the national debt, the concentration of wealth and the development of manufacturing industry.21 In Capital, Marx echoed Rural Rides when he associated the growth of the British national debt with the ‘sudden emergence of [the] brood of bankocrats, financiers, rentiers, brokers, stock-jobbers, etc.’: this, he agreed with Cobbett, had been the prelude to the emergence of industrial capitalism proper.22 A less dedicated German revolutionary than Marx, Heine also shared Cobbett’s view that the bondholders would oust the traditional aristocracy of landed wealth. ‘The system of state bonds’, he argued, had ‘destroyed the predominance of land, by … mobilizing property and income and at the same time endowing money with the previous privileges of the land.’23

  The anti-Semitic note in Cobbett’s work also found an echo on the racialist Right, however, after this separated itself from the socialist Left in the wake of 1848. Nearly all the early leaders of the German anti-Semitic movement denounced the ‘rapacious capital’ of the stock exchange and called on the German Volk to free itself from the ‘interest slavery’ of the Jewish financiers.24 The same theme could still be heard in early Nazi propaganda. Dietrich Eckart’s address ‘To All Working People’ (1919) was a denunciation of the Rothschilds and their ilk which could equally well have come from the anti-Semites of the 1880s:

  [They] only need to administer their wealth, to see that it is nicely placed, they do not need to work, at least not what we understand by work. But who provides them and their like with such an enormous amount of money?… Who does this? You do it, nobody but you! That’s right, it is your money, hard-earned through care and sorrow, which is drawn as if magnetically into the coffers of these insatiable people.25

  Yet Cobbett’s invective against Jews – so offensive to the modern reader who knows where such talk ultimately led – should not distract us from the underlying validity of his argument about the socially redistributive effects of the national debt.26 In the Britain of the 1820s, debt service was financed largely out of regressive taxation on consumption, so the transfer was indeed from the property-less majority to a tiny, very wealthy élite.

  THE TAX-EATERS

  It is not easy to be sure just how many people were in fact bondholders. We know how many accounts there were for the various different stocks issued by the government. According to the latest estimates, there were around 300,000 in 1804, 340,000 in 1815 and 300,000 in 1822; excluding life annuities payable at the Exchequer the figures come to 296,500, 334,500 and 290,000. By 1850 the number had fallen to 274,000; and by 1870 it stood at 225,500. But it was possible for one individual to hold more than one account; to arrive at figures for bondholders we therefore need to reduce these totals by around 20 per cent. That suggests that there were around 270,000 bondholders in 1815; and perhaps fewer than 200,000 fifty-five years later. As a percentage of the population of England and Wales, bondholders were therefore a tiny and dwindling élite: from 2.4 per cent of the population when Napoleon I was defeated to just 0.8 per cent when the same fate befell Napoleon III.27

  Cobbett was also right about the rewards this tiny élite enjoyed. Figure 17 shows how high the real returns were on British bonds at the time of his Rural Rides: more than 9.6 per cent between 1820 and 1829. The same phenomenon arose again in the 1870s, the time of the so-called ‘Great Depression’ – ‘great deflation’ would have been more accurate – when falling prices drove up the real returns on bonds as high as 12 per cent in the United States.

  And the fiscal transfers involved were indeed profoundly regressive. As Table 8 shows, the nominal value of the wealth held in the form of bonds was equivalent to more than 200 per cent of British national income in 1804. The total annual interest payments the bondholders received on their investments were equivalent to more than 7 per cent of national income; and as a proportion of total government expenditure, interest pay
ments rose from just under a quarter in 1815 to very nearly a half in 1822, and were still around two-fifths in 1850 and a third in 1870. As we have already seen, the lion’s share of government revenue in Britain in the 1820s came from indirect taxation: as much as 69 per cent in 1822, falling only slightly over the next fifty years. American taxation was also regressive in the 1870s, when the real returns on bonds were at their height.28 These figures do indeed represent an astonishingly inequitable system of transfers from the poor majority to the bondholding minority.

  Figure 17. Real returns on British and American bonds since 1700 (decennial averages)

  Source: Global Financial Data.

  Moreover, the nineteenth century saw not the demise of ‘moneyocracy’ yearned for by Cobbett and other Radicals, but a marked increase in the bondholders’ security against default and other forms of expropriation. The spread of the gold standard, it has been argued, reflected the bondholding bourgeoisie’s preference for stable prices and exchange rates to protect their investments.29 In the same way, the stability of the international monetary system before 1914 can be linked to the persistence of non-democratic, non-proportional systems of parliamentary representation, which ensured that the rentier class remained over-represented.30

  The power of the bondholders lay not only in their over-representation within parliaments and political élites. Their ownership of the national debt gave them real economic leverage over governments. For the movements of prices of existing government bonds – the products of past fiscal policy – have, as we have seen, an important bearing on present and future fiscal policy. To put it simply, if a government wishes to borrow more by issuing more bonds, a fall in the price of its existing bonds is a serious discouragement, as it means that the yields on any new issues will have to rise, meaning that the government will get less for every nominal £100 of debt it sells to the public. Indeed, 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.

  Table 8. The bondholders and the British national debt, 1804–1870

  Sources: J. F. Wright, private communication; Mitchell and Deane, Abstract of British Historical Statistics, pp. 8 f., 392–9, 402–3; O’Brien, Power with Profit, pp. 34 f.; Mitchell, European Historical Statistics, p. 408.

  Bond prices and yields thus have a political significance that historians have too rarely appreciated. They are, of course, the product of multiple assessments by individual and institutional investors of the economic situation as a whole. But they are also, in some respects, a kind of daily opinion poll, an expression of confidence in the bond-issuing regimes. Of course, they are an opinion poll based on a highly unrepresentative sample by democratic standards. Only bondholders (or, nowadays, fund managers) get to ‘vote’ and they can express an opinion about any country whose bonds they choose to buy or sell. On the other hand, this was not such an unrepresentative kind of poll in the nineteenth-century context; for the kind of people who bought and sold government bonds were, in most countries for much of the period, the kind of people who were represented politically – not to mention the politicians themselves.31 To put it simply – but in terms any contemporary would have understood – if they bid up the price of a government’s bonds, that government could feel secure; if they did the reverse, that government was quite possibly living on borrowed time as well as money.

  The irony is – to give a specific example – that one of the decisive blows struck for the cause of electoral reform was the slide in bond prices following the Duke of Wellington’s defiant claim in 1830 that the electoral system was ‘as perfect as the wit of man could devise’. At this, consol prices fell from 84 to 77½ (an increase in the yield of some 30 basis points), suggesting that even if they did not favour reform, the bondholders understood the perils of resisting it.32 Conversely, when Lloyd George confronted the grandees of the City of London in 1909–10 over his ‘People’s Budget’, it was the fact that yields held steady that helped ensure his victory. Whatever the self-appointed spokesmen of the City might say against his increases in income tax and death duties, the bond market as a whole favoured them as a step towards balancing the budget.33

  Still, the power of the nineteenth-century bondholder should not be exaggerated. With the exception of the investor in consols (or any bonds underwritten by the British government), the bondholder’s position was not a great deal more secure in the less democratic half-century before 1880 than it was in the more democratic half-century after 1914. On either side of this brief ‘golden age’, wars, defaults and devaluations periodically disturbed the calm of the coupon-clippers – and to describe such events as ‘well-understood emergencies’ is to understate their unpredictability.34

  Moreover, although Cobbett’s hopes for some kind of legally imposed reduction of the national debt were disappointed, relief from the ‘blessed Debt’ did come, in the form of debt redemption, reduced real interest rates and higher economic growth. Between 1850 and 1870, as Table 8 makes clear, there were substantial falls in both the size of the debt burden and the cost of servicing it relative to national income. The interest on the funded national debt amounted to less than 2 per cent of GDP by 1870. Elsewhere, the spread of the gold standard not only reduced the risk of investing in the bonds of countries with records of default or depreciation; for precisely this reason it also caused bond yields to decline. When this decline continued even after growth and inflation picked up in the mid-1890s,35 the effect was significantly to reduce the real returns on bonds, as Figure 17 shows. In both Britain and the United States, real returns on bonds fell close to 3 per cent in the 1890s and were close to zero in the decade beginning in 1900. The golden age of the bondholder was over at least ten years before the gold standard itself was plunged into crisis.

  THE EUTHANASIA OF THE RENTIER?

  This process whereby the bondholders’ due was painlessly reduced by growth, gentle inflation and low yields came to an abrupt end in 1914. The First World War returned Europe as a whole to the position Britain had been in a hundred years before. By 1918 all had incurred immense debts – the British and American debts rose ninefold, the German sixfold, the Italian fourfold and the French threefold – and all had seen prices at least double or treble following the suspension of the gold standard and the wartime expansion of the circulation of banknotes. Few, however, opted to favour the minority of bondholders with a policy of deflation, as Britain had after 1815 – few, that is, apart from Britain once again. Why was this?

  In an analysis that owes much to the pioneering work of Charles Maier on the experience of France, Italy and Germany after the First World War,36 Alberto Alesina has set out a simple schema for understanding such redistributive conflicts. In this model, as in the familiar class system, there are three groups, each with a different view of the national debt. The rentiers naturally oppose default or high inflation, and are in favour of tax increases, provided these fall predominantly on consumption rather than high incomes (for they also tend to be in higher tax brackets). Businessmen, however, prefer inflation and even debt default, though they agree with the rentiers that taxation should be regressive rather than progressive. The advantage of inflation to them is that it reduces the real value not only of the government debt but also the debts of their own enterprises; it may also reduce real wages and, if associated with a weakening exchange rate, boost their sales abroad. Naturally businessmen are averse to taxes on wealth if they extend to physical capital. Finally, the workers favour debt default, since they are not bondholders; but they also favour progressive income tax and taxes on all forms of wealth. They are ambivalent about inflation: it may reduce real wages if they are unable to bargain effectively; on the other hand, it may be associated with expansionary fiscal and monetary policies which boost employment.37 Thus the reason for high inflation in Italy, France and Germany after the First World War was that
‘socialist “workers” were strong enough to represent a credible threat … [so] the “rentiers” and the “businessmen” could not impose overly harsh measures on the working class for fear of communist insurrections’.38 Germany in particular saw a state-sponsored ‘inflationary consensus’ between big business and organized labour: the classic combination characterized by some later writers as ‘corporatism’.39 In Britain this was not the case. Rentiers and businessmen, united by a ‘conventional wisdom’ in favour of fiscal orthodoxy, succeeded in imposing the costs of deflation on the workers in the form of high unemployment.40

  In much of the modern literature on the German hyperinflation, there has been a readiness to view what Keynes called the ‘euthanasia of the rentier’ in a positive light. In his Tract on Monetary Reform (1923), Keynes argued that, though inflation was ‘worse’ than deflation ‘in altering the distribution of wealth’, deflation was ‘more injurious’ in ‘retarding the production of wealth’; he therefore favoured the former, ‘because it is worse in an impoverished world to provoke unemployment than to disappoint the rentier’.41 This analysis has encouraged many historians to conclude that ‘the balance of material gains and losses’ of the German hyperinflation was ‘on the side of gains’.42 Perhaps the most economically sophisticated history of the inflation echoes this conclusion, showing that the inflation resulted in a more equal distribution of the income, if not of wealth.43 The inflation was thus a modern-day version of Solon’s seisachtheia: a jubilee in which all debts were simply wiped out, including those of the state, to the benefit of the indebted majority.44