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

Basic Books • 2001 • 425 pages • $30.00

Reviewed by Martin Morse Wooster

Niall Ferguson, an Oxford University historian, is best known for The Pity of War, a book arguing that it was a mistake for Britain to enter World War I. But he is also a financial historian, whose most lengthy book is a two-volume history of the Rothschild banking dynasty. In his latest book, Ferguson engagingly examines three centuries of European and American financial history in search of economic trends. Although some of his conclusions are debatable, Ferguson is a lively and intelligent writer whose research once again confirms that, left unchecked, government will grow endlessly.

In many ways, The Cash Nexus is a conservative response to The Rise and Fall of the Great Powers, a 1988 work by historian Paul Kennedy that contended that the United States, by spending too much money on the military, was suffering from “imperial overstretch” and would lose the economic war with Germany and Japan. Ferguson argues that, after the Cold War, the reverse is true—that an American elite afraid of causalities in foreign wars is abandoning its role as the world’s policeman. “The leaders of the one state with the economic resources to make the world a better place lack the guts to do it,” he writes.

Readers who wonder why the United States should in any way interfere in the domestic politics of Yugoslavia, Somalia, or Haiti should, however, realize that Ferguson’s saber-rattling accounts for only two chapters of this lengthy work. The rest of the book, which describes the role that economics plays in politics, is one that market-oriented types should find quite congenial.

The Cash Nexus explores many economic topics. Among them are whether or not rising incomes advance democracy; the role economics plays in elections; the origins of national debt and the influence of the bond market in politics; the connections between inflation and political instability; and the relationship between the business cycle and politics. The result is a book that more closely resembles a public-policy book with historical examples than a more conventional history.

In less skillful hands, The Cash Nexus could have been dull. But Ferguson is an excellent writer who is good at unearthing illuminating anecdotes. He also has a gift for comedy. For example, when discussing gold, Ferguson begins by summarizing the section of Ian Fleming’s Goldfinger in which James Bond, “whose ignorance of monetary matters outside the casino is more or less complete,” is lectured by a representative of the Bank of England on the importance of gold to the British economy.

Perhaps Ferguson’s most interesting research is on the origin of democracy. Many of us were taught that democracy arose because the people were disgusted by the tyrannies of unaccountable monarchs and demanded a say in how they were governed. But Ferguson shows the state’s hunger for taxes played a more crucial role.

In the Middle Ages, taxation tended to be the royal prerogative, thanks to “the royal domain,” a system of state-owned monopolies. But monarchs needed to raise revenue for war, so they ended up selling most of these monopolies to pay the troops. For example, when Henry VIII closed and seized Britain’s monasteries in the 1530s and 1540s, he wasn’t just stressing the independence of the Church of England; he also wanted the revenue from the Catholic Church’s properties. But by the time Henry’s son, Edward VI, became king in 1547, nearly seven-eighths of this land had been sold to pay for military campaigns.

Ferguson shows that new forms of taxation (such as income tax) were controlled by parliaments, which tended to gain power as their control of taxation increased. He also notes a strong correlation between easing the requirements to vote (such as allowing people to vote who weren’t property owners) and the rise of the state. Many of the newer voters had incomes so low that they didn’t have to pay income taxes, so they constantly agitated for taxes to be raised on richer Britons in order that they would get more government subsidies. By 1913 Sir Bernard Mallett would argue that in democratic Britain, public policy was determined by “an electorate consisting mainly of the poorer classes, while revenue is obtained mainly from a minority of wealthier persons.” The tendency of government to tax the rich to reward the indolent, argues Ferguson, has only increased with the rise of the welfare state.

There is much more intelligent analysis in The Cash Nexus, from how increased taxation caused the creation of government bureaucracy to the ways the international bond market redistributes wealth from poor taxpayers to wealthier bondholders. Ferguson is an independent voice, generally skeptical of the excuses politicians make for raising taxes or bloating government. The lasting lesson his pioneering work provides is that raising taxes is, for most politicians, an action as natural as breathing or eating.

Martin Morse Wooster is an associate editor of The American Enterprise.

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