NIALL FERGUSON
The Cash Nexus
Money and Power in the Modern World, 1700–2000
PENGUIN BOOKS
Contents
List of Tables
List of Figures
List of Illustrations
Abbreviations
Introduction
SECTION ONE: SPENDING AND TAXING
1. The Rise and Fall of the Warfare State
2. ‘Hateful Taxes’
3. The Commons and the Castle: Representation and Administration
SECTION TWO: PROMISES TO PAY
4. Mountains of the Moon: Public Debts
5. The Money Printers: Default and Debasement
6. Of Interest
SECTION THREE: ECONOMIC POLITICS
7. Dead Weights and Tax-eaters: The Social History of Finance
8. The Myth of the Feelgood Factor
9. The Silverbridge Syndrome: Electoral Economics
SECTION FOUR: GLOBAL POWER
10. Masters and Plankton: Financial Globalization
11. Golden Fetters, Paper Chains: International Monetary Regimes
12. The American Wave: Democracy’s Flow and Ebb
13. Fractured Unities
14. Understretch: The Limits of Economic Power
Conclusion
Appendices
Bibliography
Notes
Acknowledgements
ABOUT THE AUTHOR
Niall Ferguson is Professor of Political and Financial History at Oxford University and Visiting Professor of Economics at the Stern Business School, New York University. He is the author of Paper and Iron, The House of Rothschild (two volumes) and The Pity of War, and editor of the best-selling Virtual History. He lives in Oxfordshire with his wife and three children.
For Mary and May
PENGUIN BOOKS
THE CASH NEXUS
‘Ferguson combines an ability to make statistics dance … with a prodigious range of literary and historical reference … “Money,” the Bible said, “answereth all things,” but as Niall Ferguson proves with such scholarly verve, it never quite answereth them completely’ Martin Vander Weyer, Literary Review
‘Brilliant’ Rory O’Donnell, Irish Times
‘Whatever Niall Ferguson writes is of intense interest. In The Cash Nexus he explores perhaps the greatest force in recent history’ Melvyn Bragg, BBC History
‘Erudite and noble … a welcome caution against the naïve expectations of fashionable triumphalists’ David Calleo, The New York Times
‘Ferguson is always thoroughly analytical, engaging and engaged’ James Davidson, Daily Telegraph
‘Not only original and creative but [also] deeply researched’ Daniel Yergin, Wall Street Journal
‘A rigorous historical analysis of the interaction of money and power over the past 300 years’ John Gray, New Statesman
‘Niall Ferguson challenges some central assumptions about the relationship between money and power … This book is diamantine in its appeal, and it is immensely well researched’ Bill Jamieson, Scotsman
‘Ferguson’s greatest achievement is in using this narrative to make us rethink the connections between cash and power’ Sean Coughlan, The Times Higher Education Supplement
List of Tables
Defence expenditure as a percentage of total public spending, 1891–1997
Average annual central government budget deficits as a percentage of national product, selected periods
The growth and structure of the London Stock Exchange, 1853–1990
European price inflation during and after the First World War
Increase or decrease in the British national debt by sub-periods, 1822–1997
The structure of European national debts, circa 1993
Determinants of fluctuations in the price of consols, 1845–1900, as cited in The Economist
The bondholders and the British national debt, 1804–1870
Redistribution of income through taxes and benefits, United Kingdom 1992, by quintile groups of households (£ per year)
Dependency ratios, actual and projected, 1900–2050
Reasons for changes of government or prime minister, 1832–1997
British economic indicators and election results, 1918–1997: change since previous election
Individual membership of the three major British political parties, 1953–1997
Foreign holdings of developed countries’ national debts, circa 1993
Wars, revolutions and the bond market, 1830–1914
Anticipated and real premiums on selected international bonds, 1850–1983
Indicators of commercial and financial globalization
A tale of two hegemons, 1870–1995
Exchange rate regimes and inflation
Free, partly free and not free countries: the Freedom House Surveys for 1972–1973 and 1998–1999
Average democracy score per country, by regions, 1800–1998
Average democracy score (maximum 1.00, minimum 0.00) for 136 countries, 1975–1994
The Jews in economic élites: selected statistics
World population and the number of independent states since 1871
Military expenditure of the world’s principal powers (in US $millions, at constant 1995 prices and exchange rates)
Appendices
The biggest wars in history
Multiple regression of British government popularity and economic indicators
The global bond market, June 1999
Public debt burdens in 1887–1888
Economic and social indicators and the inter-war crisis of democracy, 1919–1938
List of Figures
The ‘square of power’
Military personnel as a percentage of population, 1816–1997 (log. scale)
Defence spending per serviceman in Britain and the United States, 1816–1998 (log. scale)
Defence spending as a percentage of national product, 1850–1998 (log. scale)
Income tax as a percentage of taxation, 1866–1999
Electorate as a proportion of population aged above 20, 1815–1974
Government employment as a percentage of total employment, 1960–1999
Public debt/GNP ratios since the late seventeenth century
Debt service as a percentage of government expenditure, 1802–1999
British money supply and inflation (annual growth rates), 1871–1997
The real growth rate minus the real interest rate in Britain, 1831–1997
British and French bond yields, 1753–1815
Major bond yields since 1700 (annual averages)
The yield on consols (end-of-month figures), 1754–1998
Monthly bond yields, 1914–1945
US Long-term bond yields, 1979–1989
Real returns on British and American bonds since 1700 (decennial averages)
Relative poverty rates before and after taxation and transfers, 1991
Two alternative ways of achieving generational balance (percentage increases required)
President Clinton’s approval rating and the Dow-Jones Index, 1993–2000
Government lead (left-hand axis) and the ‘misery index’ (right-hand axis), 1948–2000
The real cost of British elections: candidates’ declared general election expenses, 1880–1997
Total general election expenditure of the three main British parties, 1964–1997 (thousands of 1997 pounds)
Conservative and Labour parties, central expenditure (routine and election), 1900–1992 (thousands of 1997 pounds)
Individual Labour Party membership as a percentage of the UK population, 1928–1997
Unadjusted yields on European bonds, London prices, end of week, 1843–1871
Government bonds as a percentage of all securities quoted on the London Stock Exchange, 1853–1990
Yield spreads over consols, 1870–1913
Exchange rates of major currencies per US dollar, 1792–1999 (1913 = 100)
World gold production, five-yearly totals, 1835–1989 (metric tonnes)
US dollars per ecu/euro, 1975–1999
The rise of democracy, 1800–1996
The average democracy ‘score’ for 29 European countries, 1900–1950
Real national product indices for European democracies, 1919–1939 (1927 = 100)
Real national product indices for European ‘dictatorships’, 1919–1939 (1927 = 100)
Number of wars in progress per year, 1816–1992
Circles of interest
List of Illustrations
James Gillray, Begging No Robbery: – i.e. – Voluntary Contribution: – or John Bull, escaping a Forced Loan, 1796
James Gillray, after ‘F. L. Esq.’, John Bull Ground Down, 1795
H. Heath, after George Cruikshank, The Pillar of State, or John Bull Overloaded, 1827
Francis Jukes, An Historical, Emblematical, Patriotical and Political Print representing the English Balloon or National Debt in the Year 1782 with a Full View of the Stock Exchange, and its supporters the Financiers, Bulls, Bears, Brokers, Lame Ducks, and others, and a proportionable Ball of Gold, the specific size of all the Money we have to pay it with supposing that to be Twenty Millions of Pounds sterling, the Gold and Silver Trees entwined with Serpents & upheld by Dragons for the pleasure of Pluto & all his Bosom Friends, 1785
James Gillray, Midas, Transmuting all into Paper, 1797
Anon. (English School), The National Parachute, or John Bull Conducted to Plenty and Emancipation, 1802
Anon. (English School), The Tree of Taxation, 1838
George Cruikshank, The ‘System’ that ‘Works so Well’!! – or The Boroughmongers’ Grinding Machine, 1831
Cheffins, King Cash! – The Boss of Every Election, from ‘Illustrated Bits’, 1885
Thomas Derrick, Sentiment on the Stock Exchange, from ‘Punch’, 1938
Olav Gulbransson, Worshipping the Almighty Dollar, from ‘Simplicissimus’, 1923
Olav Gulbransson, President Wilson mounted on Morgan’s Gold Mountain, from ‘Simplicissmus’, 1916
James Gillray, The Plumb-pudding in danger: or State Epicures taking un Petit Souper, 1805
James Gillray, The Giant Factotum amusing himself, 1797
Photographic acknowledgements, where applicable: Andrew Edmunds: 1, 2; Bridgeman Art Library: 6; Fotomas Index: 3, 4, 7, 8, 10, 14; Mary Evans Picture Library: 9, 11, 12
Abbreviations
ECB
European Central Bank
GDP
Gross Domestic Product
GNP
Gross National Product
HMSO
Her Majesty’s Stationery Office
IISS
International Institute for Strategic Studies
IMF
International Monetary Fund
INSEE
Institut National de la Statistique et des Études Économiques
NBER
National Bureau of Economic Research
NIC
National Insurance Contributions
NNP
Net National Product
OECD
Organisation of Economic Cooperation and Development
ONS
Office of National Statistics
OPEC
Organization of Petroleum Exporting Countries
PSBR
Public Sector Borrowing Requirement
SIPRI
Stockholm International Peace Research Institute
SPD
Social Democratic Party of Germany
Introduction: The Old Economic Determinism and the New
Money makes the world go round, of that we all are sure – On being poor.
Cabaret (1972)
The idea that money makes the world go round – as the Master of Ceremonies sang in the musical Cabaret – is an old one, yet remarkably resilient. It is there in the Bible, in both the Old and the New Testaments: compare ‘Money answereth all things’ (Ecclesiastes 10: 19) with ‘The love of money is the root of all evil’ (1 Timothy 6: 10). The sin of avarice was, of course, condemned by Mosaic law. But in Christian doctrine, as the second aphorism suggests, even the normal pecuniary motive was condemned. Part of the revolutionary appeal of Christ’s teaching was the prospect that the rich would be excluded from the Kingdom of God: it was easier ‘for a camel to go through the eye of a needle, than for a rich man to enter into the kingdom of God’ (Matthew 19: 24).
Plainly, Western Europe would not have progressed so successfully from feudalism to capitalism had this dogma deterred people from making money. The point, of course, was that it did nothing of the sort. Rather, it consoled those (the majority) who had no money and instilled a sense of guilt in those who had much: an optimal strategy for an organization seeking both mass membership and substantial private donations from the élite.
The notion of a fundamental conflict between morality and Mammon also informed the most successful ‘secular religion’ of modern times. To Karl Marx and Friedrich Engels what was odious about their own class, the bourgeoisie, was its ethos of ‘naked self interest’ and ‘callous “cash payment”’.1 Of course, Marx’s claim that the internal contradictions of capitalism would precipitate its own downfall was supposed to be ‘scientific’ and ‘objective’. It was the inexorable rise of capitalism and the bourgeoisie that had overthrown the feudal aristocratic order; in turn, the formation in the factories of an impoverished but immense proletariat would inevitably destroy capitalism and the bourgeoisie. Marx was contemptuous of the faith of his ancestors, and indifferent to the Lutheranism his father had adopted. Yet Marxism would not have won so many adherents if it had not offered the prospect of a secular Day of Judgement in the form of the promised revolution in which, once again, the rich would get their deserts. As Isaiah Berlin observed, the more thunderous passages in Capital are the work of a man who ‘in the manner of an ancient Hebrew prophet … speaks the name of the elect, pronouncing the burden of capitalism, the doom of the accursed system, the punishment that is in store for those who are blind to the course and goal of history and therefore self-destructive and condemned to liquidation’.2 Marx’s debts to Hegel, Ricardo and the French Radicals are well known. But it is worth recalling that the Communist Manifesto also owed a debt to a more overtly religious and indeed conservative critique of capitalism. It was in fact Thomas Carlyle who coined the phrase ‘cash nexus’ in his Chartism (1840),3 though where Marx looked forward to a proletarian utopia, Carlyle regretted the passing of a romanticized medieval England.4
Though it is no longer fashionable to do so, it is possible to interpret Richard Wagner’s The Ring of the Nibelung as another romantic critique of capitalism. Its central argument, as one of the Rhine maidens tells the dwarf Alberich in the very first scene, is that money – to be precise, gold which has been mined and worked – is power: ‘He that would fashion from the Rhinegold the ring / that would confer on him immeasurable might / could win the world’s wealth for his own.’ But there is a catch: ‘Only he who forswears love’s power, / only he who forfeits love’s delight, / only he can attain the magic / to fashion the gold into a ring.’ In other words, the acquisition of wealth and emotional fulfilment are mutually exclusive. His lecherous advances having been mockingly rebuffed by the Rhine maidens, Alberich has little difficulty in opting for the former: significantly, the first act of capital accumulation in The Ring is his theft of the gold.
This is not the only economic symbolism in The Rhinegold. The next scene is dominated by a contractual dispute between the g
od Wotan and the giants Fafner and Fasolt, who have just completed the construction of a new fortress, Valhalla. It is the third scene, however, that contains the most explicit economics. Here we see Alberich in his new incarnation as the heartless master of Nibelheim, mercilessly sweating his fellow dwarfs, the Nibelungs, in an immense gold factory. As his wretched brother Mime explains, his people were once ‘carefree smiths’ who ‘created / ornaments for our women, wondrous trinkets, / dainty trifles for Nibelungs, / and lightly laughed out our work’. But ‘now this villain compels us / to creep into our caverns / and ever toil for him alone … without pause or peace’. The relentless pace of work demanded by Alberich is memorably evoked by the sound of hammers rhythmically striking anvils. It is a sound we hear again later in the cycle when Siegfried reforges his father’s shattered sword Notung: perhaps the only example of a breakthrough in arms manufacturing set to music.
Of course, few serious Wagnerians nowadays would wish to overplay the economic theme in The Ring.5 What still seemed fresh in the 1976 production at Bayreuth was tired by 1991, when a Covent Garden production dressed Alberich in a top hat and Siegfried in a worker’s blue overalls. On the other hand, it was Wagner himself who compared the smog-filled London of his day with Nibelheim. Nor is it without significance that he first conceived the cycle in the revolutionary year 1848, shortly before taking to the barricades of Dresden alongside the anarchist Mikhail Bakunin (where the two passed the time by sketching out a blasphemous crucifixion scene for a projected opera entitled ‘Jesus of Nazareth’). By the time the completed Ring was given its first performance in August 1876 Wagner had certainly moved away from the radical politics of his youth. But to the young Irish writer George Bernard Shaw, who turned 20 that same year, the economic subtext of Wagner’s work was still discernible: he was even seen in the Reading Room of the British Museum studying the orchestral score of Tristan und Isolde alongside a French translation of Marx’s Capital. For Shaw, The Ring was an allegory of the class system: Alberich was a ‘poor, rough, vulgar, coarse fellow’ who sought ‘to take his part in aristocratic society’ but was ‘snubbed into the knowledge that only as a millionaire could he ever hope to bring that society to his feet and buy himself a beautiful and refined wife. His choice is forced upon him. He forswears love as thousands forswear it every day; and in a moment the gold is in his grasp.’6