An economics professor takes an iconoclastic view
of finance, government, and the role the U.S. should play on the world
Watching a writer take on an entire school of thought
is great fun: there's the shock in recognizing the magnitude of the
assault, and the gratification of seeing sacred cows slaughtered. In
"The Cash Nexus: Money and Power in the Modern World, 1700-2000," Niall
Ferguson, Professor of Political and Financial History at Oxford University
and a visiting Professor of Economics at New York University's business
school, boldly and successfully challenges many of the central tenets
of modern political economics. More important, his findings point to
a need to rethink America's military and diplomatic posture.
"The Cash Nexus" is required reading for anyone interested
in the relationship between finance and government.
But Ferguson uses stealth to advance his iconoclastic
views. "The Cash Nexus" does not argue a central thesis but instead
presents a series of essays, organized along historical lines, exploring
the role of financial and economic power in military and political victories.
Ferguson starts with a compelling observation. Despite
the prevailing determinism that sees economic forces as the main influence
on politics, in fact political events - particularly wars - have had
a seminal impact on financial institutions and the growth and development
The first half of the book, which examines how the financing
of wars drove financial innovation and institution-building, is thorough,
well written, and in many respects novel, but not the most gripping
subject matter. For example, one chapter discusses how government bond
yields were determined historically. Only later does one realize that
this material set the groundwork for some provocative observations.
Contrary to modern revealed wisdom, which holds that
superior productive capacity translates into military dominance, England
was long able to punch above its weight by virtue of having developed
a professional tax-collecting bureaucracy and by being scrupulous about
paying its creditors, while much larger economies, like France, had
comparatively poor payment records and hence less access to debt.
Ferguson disputes many widely-held views: that the costs
of war, relative to GDP, have tended to rise; that economic growth supports
the spread of democracy, and vice-versa; that growth leads to success
at the polls (witness the failure of the Gore campaign); that the progress
of democracy is inexorable.
He also argues, convincingly, that relatively high levels
of military spending do not reduce GDP growth, and that the decline
of the British Empire was due not to excessive military commitments,
but to "understretch." And there are scintillating asides. For example,
Ferguson posits that the recent stock market boom most resembles John
Law's Mississippi and South Sea bubbles of the early 1700s, where his
companies were a vehicle for the conversion of public sector debt to
equity. The parallel is that the U.S. has reduced the government debt
outstanding while encouraging citizens and employers to make retirement
investments in stocks (one justification for inflated stock prices was
that 401 (k) assets had nowhere else to go).
Although his examination of these topics is worthwhile
in and of itself, over the course of the book Ferguson carefully moves
the chess pieces into place to defend his most controversial position:
"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....[T]hese
are not naturally occurring, but require strong 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....The reasons it will not happen
are threefold: an ideological embarrassment about being seen to wield
imperial power, an exaggerated notion of what Russia and China would
do in response; and a pusillanimous fear of military casualties. Perhaps
that is the greatest disappointment....that the leaders of the one state
with the economic resources to make the world a better place lack the
guts to do it."
Despite its lucid style, cogent arguments, and broad
historical perspective, "The Cash Nexus" will not suit all tastes. Ferguson
puts his best material towards the end, and many readers may find his
earlier chapters slow going. Similarly, Americans may chafe at the seemingly
Euro-centric focus of the much of the book, but Europe offers a longer
financial history and greater breadth of experience than the U.S.
Nevertheless, Ferguson's closing argument is a wake-up
call. Most Americans seem to have forgotten how hard the fight for freedom
has been, and how fragile many democracies are. Yet the Bush Administration's
modest aims and isolationist posture seem inconsistent with increased
defense spending (of course, it may simply be good for business). And
Secretaary of State Colin Powell appears to have drawn the wrong inference
from his experience in Vietnam: to do nothing, rather than to do something
"The Cash Nexus" is an ambitious and penetrating book
that calls on policy makers to change their perceptions about the proper
uses of power.