BESTSELLING AUTHOR OF THE PITY OF WAR NI AL ERGUSON ONEY AND POWER IN THE MODERN WORLD, 1700-2000 ASH xus $30.00 US $44.95 CAN idea that money makes the world go round is a seductive one. From class conflict to the "feel good" factor, from Karl Marx to Bill Clinton, few of us would deny the importance of the econo- my in politics. Economic change has seemed to he the prime mover of political change whether in the age of industry or the Internet. The Clinton cam- paign motto in 1992—"It's the economy, stupid"— sums up a central assumption of modern life. In The Cash Nexus, Oxford historian Niall Ferguson challenges this assumption by offering a radical new history of the relationship between economics and politics. Setting contemporary issues in a three hundred year historical perspec- tive, he brilliantly redefines the "cash nexus"— the pivotal link from money to power. Throughout modern history, Ferguson argues, the way states have managed their money has been crucial to their survival and success. It has been finance as much as firepower that has decid- ed the fates of nations in the supreme test of war. And war itself has been the principal engine of financial innovation. Our lives today are still dom- inated by the institutions of the warfare state: income tax, parliaments, national debts, central banks and even stock markets. This is the "square of power" on which the great Western empires have been based. Yet the evolution of these institutions over three centuries has been anything but a one-way street. There is no universally optimal equilibrium in the balance between taxing and borrowing, and sometimes a high debt burden can be a source of strength rather than weakness. The democratiza- tion of parliamentary institutions in the twentieth century has not always been conducive to econom- ic stability and a bigger tax base. Sometimes the square of power can collapse into tax revolts, defaults, inflations or financial panics. Ferguson arrives at provocative conclusions. Domestic political power may have more to do with campaign finance than with pre-election (continued on back flap) (continued from front flap) prosperity; but we should spend more, not less, on the democratic process. Financial globalization in the absence of imperial rule may prove too unsta- ble to last; compared with past superpowers, the United States is neglecting its international responsibilities. Stock market bubbles and exchange rate crises may just be harbingers of a deeper crisis that could roll back the advance of democracy and capitalism. A bold synthesis of political history and mod- ern economic theory, The Cash Nexus has chal- lenging and unsettling implications for the future of both capitalism and democracy. Its challenge to the United States to make more political use of its unmatched economic resources is bound to spark heated debate. NIALL FERGUSON is Professor of Political and Financial History at the University of Oxford and Visiting Professor of Economics at the Stern School of Business, New York University. He is the author of Paper and Iron, The House of Rothschilds, and Basic's own The Pity of War and Virtual History. He writes regularly for the Times Literary Supplement and is a prolific commentator on contemporary politics. He is currently at work on a major new history of the Saxe-Coburg House of royalty. Jacket design: Tom Stvan; author photograph: Marc Atkins 2/01 Praise for THE CASH NEXUS A fascinai in», innovative and highly creative analysis oft lie interaction of polities, war and national economies. Wide ranging in time and scope—more than one thousand years and almost the entire settled world—it will be a 'must read* for anyone interested in long-nul evolu- tion and development." —LANCE DAVIS, California Institute of Technology "Erudite and completely persuasive. Ferguson continues to demonstrate how to write authoritative and appealing history. In lhis hook he offers a hold and convincing explanation of how the modern world has been shaped over the last three centuries. Economic forces are important hut Ferguson shifts the emphasis, weaving powerful political, social and other elements into the account. A brilliant hook." -^FORREST CAPIE, City University, London "This controversial hook is a fascinating interweaving of history, politics and economics. The central thesis is that major political events such as wars explain the evolution of our fundamental economic as well as political institutions. Ferguson's historical and political perspective provides impor- tant insights into our understanding of the economic development of the modern world." —MICHAEL I). BORDO, Rutgçrs University "The Ûash Xenix is a masterful synthesis of modern world economic, political and financial history. Ferguson essays with great insight the interrelationships of money, hond and slock markets, taxes, national power, and the causes and effects of wars. All of us, especially American leaders, should absorb its lessons if the new century is to he more peace- ful than the one We have just left behind." —RICHARD SÏLLA, The Stern School of Business, New York university A Member of the Perseus Books Group www.basicbooks.com .—- / /I 11/1 -z US $30.00 / $44.95 CAN ISBN D-Hb5-[]2325-fi 5 3 0 0 0 The Cash Nexus ALSO BY NIALL FERGUSON The Pity of War Virtual History: Alternatives and Counterfactuals (editor) The House of Rothschild Paper and Iron: Hamburg Business and German Politics in the Era of Inflation, iH^j-i^zj NIALL FERGUSON The Cash Nexus MONEY AND POWER IN THE MODERN WORLD, I7OO-20OO BASIC B BOOKS BASIC BOOKS Copyright © 2001 by Niall Ferguson Published by Basic Books A Member of the Perseus Books Group All rights reserved. Printed in the United States of America. No part of this book may be reproduced in any manner whatsoever without written permission except in the case of brief quotations embodied in critical articles and reviews. For information, address Basic Books, 10 East 53 rd Street, New York, NY 10022-5299. A Cataloging-in-Publication record for this book is available from the Library of Congress. ISBN 0-465-02325-8 01 02 03 / 10 9 8 7 6 5 4 3 2 1 For Mary and May [...]... As the old Junker Dubslav von Stechlin laments: They send [the stills which they manufacture] to other factories and right away they start distilling all kinds of dreadful things in these green balloons: hydrochloric acid; sulphuric acid; smoking nitric acid And each drop burns a hole, whether in linen, or in cloth, or in leather; in everything; everything is burnt and scorched And when I think... were the driving force behind changes in other areas of life The pace of economic change was so great as to the shake the rest of history to its foundation For perhaps the first time, the making and using the necessities of and conveniences of daily life and how production, consumption and distribution changed—was the driving force behind a single century's history 16 Even the mid-century dictatorships... of the performance of the economy A widely held version of this theory explained President Clinton's sur vival of the 1999 impeachment process with reference to the sustained 23 9 INTRODUCTION rise of the US stock market The 1 9 9 2 Clinton campaign watchword— "It's the Economy, Stupid"—has become a kind of shorthand for this theory 3 Economic growth is the key to international power (hut too much power. .. the causal link—which can be found in innumer able textbooks—between the Great Depression, the rise of Hitler and fascism generally and the origins of the Second World War Here is a classic example of the argument: 19 20 21 The immediate effect of the economic crisis in Europe was to increase domes tic political and social tensions, to bring Hitler to power in Germany and to encourage the development... 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 p r o p h e t speaks the name of the elect, pro nouncing 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... lead to economic decline) In The Rise and Fall of the Great Powers, Paul Kennedy argued that economics provided the key to the history of international relations: "all of the major shifts in the world's military -power balance have followed alterations in the productive bal ances where victory has always gone to the side with the greatest material resources." Given the overwhelming superiority of the. .. father, a mysterious Portuguese (later American) millionaire named Crawford Borrowing against these securities, she and her husband were able to buy a luxurious hôtel in the avenue de la Grande Armée, to gain a controlling interest in a Parisian newspaper and to engineer his election as a socialist deputy Ten thousand people gathered outside the house when the box was ii INTRODUCTION finally opened in. .. prosperity to the propensity to experi ence democracy." In the words of another eminent American econo mist, Benjamin Friedman, "a society is more likely to become more open and tolerant and democratic when its citizens standard of living is rising, and to move in the opposite direction when living standards stagnate." The most obvious example which most readers will think of is a negative one: the causal... both physical and psychological, in numbers) and what Nietzsche called the will to power: the satisfaction that comes from dominating other weaker groups N o theory has adequately described this phenomenon, not least because individuals are plainly capable of sustaining multiple, overlap ping identities; and of tolerating the proximity of quite different groups, and indeed co-operating with them Only... obstructed, the middle classes were willing to relinquish their political aspirations and to leave the old regime substantially in charge, in return for protection from an increasingly threatening proletariat The influence on this model would be hard to exaggerate Typical of the way his torians have continued to work with Marxist concepts (even when not them selves overtly Marxist) has been the link often . Paper and Iron: Hamburg Business and German Politics in the Era of Inflation, iH^j-i^zj NIALL FERGUSON The Cash Nexus MONEY AND POWER IN THE MODERN WORLD, I7OO-20OO BASIC B BOOKS BASIC . change whether in the age of industry or the Internet. The Clinton cam- paign motto in 1992—"It's the economy, stupid"— sums up a central assumption of modern life. In The Cash Nexus,. to their survival and success. It has been finance as much as firepower that has decid- ed the fates of nations in the supreme test of war. And war itself has been the principal engine of financial