Turning the Table$

The Cash Nexusby By Niall FergusonBasic Books. 380p $30,

Niall Ferguson is one of the leading—and almost certainly the most controversial—historian in contemporary Britain. He last shocked his compatriots with The Pity of War, which argued that Britain was as much to blame as Germany for World War I, that the war could have been avoided and that on balance Britain was worse off, rather than better off, as a result of the war. Much of his argument was based on the use of economic and other statistics, which he managed to use in a way that did not daunt the ordinary reader.

His latest work builds on the same method, making a case for out-of-the-mainstream contentions bolstered by hard data. He discusses economic principles and economic history in detail accessible to the lay reader, yet his new heresy is that economics is not at all the basis of political and social change and that war and politics usually determine economics rather than the other way around. “From the very earliest days of recorded history until the very recent past, war has been the motor of financial change,” he asserts in the first paragraph of The Cash Nexus. War is the star of Ferguson’s tale. War is a perennial element in history, and the need for means to pay for it has driven changes in monetary and fiscal policy, taxation, the public debt, representation and virtually every aspect of political and social change.


Even in peacetime, politics—in contrast to the view of vulgar Marxism—holds primacy over economics. Contrary to economic theory, “investors do not rely purely on economic data when forming their expectations of future policy. They are as much interested in political events.” In the 19th century, the bond market, dominated by the Rothschilds, paid more attention to political than to economic developments, and that is the case more often than not. “In the financial markets, political events have economic consequences too. In fact, the direction of causation runs both ways.” Nor is it only in the markets that politics often trumps economics. Despite the Clinton mantra, “It’s the economy, stupid,” in electoral politics economics does not always prove primary. Ferguson’s studies indicate, for instance, that “there was little or no correlation between economic success and political success in twentieth-century Britain.” He holds that “economic relationships...are frequently ‘drowned out’ by political events.” He agrees with Maurice Saatchi that it is “economic perceptions,” not “economic facts” that count. Voters, he argues, often and “wisely” vote on the basis of what they expect government can and will do for them rather than on the basis of what an incumbent government has done for them.

Ferguson’s skepticism extends beyond doubting the primacy of economics over politics. He also firmly rejects the emerging “new orthodoxy” that “democracy and economic progress are mutually reinforcing.” Contrary to the views of Francis Fukuyama, Amartya Sen and Mancur Olson, matters are far from simple. On the basis of many historical-empirical surveys, he concludes that “democracy is not a critical determinant of growth.” Insofar as increased democracy may lead to a push for greater equality, it may actually retard economic progress. In any case, like Alexis de Toqueville, to whom he refers, Ferguson believes that “democracy may indeed be destined to triumph over autocracy around the world. But we cannot take it for granted that liberty—including economic liberty—will always share in that victory.” Many democracies are what have been characterized as “illiberal democracies,” in which there is little respect for civil rights.

On the vexed question of globalization, Ferguson is also a contrarian—at least as far as the major cheerleaders for globalization are concerned. An earlier period of globalization prior to World War I did indeed collapse, proving that globalization is not irreversible. Today’s globalization is far greater than that of the past, especially in terms of goods and financial services. But the global labor market is far less open. As a result, “free trade and capital movement without a proportionate volume of international migration are leading to unprecedented levels of inequality around the world.” This will continue: “the way the world is going, the gap between rich and poor can only widen within the foreseeable future.”

The only solution is, logically, mass immigration. And immigration also provides a solution for what Ferguson sees as a major problem of democracy, the coming struggle for generational equality. Since voters are now in control, the welfare state has grown to unsustainable size. Three solutions present themselves. Taxes can be significantly raised, or benefits can be cut in a major way. Both of these would be difficult in a democracy. However, newer citizens can be sought to lighten the burden. The American Social Security system is already benefiting from the addition to the population of new young workers, who do not yet draw old age pensions. European nations hostile to immigrants will have to make similar adjustments in social and economic policy if they are to survive.

Ethnicity is another matter regarding which Ferguson does not completely accept the conventional wisdom. Like others, he believes that the politics of ethnicity “may have fewer ideological rivals” than a century ago. But he holds that, contrary to the belief of Timothy Garton Ash, ethnic homogeneity is not a prerequisite for democracy. While he deplores what he sees as the current tendency to “political fragmentation” and ethnic-based civil war, he doubts that international forces can overcome the dangers posed by fragmentation. Economic globalization and the rise of nongovernmental organizations, such as Greenpeace and Amnesty International, can help; but the basic problem is that the United Nations has not the financial resources to make a critical difference in “ethnic cleansing,” as he holds the example of Yugoslavia shows.

What then? Here Ferguson makes a crucial connection between theoretical heresy and policy prescription. Paul Kennedy, he holds, is completely wrong in arguing that “overreach” has doomed empires in the past and threatens the United States today. On the contrary, had Britain invested more in national power prior to World War I and World War II, neither conflict might have occurred. Actually, high defense expenditures and war itself may benefit a nation economically, as World War II finally took America out of the Depression. Since the United Nations is not capable of keeping world peace, the United States “should be devoting a larger percentage of its vast resources to making the world safe for capitalism and democracy.” The problem is not overreach but underreach. Unfortunately, as Kosovo underlined, the greatest power in the world is terrified of any casualties. His final sentence in the book’s pre-epilogue is that “the greatest disappointment facing the world in the twenty-first century is that the state with the economic resources to make the world a better place lacks the guts to do it.”

Not every reader will find The Cash Nexus to his or her liking. Though the book is generally free from jargon, the detailed economic history—including tables and charts—can sometimes make for slow going. While the underlying argument is coherent, sometimes the parts work better than the whole. But no one can come away from the book without having been forced to rethink long-assumed ideas about economics and politics, and without having picked up a great deal of useful and sometimes entertaining information in the process. Ferguson seems to have done it again.

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