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.

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

NIALL FERGUSON

The Cash Nexus

Money and Power in the Modern World, 1700–2000

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First published by Allen Lane The Penguin Press 2001
Published in Penguin Books 2002

Copyright © Niall Ferguson, 2001
All rights reserved.

The moral right of the author has been asserted

ISBN: 978-0-141-97641-9

For Mary and May

Acknowledgements

This book would not have come into existence without the generosity of the Trustees of the Houblon-Norman Fund at the Bank of England, whose financial support allowed me to spend a year of full-time research at the Bank.

As an historian venturing into economists’ territory, I was especially grateful to Mervyn King, Charles Goodhart and John Vickers for their encouragement and advice throughout my time in Threadneedle Street. I should also like to thank Bill Allen, Spencer Dale, Stephen Millard, Katherine Neiss, Nick Oulton, Andrew Scott, Paul Tucker and Tony Yates. In the Information Centre, I was greatly assisted by Howard Picton and Kath Begley; and in the Archive Henry Gillett and Sarah Millard were always ready to answer my questions, no matter how obscure. Last, but most certainly not least, Hilary Clark, Sandra Dufuss, Chris Jewson and Margot Wilson provided first-class secretarial support.

The corollary of my year at the Bank was my absence from Jesus College, Oxford. I am particularly grateful to Dr Jan Palmowski for so ably taking over my tutorial and other responsibilities; as well as to my colleague Dr Felicity Heal, whose life was not made easier by my absence. I would also like to thank the Principal and Fellows of Jesus for granting me special leave, not least Peter Clarke and Peter Mirfield, who punctiliously dealt with the financial arrangements. The book was largely written after I returned to Jesus, and I should like to express my gratitude to all the staff at the College who in their various ways made the task easier, especially Vivien Bowyer and Robert Haines.

Some parts of this book originated in collaborative work. I am especially indebted to Glen O’Hara, who co-authored Chapter 8 and provided substantial assistance with Chapter 9. My room-mate at the Bank, Laurence Kotlikoff, introduced me to generational accounting and tried to improve my economics; his influence is most apparent in Chapters 7 and 11. I would also like to thank Brigitte Granville and Richard Batley, with whom I co-wrote academic articles on related subjects while I was working on the book, and whose influence is discernible here too. Daniel Fattal was indefatigable in gathering statistics and quotations from The Economist, while Thomas Fleuriot hunted down elusive references with equal zeal.

Special thanks are due to Mike Bordo, Forrest Capie, Charles Goodhart and Harold James, all of whom generously took time to look at the entire manuscript in draft, and saved me from numerous errors. Benjamin Friedman and Barry Weingast also read sections of the manuscript and offered penetrating criticism.

My first stab at the history of the bond market was given an airing at the opening conference of the Yale School of Management’s International Center for Finance; thanks are due to William Goetzmann and Geert Rouwenhorst for inviting me to participate, as well as to those who offered comments and suggestions. A part of Chapter 11 was presented at N. M. Rothschild & Sons during the June 1999 FT Gold Conference; I am grateful to Sir Evelyn de Rothschild and Sir Derek Taylor for their invitation to speak. Fareed Zakaria encouraged me to put EMU into historical perspective for Foreign Affairs; he will see how that argument developed in the later sections of Chapter 11. Some of Chapter 12 originated in a paper given at the conference on ‘Social Science and the Future’ held in Oxford in July 1999; I should like to thank Richard Cooper, Graham Ingham and Richard Layard for their invitation to participate in the conference, and all those present for their comments, particularly Lord Lipsey. Chapter 13 made an appearance in draft at a Stanford History Department seminar; I am grateful to Norman Naimark and his colleagues for their hospitality.

I would also like to thank for miscellaneous comments and information: Lord Baker, Sir Samuel Brittan, Phil Cottrell, Eugene Dattel, Lance Davis, Luca Einaudi, Walter Eltis, Campbell and Molly Ferguson, Marc Flandreau, John Flemming, Christian Gleditsch, Michael Hughes, Paul Kennedy, Jan Tore Klovland, David Landes, Ronald McKinnon, Ranald Michie, Paul Mills, Larry Neal, Patrick O’Brien, Avner Offer, Richard Roberts, Hugh Rockoff, Emma Rothschild, Lord Saatchi, Norman Stone, Martin Thomas, François Velde, Joachim Voth, Digby Waller, Michael Ward, Eugene White, David Womersley, Geoffrey Wood and J. F. Wright.

I owe a huge debt to Simon Winder, my editor, who laboured long and hard to improve the original manuscript. Thanks are also due to Clare Alexander, my agent, and Elizabeth Stratford, my copy-editor. I wish it were possible to mention everybody at Penguin who has helped to produce the book, but I have been persuaded that the list would be prohibitively long.

Most of my references are to published articles and books, rather than to original documents, with a very few exceptions. Leopold I’s letter to Queen Victoria of 19 September 1840 is quoted with the gracious permission of Her Majesty the Queen. I would also like to thank Sir Evelyn de Rothschild for permission to quote from documents in the Rothschild Archive.

Finally, to Susan, Felix, Freya and Lachlan I can offer only an apology for all the sins of omission and commission perpetrated by the author during the writing of this book.

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

1. Defence expenditure as a percentage of total public spending, 1891–1997
2. Average annual central government budget deficits as a percentage of national product, selected periods
3. The growth and structure of the London Stock Exchange, 1853–1990
4. European price inflation during and after the First World War
5. Increase or decrease in the British national debt by sub-periods, 1822–1997
6. The structure of European national debts, circa 1993
7. Determinants of fluctuations in the price of consols, 1845–1900, as cited in The Economist
8. The bondholders and the British national debt, 1804–1870
9. Redistribution of income through taxes and benefits, United Kingdom 1992, by quintile groups of households (£ per year)
10. Dependency ratios, actual and projected, 1900–2050
11. Reasons for changes of government or prime minister, 1832–1997
12. British economic indicators and election results, 1918–1997: change since previous election
13. Individual membership of the three major British political parties, 1953–1997
14. Foreign holdings of developed countries’ national debts, circa 1993
15. Wars, revolutions and the bond market, 1830–1914
16. Anticipated and real premiums on selected international bonds, 1850–1983
17. Indicators of commercial and financial globalization
18. A tale of two hegemons, 1870–1995
19. Exchange rate regimes and inflation
20. Free, partly free and not free countries: the Freedom House Surveys for 1972–1973 and 1998–1999
21. Average democracy score per country, by regions, 1800–1998
22. Average democracy score (maximum 1.00, minimum 0.00) for 136 countries, 1975–1994
23. The Jews in economic élites: selected statistics
24. World population and the number of independent states since 1871
25. Military expenditure of the world’s principal powers (in US $millions, at constant 1995 prices and exchange rates)

Appendices

1. The biggest wars in history
2. Multiple regression of British government popularity and economic indicators
3. The global bond market, June 1999
4. Public debt burdens in 1887–1888
5. Economic and social indicators and the inter-war crisis of democracy, 1919–1938

List of Figures

1. The ‘square of power’
2. Military personnel as a percentage of population, 1816–1997 (log. scale)
3. Defence spending per serviceman in Britain and the United States, 1816–1998 (log. scale)
4. Defence spending as a percentage of national product, 1850–1998 (log. scale)
5. Income tax as a percentage of taxation, 1866–1999
6. Electorate as a proportion of population aged above 20, 1815–1974
7. Government employment as a percentage of total employment, 1960–1999
8. Public debt/GNP ratios since the late seventeenth century
9. Debt service as a percentage of government expenditure, 1802–1999
10. British money supply and inflation (annual growth rates), 1871–1997
11. The real growth rate minus the real interest rate in Britain, 1831–1997
12. British and French bond yields, 1753–1815
13. Major bond yields since 1700 (annual averages)
14. The yield on consols (end-of-month figures), 1754–1998
15. Monthly bond yields, 1914–1945
16. US Long-term bond yields, 1979–1989
17. Real returns on British and American bonds since 1700 (decennial averages)
18. Relative poverty rates before and after taxation and transfers, 1991
19. Two alternative ways of achieving generational balance (percentage increases required)
20. President Clinton’s approval rating and the Dow-Jones Index, 1993–2000
21. Government lead (left-hand axis) and the ‘misery index’ (right-hand axis), 1948–2000
22. The real cost of British elections: candidates’ declared general election expenses, 1880–1997
23. Total general election expenditure of the three main British parties, 1964–1997 (thousands of 1997 pounds)
24. Conservative and Labour parties, central expenditure (routine and election), 1900–1992 (thousands of 1997 pounds)
25. Individual Labour Party membership as a percentage of the UK population, 1928–1997
26. Unadjusted yields on European bonds, London prices, end of week, 1843–1871
27. Government bonds as a percentage of all securities quoted on the London Stock Exchange, 1853–1990
28. Yield spreads over consols, 1870–1913
29. Exchange rates of major currencies per US dollar, 1792–1999 (1913 = 100)
30. World gold production, five-yearly totals, 1835–1989 (metric tonnes)
31. US dollars per ecu/euro, 1975–1999
32. The rise of democracy, 1800–1996
33. The average democracy ‘score’ for 29 European countries, 1900–1950
34. Real national product indices for European democracies, 1919–1939 (1927 = 100)
35. Real national product indices for European ‘dictatorships’, 1919–1939 (1927 = 100)
36. Number of wars in progress per year, 1816–1992
37. Circles of interest

List of Illustrations

1. James Gillray, Begging No Robbery: – i.e. – Voluntary Contribution: – or John Bull, escaping a Forced Loan, 1796
2. James Gillray, after ‘F. L. Esq.’, John Bull Ground Down, 1795
3. H. Heath, after George Cruikshank, The Pillar of State, or John Bull Overloaded, 1827
4. 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
5. James Gillray, Midas, Transmuting all into Paper, 1797
6. Anon. (English School), The National Parachute, or John Bull Conducted to Plenty and Emancipation, 1802
7. Anon. (English School), The Tree of Taxation, 1838
8. George Cruikshank, The ‘System’ that ‘Works so Well’!! – or The Boroughmongers’ Grinding Machine, 1831
9. Cheffins, King Cash! – The Boss of Every Election, from ‘Illustrated Bits’, 1885
10. Thomas Derrick, Sentiment on the Stock Exchange, from ‘Punch’, 1938
11. Olav Gulbransson, Worshipping the Almighty Dollar, from ‘Simplicissimus’, 1923
12. Olav Gulbransson, President Wilson mounted on Morgan’s Gold Mountain, from ‘Simplicissmus’, 1916
13. James Gillray, The Plumb-pudding in danger: or State Epicures taking un Petit Souper, 1805
14. 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