Book Reviews

The Cash Nexus Money and Power in the Modern World, 1700-2000

Niall Ferguson - Allen Lane, Penguin Press, London, 2001, xix + 553 pp., £20 (cloth).

A powerful strand of contemporary opinion regards globalization as being driven by an unstoppable economic logic. The familiar mantra of writers like Francis Fukuyama is that the worldwide trend toward free markets and liberal democracy is inherently desirable and, at the same time, inevitable. In the view of Niall Ferguson, one of the leading younger members of the Oxford University history faculty who has made his reputation with books on military history and on the Rothschild family, this formula rests as much on fallacious economic determinism as did Marxism. Although he takes his title from a phrase in the Communist Manifesto, nowadays the economic determinists are at the opposite end of the political spectrum.

To economic determinism, Ferguson counterpoises his own model of the "square of power," first developed in Great Britain during the late seventeenth and early eighteenth centuries. Its efficiency in mobilizing resources for war was behind Great Britain's triumph over rival European powers like France and powered the growth of empire. Subsequently, all the Western powers, including the United States, adopted the square of power.

This model postulates a much richer and more complex relationship between economics and politics than the simple, unidirectional causation implied in the proposition that capitalism gives rise to democracy and internationalism. Each corner of the square is occupied by a different institution: a professional, tax-gathering bureaucracy comprising salaried officials; parliamentary institutions in which taxpayers are granted a measure of political representation, thus tending to enhance the amount of revenue a state can raise; a system of national debt that allows a state to anticipate tax revenues in the event of a sudden increase in expenditures; and a central bank, responsible not merely for managing the debt issuance but also for extracting seigniorage from the issuance of paper money.

Ferguson uses his model to illuminate not only the foundations of military power-the book's main theme-but also a wide range of issues of political economy. He is no fan of the welfare state, attributing it to the momentum acquired by bureaucratization and parliamentarization during the twentieth century, with the result that resources were increasingly diverted "away from military towards civilian employment and redistributive transfers." He also concludes that the European Economic and Monetary Union (EMU) could unravel because of the asymmetric fiscal effect on member countries "caused by unaffordable social security and pension systems." Noting a parallel with the ill-fated Austro-Hungarian Monetary Union of 1867-1914, Ferguson argues that unfunded pension liabilities will play the same role in undermining EMU that the First World War had on the monetary arrangements of the Habsburg empire.

Although it is not a theme Ferguson explores in any depth, the square of power is also a useful device for understanding financial crises. The roots of such crises can often be traced to inefficient or corrupt tax administrations, parliaments dominated by vested interests that resist granting the needed revenues to government, and central banks that have insufficient institutional autonomy. Conversely, a country's access to international capital markets goes much better when all the elements of the square of power are in place.

This leads us back to the globalization theme. The cash nexus is "no more than one link in the long and tangled chain of human motivation," Ferguson argues. Other motivations can dominate pure economic advantage, with the result that there is nothing inevitable about globalization, free trade, or international capital markets. Globalization requires strong institutional foundations-international order, the rule of law-and these institutions need to be...