The Cash Nexus

(Literary Masterpieces, Critical Compilation)

Most theories of the relationship between economics and politics involve some form of economic determinism. In one common version of economic determinism, associated with the work of Karl Marx (1818-1883) and Friedrich Engels (1820-1895), governments simply reflect the power relations created by types of economic production. In a capitalist country, in which power is concentrated in the hands of owners of competitive business enterprises, political institutions express the interests of the owning classes. A major problem with this view of the relation between economics and politics, though, is that there are a great many variations among the political systems of capitalist countries.

In an opposing version of economic determinism popular with U.S. policymakers, healthy, competitive markets create truly democratic institutions, rather than concentrations of power in the hands of a single class or group of people. In dealing with post-Communist Russia, Eastern Europe, China, and the developing nations of the world, diplomats and scholars have often maintained that liberalizing the economies of these nations will create more open societies. This, in turn, will gradually result in the emergence of democratic, participatory political structures.

Oxford historian and prolific author Niall Ferguson calls both versions of economic determinism into question. Ferguson has recently published two best-selling volumes on the history of the Rothschilds, the noted European banking family, and The Pity of War (1999), an account of World War I. In The Cash Nexus, Ferguson brings together these two topics of military history and economic history. He argues that war, not the means of production, has been the driving force in modern history.

Ferguson begins by attempting to show that until recently, the growth of the state and its fiscal institutions have been primarily consequences of warfare. War is an expensive business, he points out, although he contradicts common wisdom by offering evidence that it has grown cheaper over the course of the modern period. The royal and imperial governments of the world needed to find ways to fund their costly battles, and this meant the creation of new and efficient forms of taxation. Ferguson therefore turns to the history of taxation, tracing the development of indirect and direct taxation and other revenue-raising devices that enabled governments to pay for military expenses. As direct taxation, such as income taxes, came to supply an ever larger portion of the funds, both bureaucracies and representative political bodies came into existence to varying degrees in different political contexts. Taxation, in other words, led to representation as a means of getting subjects or citizens to raise money from themselves. However, as representative government became more entrenched and the vote spread to ever-larger portions of the population, welfare began to replace warfare as the chief object of government spending.

Taxation is not the only way in which governments can raise money. They can also borrow it. For this reason, Ferguson moves from considering how political decisions about warfare stimulated taxation, political institutions, and governmental bureaucracies to a discussion of the evolution of the public debt. The section devoted to national debt contains some of the most technical information in the book, dealing with inflation, interest rates, and bond yields. As Ferguson points out in his introduction, he considers the national debt to be part of a square of four governmental institutions. The need to raise funds, for war and then other activities, gave rise to a professional tax-gathering bureaucracy, the first of the four institutions. Taxation led to representative bodies such as parliaments, the second. The third institution, national debt, involved the borrowing of money to spread military and other political expenditures over time. Central banks, the fourth institution, made it possible to manage national debts. Although Ferguson maintains that warfare stimulated the growth of these institutions, politics and economics are connected by the continual interaction of all four.

Having sketched the origins and nature of the institutions of political economy,...

(The entire section is 1742 words.)