The Cash Nexus: Economics and Politics From the Age Of Warfare through the Age Of Welfare, 1700-2000 [Paperback]

The most interesting part of the book is the first 6 chapters, which focus on how state institutions have emerged over time to serve the needs of war finance--the principal impetus behind the rise of the modern state. These institutions produce what Ferguson calls an optimal combination for producing power and include 4 institutions: a professional tax gathering bureaucracy; a parliament that accords a measure of representation to tax payers; the management of a system of national debt, which allows the state to borrow; and a central bank to manage a currency and the national debt. Ferguson maintains that this combination first emerged in Britain after the Glorious Revolution and was later exported to other countries and, together, produced many unintended benefits, such as an educated civil service and expanded capital markets which served the needs of the economy.

An important part of Ferguson's argument is that economic philosophies have produced two deterministic views of history--one Marxist and the other liberal capitalist. While one opposes capitalism and the other celebrates it, both see history as being essentially economic history. The modern variety of economic determinism (neoclassical economics) has produced three ideas that Ferguson criticizes: economic growth promotes democratization; economic success leads to re-election; and economic growth is the key to international power. While Ferguson's criticisms are interesting, there are a few shortcomings.

One is that he makes the mistake of equating wealth with money when discussing liberal economics. In fact, the term money seems to be a synonym for economics wherever Ferguson discusses modern economic ideas on history, but he does not take note of the fact that liberal economics--whether classical or modern--does not view money as being the core of the economy.

The dichotomy between Marxism and neoclassical economics appears too simple as well. He fails to note that much of the West--i.e., on the Continent of Europe--practices a rather different variety of capitalism than that suggested by the Anglo-American model, one that is corporatist and whose adherents are often in strong antipathy to open and competitive markets. The absence of this distinction becomes annoying when he discusses fixed exchange rates and monetary unions (Chapter 11). He argues that floating exchange rates and market instability cannot go on forever, that some sort of supranational controls are required. If we take the Anglo-American model to mean the way the United States and Britain operate, then fixed exchange rates and monetary unions are not part of that. In fact, proponents of this model generally argue against what Ferguson argues for.

Sections 3 and 4 (Chapters 7-14) cover so many different topics that the material does not integrate well into the core themes of the first two sections. A related matter is one of depth. While the research of other disciplines is frequently discussed (e.g., political science and economics), he often considers too thin a slice of that research to provide enough depth in any one place. While arguing against the idea that political manipulation of the business cycle always leads to re-election, for example, he does not engage most of the literature on this question.

Another issue is the way in which data is used. Some of his charts present data across so many years and countries that it is hard to see the detail in the movement of the figures. This is especially true when the figures contain extreme values during the world wars.

Ferguson returns to the warfare state at the end of the book to argue that the West is quite under-militarized and potentially vulnerable to more aggressive states. The United States should heed this warning and assert its role as a hegemonic power again. Ferguson concludes that money does not, after all, make the world go round. People are driven by motivations other than economic gain and power has many facets to it--some tangible and some not. While this may be true, it is not much of a revelation.

If our American economic and political system is to be supported and encouraged, and we are his intended audience, then who is the target of Fergusons criticism? It's axiomatic that it's Marxist historians and supporters of historicism as Ferguson sees nothing "deterministic" or directional about economic history. Ferguson instead convincingly argues that a CASH NEXUS exists and it is there, in the linkage between money and power, where the real story lies. Indeed he says quite clearly that "money does not make the world go round...it has been political events - above all,wars - that have shaped the institutions of modern economic life: tax-collecting, bureaucracies, central banks, bond markets, stock exchanges."

The whole book is a development on this point. Financial statistics and bond yields are presented in chapters such as "The Money Printers: Default and Debasement", "Of Interest", "Dead Weights and Tax-eaters: The social History of Finance" and "Bubbles and Busts: Stock Markets in the Long Run". These chapters are obviously analytical and there is sometimes a flood of data that tends to dampen enjoyment of the book. The latter half of the book where Ferguson spends more time making the connections between money, power, politics, culture, and warfare and less time analyzing, is both more enjoyable to read and more instructive.

It's an interesting book well written and certainly very opinionated. It's broad ranging covering the last 300 years of western economic development and interdisciplinary in scope touching on philosophy, political science, geography as well as it's main subjects of history, finance, and economics. Opinionated history like this is always contentious but it's equally always enjoyable to read.

I haven't read such a well argued, informative and in addition entertaining non-fiction book since "Guns, Germs and Steel". I was overjoyed when that book won the recognition it deserved. I hope this book does as well.

In addition, this book is important because it hits on today's news. Read the section on Debt management, and then see how you feel about Bush's tax cuts, or defence policy. This is not to say the book is partisan, but the author is a financial historian, and will bring up new ways of thinking about current topics.

If your are interested in financial history, the link between finances and politics, you will find this book fascinating.