The Cash Nexus | Niall Ferguson

Summary of: The Cash Nexus: Money and Power in the Modern World, 1700-2000
By: Niall Ferguson


Delve into the captivating world of financial power as we explore Niall Ferguson’s engrossing book, The Cash Nexus: Money and Power in the Modern World, 1700-2000. Ferguson dismantles the popular notion that economic determinism controls everything, revealing the significant impact of war and the drive for power, violence, and sex. In this summary, we’ll trace the development of financial institutions and structures, the effect of war on financial evolution, and the politics of public debt. With a closer look at taxation, democracy, military spending, and warfare, prepare to question the beliefs you held about money, power and their influence on our modern world.

The Resilience of Economic Determinism

The Notion that “Money” Answers “All Things” Persists

The idea that economics is the driving force behind human actions has been a remarkably persistent notion throughout history. Although Marxism’s collapse failed to deflate economic determinism, it survives today in several popular beliefs. For instance, individuals believe that economic growth forms the basis for the spread of democracy, and achieving economic success ensures re-election and unlocks international power.

However, according to the author, political events, notably wars, not economics, have played a crucial role in shaping the institutions of modern economic life, such as tax-collecting bureaucracies, central banks, bond markets, and stock exchanges. Although economists refer to military upheavals as “shocks” considered “exogenous” to their models, the drives for sex, violence, and power can override the power of money and lead to a war.

While human behavior is unpredictable, people are mainly driven by motivation and money, which does not make the world go around. In conclusion, although economics certainly plays a vital role in shaping our world, it must be viewed within the context of other factors that can significantly influence human actions and their outcomes.

War and Finance

War has been the catalyst for financial evolution throughout history. From melting Athena’s statue for coins to pay for war, to modern-day governments using indirect taxes, the need to finance wars has molded financial structures. Corruption has been viewed as an economic rather than moral phenomenon. The death toll of war has been devastating, with the Second World War claiming as many as 57 million lives. The U.S. and Britain industrialized war, shifting resources to tanks, warships, and aircraft to save lives. War provides incentive for financial innovation, which has been used to bridge the gap between funds needed for war and the funds on hand.

The Evolution of Taxation

Taxation has been an innate response to financial needs, dating back to the time of Christ, where Mary and Joseph were taxed by Caesar. Wars have also been a driving force behind the rise of taxation, leading to the transformation of early warfare states into welfare states. Despite the inflation tax being a practice that predates the twentieth century, it saw its most extensive and ruthless use in that era. Comparing British government finances in 1898 and 1998, the shift in taxation from mainly defense and debt service costs to a more progressive system aimed at redressing social inequality is evident.

Is Public Debt Good or Bad?

The book explores the concept of public debt and its impact on the economy. Although there have been historical circumstances where public debt was necessary, the question remains, how much is too much? The book delves into the Keynesian revolution in public finance, where government expenditure was used to increase domestic consumer demand. However, this strategy was not frequently employed before the 1970s. The author argues that deficit financing is not the most desirable method, and full employment is necessary to balance the budget. The book also poses the question of when enough is enough. While some view any deficit as harmful, others see debt as a sign of a robust economy. The author provides historical examples of nations that suffered from excessive service on outstanding debt, such as pre-revolutionary France, where debt service consumed 62% of the country’s total tax revenues. The book concludes that while public debt can be beneficial in certain situations, it is crucial to find a balance to prevent economic collapse.

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