Niall Ferguson Interview: Conversations with History; Institute of International Studies, UC Berkeley

Money and Power: Conversation with Niall Ferguson, John Herzog Professor of Financial History, New York University; November 3, 2003 by Harry Kreisler

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Money and Power

Much of your work has been about what you call the nexus of money and power. And your book is called that, actually. I can show the book. Tell us what drew you to that set of problems. Was it a particular mentor that you had? It didn't all come from Tolstoy, I assume.

Well, Tolstoy has relatively little to say about financial history, so it's true. From a fairly early stage in my undergraduate career at Oxford, I became interested in economic questions, more interested than my tutors, who were rather horrified when I said I'd rather read Adam Smith than Hobbes. This was a great turning point in my Oxford career. I think it was regarded as distinctly revolutionary from then on. But from my point of view, as somebody who was fundamentally interested in the modern period, it was far more important to understand Adam Smith than to understand Hobbes, and far more important to read Keynes than to read Marx, who manifestly had no idea about economics, though he had some quite interesting philosophical insights. So I spent some of my undergraduate career almost teaching myself economics and economic history on the side, because traditional Oxford history courses didn't have terribly much of that sort of thing.

I wonder if that was partly a function of my Glasgow region background. I mentioned earlier that I sprang from the Glasgow bourgeois. I remember being given Adam Smith as a present by my father on one occasion, with an obvious implication that it was time I started thinking about the cash nexus. Scots, generally speaking, are more prepared to talk about money than the English. Thomas Carlyle, the great mid-nineteenth-century historian, a Scotsman himself, was the man who coined the phrase, "the cash nexus." The interesting thing was that Carlyle argued against many nineteenth-century materialist philosophers that money wasn't everything; that money wasn't really the driving force in political change. book coverSo when I used the words "the cash nexus," it's partly in order to capture Carlyle's idea.

This is important, the relationship between politics and economics, between power and finance. It's very, very important. But we shouldn't assume that it's a one-way street in which economic development determines political outcomes. The central arguments of The Cash Nexus as a book was that quite often the direction is in the opposite way, and that it's actually political crises, political events, and particularly wars that shape economic and financial development.

What that book really becomes is a statement about the kinds of institutions that were created by the state as part of the state-building process --

Or as part of the war-making process.

-- which had broader implications for the economy. You have a "power square." Tell us what that is and what you wound up concluding.

This came about because I was trying to persuade my wife, a very skeptical woman, that the argument of the book was worth making. On the back of a paper serves [napkin] in Venice, where we were celebrating our wedding anniversary, I sketched what I thought was the essence of the argument of the book. I drew a square, and I said, "Look, there are four institutions that come about almost inadvertently as a result of war-making and the exigencies of war finance. These institutions are a tax collecting bureaucracy, a representative assembly, a central bank, and some kind of financial markets in which the national debt can be financed. These are the institutions that arise." They arise primarily out of the exigencies of military conflict, but when they come together, first in Holland, and then spectacularly in England in the seventeenth and eighteenth centuries, they turn out to be the magic key that unlocks economic development.

It's not intentional. It's not supposed to bring about the industrial revolution. But once you get this combination of non-corrupt tax collectors, of representative assemblies in which property owners actually have a say about the tax rates that they pay, once you get a central bank in which the money in an economy is managed in a rational way without the multiplicities of coins or worthless pieces of paper in other systems, and, finally, once you get financial markets where governments can borrow quite large sums of money at low interest rates, then you're off. There are all kinds of what economists call "externalities," that's to say, unexpected side benefits that propel economic developments in the private sector. That was the crux of the argument.

I know little diagrams of squares and triangles often look like the worst kind of political science. But, look, it convinced my wife, so how can you argue with that?

That's right. It was done on a napkin, you said?

It was, indeed.

Well, yeah, that's how we make economic policies, so you know ...

The greatest decisions in history have been done on the back of paper napkins.

That's right. So, in a way, in this power square, you're establishing the basis for knowledge-building of the state, and the criteria by which you can anticipate which states will become more powerful than others.

Right. There's actually quite a wide range of different combinations in the modern period, as states adopt or choose not to adopt this combination of institutions. Some, for example, don't get adopted at all or get adopted very late. You can have a system in which one corner of the square is missing.

Now, the interesting thing about the United States, they didn't have a proper central bank until the eve of the First World War. It muddled through the nineteenth century with only periodic central banking functions being performed by the First and Second Bank of the United States. And in the later nineteenth century, before the creation of the Federal Reserve System, there was actually a tremendous chaos in the monetary institutions of the U.S., giving rise to quite severe financial crises. So what's interesting about the square of power, as I call it, is that you can have three of the institutions and be missing a fourth. That can have quite important consequences for economic development. It's not, in a sense, an equation, it's just a representation that allows us to see which institutions matter.

What I was really trying to do in the most recent economic work on institutions is to say that it's been very clear that institutions matter and markets don't operate without the right institutional framework. This wasn't a novel insight; I was just applying it to the past and then saying, "This helps us do things with social history, too." Because instead of thinking in terms of classes (which, traditionally, historians did, following a long tradition going back to Ricardo, not just to Marx), we can think about particular functions associated with these different institutions.

That gave rise to another concept, which is central to the book's argument, that there are circles of influence and enough classes that they are separate functions -- taxpayer, voter, borrower, bondholder -- and these functions overlap. Individuals can be all four of these things, or they can be only one of these things. I find that far, far more illuminating than traditional class analysis.

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