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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The State and Global Politics

The other element in your work that stands out -- and there's obviously a nice transition when you talk about state-building -- is your sense of the globe, of the world, of different places where these phenomena are happening. How, in the case of state power, one state does it right, everything comes together, and suddenly, they are all over the globe. book coverHence, your work on the British Empire. Before we talk about that, how do you explain that intellectual leap from the focus on the state to a global perspective? This is your new book on Empire.

The answer is that once I had begun to think in terms of political structures and financial institutions, it hit me that the world was not, in fact, made up of nice, neat, discrete nation states. A lot of nineteenth century history textbooks tended to argue that it was. But when I was writing a history of the Rothschild Bank, which was in some ways the biggest scholarly undertaking of my career to date, which involved five years in the archives of the biggest financial institution of the nineteenth century, it suddenly hit that the nineteenth-century world wasn't like that at all. That there were, actually, relatively few nation states in the classical sense. The world was far more shaped by empires and their satellites, colonies, and dependants. Writing the history of Rothschild brought me right up against the simple truth that the later nineteenth century, particularly, was an age of globalization, dominated by a supranational entity called the British Empire.

Now, once I had hit that subject, it was one of those epiphanies. I suddenly thought, "I've been teaching nineteenth-century history, British and European history, and I've completely missed the most important thing about this period. That is, that a quarter of the world is under some form of British rule, and the areas outside that formal empire are also pretty clearly under British influence." After that insight came, once I had come up with a theory of nineteenth-century globalization that said, actually, "globalization," well, I had to go off and do some work on the British Empire, face-to-face, directly.

Before we talk about that, tell us a little about the Rothschilds. book coverWhat emerged from that study, that enormous tome, that surprised you, if anything? Was there something that was really a discovery for you?

Oh, it was a huge discovery, a revelation. There were two parts to it. The first was the sheer scale of this institution. It was vastly bigger in terms of its assets and its operational extent than most states. This was an institution which you could only imagine existing today if tomorrow's Wall Street Journal [reported] that Goldman Sachs and Merrill Lynch and CitiGroup were merging with the International Monetary Fund and the World Bank. That was the scale that Rothschild Bank's operations represented a century ago. So the scale of it just blew me away. The second part of the realization was just how financial power operated through this extraordinary and rather intimidating thing called the bond market. Because what Rothschild did was, they traded government debt. They issued government debt and they traded it. If a government went into financial difficulties, needed to raise a loan, which was usually to fight a war in the nineteenth century, it was quite hard for them to avoid dealing with the Rothschilds.

So I suddenly realized that a lot of nineteenth century history, the classical diplomatic history that I'd been raised on, reading A.J.P. Taylor as a student, was missing a key actor. It was almost completely invisible from the scene, if you look through the diplomatic documents. But if you look through the archives at the Rothschild Bank, you discovered that the likes of Bismarck or Metternich, these great, towering political figures, were at times in their careers entirely in hock to this financial institution, really very dependent on its financial power, indeed.

So this was a real revelation. I do think, actually, that nineteenth century historians haven't yet fully taken on board the magnitude of the Rothschild contribution, partly because there's still a professional sense that that's "business history." "Ferguson wrote the history of bank. It's very good, it's very nice, but it's really got nothing to do with us. We do political history." Sorry, folks, political history in the nineteenth century was completely inseparable from the way in which the bond market worked, because all these governments had very narrow tax bases. If they wanted to go to war ... Bismarck wanted to unify Germany; he had to do it with the connivance of the bond market. Otherwise, he simply didn't have the resources.

Did that suggest that the arrows flowed the other way, from money to power, or is it just rather that power really had to negotiate with the Rothschild?

It was fascinating to see the way in which the arrows went in both directions. Of course, there was a great nineteenth century, often anti-Semitic myth that said the Rothschild ruled the world. American populists believed it at the time that the U.S. went onto the gold standard. So part of my objective was to see just how true that was, just how powerful this institution was. The answer to the question was it was powerful, but there were limits to its power. There were moments when a political decision could trump the power of the financial markets when, in fact, by inducing a financial crisis, an event like, say, the 1848 Revolution could very nearly wipe the Rothschilds out. So, for me, the really satisfying thing about the study was to see that the financial part really mattered. But it wasn't as enormous, as absolute, as its critics often alleged.

I interrupted you when you were on the road to Empire. So what are the lessons, if that isn't too presumptuous a question, that you learned about the British Empire in your study?

It's not presumptuous, because the word "lessons" appears in the subtitle of the American edition. I should say that "The lessons for global power" was a subtitle that I wasn't entirely comfortable with. The subtitle of the British edition of the book is "How Britain Made the Modern World." But, strangely enough, an American publisher felt this wasn't the ideal subtitle for the U.S. edition. So there are explicit lessons, and I draw them out in the conclusion to the book.

One of the key arguments, and it's tremendously topical today, is whether an Anglophone imperial power, engaged in what we now call "nation-building," but which a hundred years ago was called "empire," can successfully transform the institutions of failed states or rogue regimes, and lay the foundations for the things that both British and American empires believe in: namely, free markets, the rule of law, noncorrupted administration, and ultimately, a representative government. The lesson of the British Imperial experience is that this can, indeed, be achieved, but that it takes really quite a long time for this to happen.

Occupations of such states, and there were a great many, particularly in the second half of the nineteenth century, when I would say the British Empire entered its most liberal phase -- there really were a lot of these countries that came under British rule, but they stayed under British rule for many decades. The most obvious and important example here is the case of India, which was under British rule from the mid-eighteenth century right up until 1947, for nearly two hundred years.

That is an important distinction, because if one contemplates American policy today, the timeframe is a long way short of two hundred years. Nation-building is supposed to be done in roughly twenty-four months, as far as I can see. The most important lesson my book draws from the British experience is that that's not realistic.

What were the British contributions to world order, as you see it?

There are two things, really, that cry out to be emphasized. The first is that by creating a military dominance, particularly a naval dominance -- this, of course, was the era before air power, it was the sea that really mattered -- the British did create a period of relative global peace: lots of small wars, but very few big ones between the Crimea and 1914. So there's a global order within which economic development is unquestionably more easy, in which free trade and international capital movements are a great deal less subject to disruption than they had been in previous ages, which had been punctuated by big great power wars.

That brings me to the second thing that one ought to emphasize, and in some ways, it's a rather technical economic point, and that is the extraordinary way in which international investment, cross-border investment, spread out all over the world, including to relatively, indeed in some cases, very poor countries. Now, globalization one hundred years ago was different in this respect from globalization today, because most capital flows today are within the developed world. They go from North America to Europe to East Asia. Whole areas of the world have no contact with the globalization. That's the real reason they're poor. It's not globalization that makes them poor; it's the fact that they're not involved in it. Whereas a hundred years ago, because the British Empire governed a great many poor countries, investors were put there to put their money at relatively low interest rates into. To give just one obvious example, a country like Rhodesia, now Zimbabwe: now, as a result of the disastrous independent government tyranny of Robert Mugabe, one of the great economic basket cases of sub-Saharan Africa, but a hundred years ago, [it was] somewhere where you actually, quite willingly, invested your money if you were a London capitalist.

So it's a combination of global security and a relatively even distribution of capital, which I argue (and this is perhaps the most controversial argument of all), was on balance, good not just for the British economy, but for the world economy.

In distinguishing the British Empire from America's global power today, you also emphasize the fact that the flow of both people and capital was out to the provinces, whereas that's not the case with the United States today, that people are coming to the United States and the U.S. is borrowing very heavily.

Yes. If one wants to understand the difference between British power a century ago and American power today, one would want to emphasize these, if you like, deficits -- manpower deficits and capital or current account deficits. British power was based fundamentally on the export, not just of capital, but of people, as you just said. Twenty-plus million people left the British Isles in this great explosion of human migration. That's why the British Empire trumps the French Empire, that's why it trumps the Dutch Empire. It's really why it trumps the Spanish Empire. No other European country has this surplus manpower, willing to go from very often the Celtic periphery to very remote, hot, dangerous countries, and stay there and settle them.

So the fact that the U.S. today is not exporting people -- in fact, Americans are quite reluctant to go abroad even for relatively short business trips, as far as I can see -- means that it doesn't have people on the ground in the way that the British Empire did. Today, there may be 3-1/2 million Americans who actually are resident abroad. Most of them live in either Canada, Mexico, or Western Europe, which aren't really the key fronts in the great war against terror. There are hardly any Americans who live in the Middle East outside Israel; hardly any live in sub-Saharan Africa. So it is an empire without settlers, today's American Empire. And that, necessarily, makes it a less powerful empire.

In your book The Cash Nexus, you were critical of the United States. In fact, in your conclusion, you basically fault the United States, because like the British in the nineteenth century, it had put together these four dimensions (the "power square") that you had identified earlier in your discussion of the buildup of state power, but somehow was almost cowardly -- and that's my word; you had a word that was fairly strong -- in assuming the responsibility that went with that power. Talk a little about that.

Well, the book was written in the later Clinton years. It was a pre-9/11 book. At that time, the thing that most preoccupied me -- I had begun teaching in New York and was very struck by this -- was the extent to which Americans regarded themselves as living on a more or less separate planet from the rest of us. I used to tease my students by calling it "Planet NASDAQ," because it seemed to be quite distinct from the rest of the world. Their preoccupations with the stock market, and, indeed, their preoccupations with American life, more or less, excluded interest in, let us say, Rwanda. It had made it extremely difficult to interest Americans [in Rwanda], though they ultimately did accept their responsibilities in the Balkans.

So my anxiety in the late 1990s and going into 2000 was that here we had globalization big time, extraordinary economic change going on in the world, integration of markets unseen in a hundred years. But the dominant power in the world was not willing to underwrite this with any kind of political structures. It was, in a sense, allowing large parts of the world to descend into, at best, a kind of organized chaos.

I argued at the end of the book that what was the most wrong with the world in the year 2000 was that we had globalization, but the world superpower was talking about a missile defense shield, as if the future lay in retreating into some huge electronic tortoise shell. I explicitly said, in the last chapter of the book, that what the U.S. should be doing was to use its enormous material resources, vast wealth, to increase its military capability and to get rid of rogue regimes, including, I specifically mentioned, Iraq. I also mentioned Milosevic's Serbia. I couldn't have predicted that so swiftly after the publication of the book, events would unfold that made those things happen.

One of the other things I said in the book was that the U.S. was kidding itself, and that a major terrorist attack was quite likely to happen in an American city. That happened within about six or seven months of the book's publication in the U.S. After that, as barely needs to be spelled out, everything changed. The [Bush] administration, which had narrowly been elected on an anti-interventionist, almost isolationist campaign, became the most interventionist administration we've seen since the 1960s -- things which in The Cash Nexus seemed tremendously reckless and rash. I was pilloried by some American reviewers for suggesting that the U.S. should engage in regime change against countries like Iraq. And now a government policy -- quite surprising, really.

As a historian, what do you see as enduring qualities of the United States, or characteristics that will deter it from assuming this new role, even though, clearly, the Bush administration has moved further along the path of assuming responsibility for global security?

Two things I would emphasize. One is the republican constitution. I mean, the U.S. is designed not to produce emperors. It's designed to produce non-charismatic leaders as presidents, as de Tocqueville pointed out. Americans always lament to me, particularly in university towns, that their president isn't a towering figure. And I'd say, "The whole idea of the constitution is to keep towering figures out of the White House. What do you want?"

So part of the point is the republican constitution. It's not designed to produce emperors and to run an empire. It's very clear that what Congress tends to represent, very accurately, is the desire of a great many Americans, particularly those who don't live in the major policy-making cities, to keep out of nasty places like Iraq; to keep out of nasty places like Afghanistan. So, point one, it's a constitutional issue. Republics only really become empires when they become empires. The Roman case is, of course, very instructive here. It took about four hundred years after the republican constitution was introduced in Rome for Caesar to cross the Rubicon and the constitution to be changed. We have a long way to go yet. We're about halfway, if you like, in American history from republic to empire.

But the second point is that Americans think that they're an anti-imperialist society. They think that historically, since I suppose 1776, they've stood for resistance to empire. This is a very widely held theory. I guess it comes from high school history. It's absolute rubbish, because, in fact, from the very outset, the United States behaved just like an empire, expanding over the entire North American continent, and then beyond the shores of that continent. But partly since Vietnam, Americans have rewritten their own history and to say, "Oh, we don't do empire. We never have done empire." And this is mantra that all American politicians will incant, and it's something that's very widely believed.

So part of the problem is the Constitution. But the other problem is almost a mental state. Americans are in denial about the fact that they are an empire. They just don't want to face that fact, because it has too many bad associations with the great debacle of Vietnam.

One of the symptoms of that is the notion that there cannot be one American life lost in an external intervention. We've moved away from that somewhat, but it is still a dominant thought about our behavior in the world, which may come back to haunt the president as the casualties mount in Iraq.

This is very striking to make this comparison. I've been working on this, because the next book I want to produce, which will be published next year, is about American Empire. It will be called Colossus. I thought I would just look at this body count story, because it's so clearly crucial. What's very striking is that it took a roundabout 30- to 40,000 killed in action in Vietnam to cause public approval of the war to fall by 20 percent. And that took about three years. We've seen a 20-plus percent drop in approval for the war in Iraq, and actually fewer than 400 -- 400! -- American troops have been killed in Iraq, and only about two-thirds of them had been killed in action.

So, in fact, the Vietnam syndrome is worse, as far as I can see, in 2003 than it ever was in the mid-1960s. That is a serious problem for a would-be empire. It's very, very hard to make a success of an undertaking like the one the U.S. embarked on in Iraq this year if the public regards even 350 American service personnel dead as being an excessive price in a timeframe short of six months. I mean, the fantastic, the unrealistic expectations that seem to lie behind this public reaction are a big, big problem. It does make me very pessimistic, because it seems to me to make a premature withdrawal of the U.S. from Iraq almost inevitable.

You're suggesting in a new article in the National Interest that another Achilles' heel is backlog of debt, and the U.S.'s inability to do something about the debt that it's growing. You're saying it's not that wars cost a lot, or Paul Kennedy wasn't right that we would be stretched too far by military expenditures. That has been totally disproved. But it's handling the domestic fiscal budget and the debt owed to retirees, to citizens for medical coverage and so on, that is creating a level of fiscal irresponsibility that could lead to disaster.

It's extraordinary that, if you go back to the 1980s, Paul Kennedy was arguing that the imperial overstretch would overtake the U.S. In truth, America's overseas military commitments have been getting cheaper and cheaper. I mean, you still have a defense budget which is roughly half in relation to gross domestic product, what it was in the Cold War. The cost of the entire reconstruction budget that the president has requested for Iraq and Afghanistan is .8 percent of the U.S. GDP. It's not big money. Although headline writers in The New York Times would love you to believe that this was the end of American solvency, these are not the problems.

It's really, actually, red ink that's mounting up in the American welfare state that spells what I would call an overstretch at home in the coming years. As the so-called Baby Boomer generation retires, the system of Social Security and Medicare and Medicaid is going to be stretched very, very severely. There are some very, very interesting calculations been done by American economists, including my co-author, Larry Kotlikoff at Boston University, that show a widening, a really rather terrifyingly large gap, between the revenues of the federal governments and its projected expenditures. These numbers dwarf the cost of nation-building in Iraq. I mean, we're talking about a long-term gap between expenditure and revenue of $45 trillion. And virtually none of that has to do with nation-building. Nearly all of it has to do with domestic welfare programs.

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