The Cash Nexus by Niall Ferguson
The Cash Nexus by Niall Ferguson
Ferguson explores how governments have raised money and how they have used it over the last three centuries. The combination of an efficient tax-collection bureau, a central bank, a national debt, and a representative democracy turns Hobbes' Leviathan into either a perenially-lampooned money-addled problem, or possibly the least-worst practical solution. While Ferguson doesn't make a definitive case, the breadth of scope provides the reader with many vantage points from which to spy upon the madding whorl of history.
It was not the amount of taxation that rankled. Indeed, in many ways it was really a tax cut elsewhere in the Emprie that provoked the Boston Tea Party: the reduction of the duty on East India Company tea imported to Britain for re-export to America. What was at stake was a constitutional question, namely that the colonies had no say in such matters... Adam Smith's counterfactual of giving the Americans representation in a kind of 'states-general of the British Empire' in return for extending the full range of British taxes to the colonies may have been logical, but that was not what the colonists were after. Their aim was to enhance the power of their local assemblies and ultimately -- as became clear at the first Continental Congress -- to give their institutions legislative parity with the Westminster parliament.
'There ought', reasoned Gladstone, 'to be an affinity between electoral privileges and contributions to taxes.' If the former were to be limited so as to exclude the poor, then so must the latter be. 'Financial feebleness and extravagance', in short, were 'the sure means of generating excessive demands for reform.'
However, many (US) voters (a high proportion of them non-taxpayers) do not exercise their right to determine who represents them. Only in the early 1960s did the number of active voters in elections to Congress exceed the number of income tax payers. In 1990 just over 61 million Americans voted; nearly 114 million paid income tax. Millions of Americans today are liable to taxation without representation; unlike their colonial forebears, however, their disenfranchisement is largely voluntary.
In his monumental 'Economy and Society', Max Weber portrayed the modern bureaucracy as admirably rational: 'rules, means, ends, and matter-of-factness dominate its bearing' yet even as he wrote, disillusionment with bureaucracy was growing, not least in the wake of the enormous expansion of the public sector during the years of war and inflation, a phenomenon more closely associated with proliferating red tape and corruption than with rationality. The reality of modern bureaucracy turned out to be closer to Kafka's Castle, in which enigmatic files are trundled up and down grey corridors, being allocated apparently at random to faceless pen-pushers behind identical office doors.
As Chapter One demonstrated, the principal cause of increases in the level of state expenditure and hence of taxation has, for most of history, been war. In peacetime, expenditure and taxation tended to fall substantially. This was one reason why the nineteenth century was also a time when tax burdens fell to historic lows in most countries. In the twentieth century, by contrast, there was a ratchet effect. In the aftermath of both the world wars, public spending failed to revert to its pre-war level, whether in absolute terms, in inflation-adjusted terms, in per capita terms or in relation to GDP.
It was the simple fact of taxation -- of more or less predictable revenue streams -- that provided the basis for the earliest systems of public debt in medieval Italy. The Venetian public debt, which originated in the twelfth century, was secured on the state salt monopoly, the revenues of which were earmarked for debt service and redemption.
In the early modern period defaults by the great powers became so frequent that they were more or less institutionalized; it may indeed be more accurate teo think of tem as moratoria, reschedulings or forced conversions of ebt, rather than states bankruptcies. Theus Sprain defaulted on all or part of her debt fourteen times between 1557 and 1696. What happened wsa that existing debts were effectively rescheduled -- usually by converting short-term asientos into long-term juros -- and new borrowing resumed shortly afterwards. However, even habitual defaulting had a cost .After 1627 Genoese financiers limited their exposure to asientos, foreseeing yet another bankruptcy which would leave them holding lower-yielding juros. The decline in the outstanding amount of asientos from its peak in 1625 (12.4 million ducats) to little more than 1 million in 1654 reflected Spain's narrowing fiscal room for manoeuvre. This had direct political implications at a time when France and the United Provinces were able to borrow more at home and abroad.
In Britain something like a quarter of the total national debt in 1997 had a maturity greater than 5 years; more than a fifth has a maturity greater than fifteen years. But in the United States, around a third of the privately held federal debt has a maturity of less than a year; and 72 per cent -- nearly three-quarters -- has a maturity of less than five years.
It is hardly surprising that distributions of consumption produced by the market differ from those collectively preferred by the electorate, since democracy offers those who are poor ... or otherwise dissatisfied with the initial distribution of endowments an opportunity to seek redress via the state. Endowed with political power in the form of universal suffrage, those who suffer as a consequence of private property will attempt to use this power to redistribute wealth ... Democracy inevitably threatens 'property rights'
The Ottoman Sultan Suleiman the Magnificent is said to have run a surplus of around a third of annual revenue, largely consisting of tributes from conquered territory. The French Revolution brought into being another regime that came to rely on the exploitation of conquered territory as a major source of income. By its last years, the Directory could count on the levies imposed in the occupied Netherlands for around a quarter of total revenue; altogether betweeen 1795 and 1804 the Dutch paid some 229 million guilders to the French, more than a year's Dutch national income.
The shifting military balance is most easily illustrated by comparing military budgets over the past decade. The difference between East and West illustrated in the table is worth pondering. In North America, Europe, and the former Soviet Union, there have been dramatic cuts in real expenditure since 1989.... And the (contrary rising Eastern) trend is even more pronounced in Asia, where every major power has cranked up its military budget: by 70 per cent in China, by more than 100 per cent in Singapore.
It should be emphasized that estimates for national income or national product even for the later twentieth century must be treated with caution, as the margins for error remain large even in the best national statistics. Eighteenth- and nineteenth-century estimates used in this chapter and elsewhere are often little more than educated guesses. Here and elsewhere percentages which use historic national product data as the numerator carry a statistical 'health warning'