The Cash Nexus: Money and Politics in Modern History, 1700-2000

by Niall Ferguson

  THE ILLUSION OF PEACE

  The disarmament of the Western powers would not matter if the chances of war were diminishing proportionately. According to one strand of liberal theory, this ought to be the case, since war is economically irrational and becomes more so as the world becomes more economically integrated.

  The idea that war is obsolescent in an economically liberal world dates back to the eighteenth century. ‘If war enriched some of the peoples of antiquity,’ wrote the Physiocrat François Quesnay, ‘it impoverishes and makes miserable the peoples of modern times.’14 In his Perpetual Peace, Kant agreed that the ‘spirit of commerce’ was ‘incompatible with war’.15 ‘The civil wars of Flanders,’ noted Adam Smith towards the end of The Wealth of Nations, ‘and the Spanish government which succeeded them, chased away the great commerce of Antwerp, Ghent, and Bruges…. The ordinary revolutions of war and government easily dry up the sources of that wealth which arises from commerce …’16 It was on this basis that Smith was critical of mercantilist policies that subordinated market forces to grand strategy. This view attracted many adherents in the nineteenth century. Though Comte conceded that in previous centuries ‘efforts … to discover and improve military apparatus … were not entirely without value for the progress of industry’, he saw the subordination of war to industrial development as a distinctive feature of his own times.17 For Richard Cobden, peace and prosperity were mutually reinforcing: hence the title of his 1842 pamphlet, Free Trade as the Best Human Means for Securing Universal and Permanent Peace. Norman Angell’s The Great Illusion (1910–1911) is a monument to the persistence of this belief. According to Angell, war was economically irrational: the fiscal burdens of armaments were excessive, indemnities difficult to collect from defeated powers, and colonies not a source of profit. ‘What is the real guarantee of the good behaviour of one state to another?’ asked Angell. ‘It is the elaborate interdependence which, not only in the economic sense, but in every sense, makes an unwarrantable aggression of one state upon another react upon the interests of the aggressor.’18

  Such beliefs have proved remarkably resilient in the face of repeated and bitter disappointment. On the very eve of the war over Kosovo in 1999, the cover of the British magazine Prospect bore the legend ‘The End of War?’, recalling Ivan Bloch’s Is War Now Impossible? a hundred years before. Perhaps the most hubristic passage in Thomas Friedman’s The Lexus and the Olive Tree is his assertion that globalization ‘increases the incentives for not making war and increases the costs of going to war in more ways than in any previous era in modern history’. To reinforce his point, Friedman propounds ‘The Golden Arches Theory of Conflict Prevention’, according to which no two countries, both of which have at least one McDonald’s franchise, have gone to war.19 Friedman’s book was published on 17 May 1999, less than two months after the United States had gone to war with the Republic of Yugoslavia – apparently oblivious to the well-advertised presence of McDonald’s in Belgrade. This does not make Friedman as wrong as Norman Angell, of course; not yet, at least. But he manifestly shares with him the belief that economic rationality should discourage war – a belief Angell lived to see exposed as the authentically great illusion it was.

  Time and again in the twentieth century, states ignored the liberal appeal to economic rationalism by going to war. They did so even when the potential costs of defeat were huge; indeed, they did so when even the potential costs of victory were high. One possible explanation for this is simply myopia – a kind of ‘bounded rationality’ which habitually understates the costs of war and overstates its benefits. However, a better explanation may be that in a non-democratic regime the aggregate and long-run costs of war may be irrelevant. Provided the immediate benefits of war flow to the ruling élites and the costs are borne by the unenfranchised masses, war can be a perfectly rational policy option.

  GIVING WAR A CHANCE

  From the point of view of an autocratic state, expenditure on war can generate a visible return in the form of booty, indemnities from vanquished states or territory (which can widen a state’s tax base or natural resource endowment) – not forgetting glory.20 In some cases, such returns may even exceed the costs of achieving victory; but if the costs of war are largely borne by an unenfranchised peasantry, this may be a minor consideration.

  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.21 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 between 1795 and 1804 the Dutch paid some 229 million guilders to the French, more than a year’s Dutch national income.22 Napoleon’s campaigns of 1806–7 were not only self-financing, but covered at least a third of ordinary French government expenditure. In Italy between 1805 and 1812 fully half of all the taxes raised went to the French treasury.23 Britain too knew how to make war pay in the nineteenth century: something in the region of 40 per cent of the total defence budget for 1842 was covered by the £5.8 million indemnity exacted from China under the Treaty of Nanking; Palmerston even boasted to the House of Commons that the war had shown a profit.24 Russia was able to squeeze increasing sums of money out of Turkey in the successive peace settlements of 1829, 1878 and 1882. As proportions of Russian defence spending those sums represented, respectively, 9 per cent, 42 per cent and 115 per cent. Even the last figure was dwarfed by the indemnity wrested from China by Japan in 1895, which amounted to more than three times total Japanese military spending in that year and around double the cost of the war.25

  But it was Prussia which perfected the art of profitable war – made war, as Mirabeau said, its ‘national industry’. Frederick the Great had pointed the way ahead with the seizure from Austria of mineral-rich Silesia between 1740 and 1745. Though the costs of retaining the province in the subsequent Seven Years War proved heavy, Silesia was an asset which yielded a healthy industrial return for two centuries. Bismarck’s victory over the German Confederation in 1866 was also close to self-financing: while total Prussian military spending in that year was at most 111 million thaler, the fruits of victory – in addition to the annexed territory of Holstein, Hanover, Hesse-Cassel, Nassau and Frankfurt – included indemnities worth 40 million thaler from Austria, a further ten from Saxony, six from Frankfurt, to say nothing of the seized treasure of the deposed king of Hanover, worth 16 million thaler, and a smaller sum from Württemberg.26 Probably the most profitable war of the entire nineteenth century was that waged by the Prussian-led North German Confederation against France in 1870. The immense sum of 5 billion francs imposed as part of the 1871 peace agreement – equivalent to around a quarter of French GDP – amounted to four times the previous year’s Prussian defence budget. In addition the French had to pay 200 million francs (a ransom from the city of Paris) and all the costs of the subsequent occupation of northern France.27

  It is of course true that such profits – including ‘reparations’, to use the twentieth-century term designed to attach blame as well as hardship to the losers – have more usually been less than the costs of the war that secured them (not to mention the effort of collecting them). About a third of Roman revenue in the time of the Emperor Augustus came from tributes from Egypt, Syria, Gaul and Spain; but the cost of maintaining the Roman army at that time consumed roughly half the total revenue.28 Between 1548 and 1598 the income from Spain’s American conquests amounted to 121 million ducats, between 12 and 24 per cent of all Castilian revenues. But in the same period the annual costs of war waged by Spain outside its own territory rose by a factor of at least four. The fighting in the Netherlands alone consumed some 218 million ducats a year.29 In the War of the Spanish Succession, contributions from occupied territory covered not much more than two-fifths of the total costs of the French army.30 Even the
profits of France’s Revolutionary and Napoleonic wars were ultimately consumed by the high costs of her defeat between 1812 and 1815. According to one recent estimate, the indemnity and other costs imposed on France by the victorious Allies after Waterloo – around 1.8 billion francs – amounted to around a fifth of French annual GDP.31 Large though this sum was, it represented a small fraction of the costs France’s enemies had incurred in the preceding two decades of war. The equivalent in sterling terms (£78 million) was only slightly more than the amount Britain had paid to her continental allies in subsidies between 1793 and 1815 (£66 million).32

  As for the reparations imposed after twentieth-century victories, these have come nowhere near covering the costs of war. The indemnity levied by Germany on Russia under the terms of the Treaty of Brest-Litovsk in 1918 was around $1.4 billion; a huge sum, but only a fraction of the total cost of the war to Germany, which was around $20 billion.33 The victorious Allies finally made up their minds to demand a total of $31 billion as reparations from Germany in the London Ultimatum of 1921, though realists like Keynes only expected around $12 billion to be forthcoming. Even that lower figure was equivalent to more than 80 per cent of German GDP.34 But again this was a small fraction of the victors’ total war expenditures, which amounted to at least $58 billion. And of course in neither of these two cases was the full amount of the indemnity ever received by the victorious side. The Germans ended up paying no more than $4.5 billion in all between 1919 and 1932, when payments were frozen. (Under the Young Plan, they were supposed to continue until 1988.) This was rather less than they themselves managed to borrow from the United States and never repay – a reflection as much of German guile in feigning impecuniousness as of Allied lack of resolve.35

  Yet the experience of the inter-war period did nothing to dissuade Germany, Japan and Italy from attempting territorial and financial predations again in the 1930s and 1940s. The Japanese occupation of Manchuria and the later German occupation of most of continental Europe were among the most ruthlessly exploitative in all history. As a proportion of German GNP, the revenues extorted from occupied territory rose from 3 per cent to a peak of 16 per cent in 1943.36 Once again, this was manifestly far less than the cost to the German economy of waging war. The Allies had failed to collect the spoils of war after 1918 by being too lenient. By being too harsh, however, the Germans shrank the very economies they sought to mulct. On the other hand, leading Nazis (Göring in particular) accumulated immense private fortunes from plundering the regime’s internal and external foes. Even a war that ultimately ends in defeat can make sense to the élite of a dictatorship who want a short but merry life. To put it differently: the dictator’s time-horizon is shorter than that of a constitutional regime. If ever men discounted the future heavily, it was those who spoke of a ‘thousand-year Reich’.

  One lesson the Western powers drew from the failure of reparations in the 1920s was to aim lower in 1945: the total amount demanded from the defeated Axis powers was just $7 billion. This should be compared with a figure for total US war expenditure of $275 billion, to say nothing of Britain’s $91 billion.37 And of course the Americans thought it prudent to assist both Western Europe (including West Germany) and Japan with post-war economic reconstruction: Marshall Aid remains a rare example of ‘reverse reparations’. The Russians tried to recoup some of their war costs by first skinning and then milking their zone of occupation in Germany; once skinned, however, the cow did not yield much milk.38

  For democracies, then, the lesson of history seems clear: war does not pay. The economic costs of war are always likely to outweigh the benefits of subsequent reparations. Indeed, if the objective of post-war policy is to conciliate – or indeed to democratize – the vanquished state, it is advisable to subsidize rather than to penalize. But an autocratic ruler might not draw the same conclusion. The costs of annexing Kuwait turned out to be very high; but that did not stop Saddam Hussein from trying. Like the dictators of the 1930s and 1940s, the Iraqi leader has no qualms about passing the costs of his failed adventures on to his people, so long as he and his cronies are not materially worse off. And indeed they are not; since, unlike Hitler and Mussolini, Saddam Hussein has not been toppled from power.

  THE CHANCE OF VICTORY

  A further reason why non-democratic regimes continue to wage wars is that military outcomes are not strictly determined by comparative economic advantage. Economic inferiority can in fact be compensated for by superior strategy, operations and tactics. It can also be compensated for by superior mobilization and morale. What war makes clear is that power is not exclusively economic, especially over the short run. War obliges peacetime winners to compete under unfamiliar rules. At least in the early phase of a war, the ability to destroy counts for more than the ability to produce. That is precisely the appeal of war to peacetime losers.

  The best-known modern wars have of course been won by the economically superior side. The Revolutionary and Napoleonic wars, the Crimean War, the American Civil War, the First World War, the Second World War and the Korean War were all won by the side with the bigger share of total world output. And to that list must be added more recent wars: the Falklands War, the Gulf War and the Kosovo War. All these outcomes would seem to confirm Kennedy’s hypothesis in The Great Powers. Yet there are significant exceptions to the rule: think only of how Vietnam humiliated France, America and China; and how Russia came to grief in Afghanistan.

  For most of the eighteenth century, Britain appears to have had a smaller economy than that of its principal foe France. In 1788, according to modern estimates, French GNP was more than double the British; the French population nearly three times larger.39 Yet despite being economically inferior, Britain was able to mobilize more men and ships at lower relative cost than her rival.40 Thanks in large part to the superiority of British fiscal institutions, the ratio of British to French warships rose from 1.3 : 1 in 1780 to 3.5 : 1 in 1810.41

  There are nineteenth-century examples too. In 1866 the Austrian-led German Confederation had nearly double the number of men under arms than Prussia and her sole ally Mecklenburg, more than double the population and spent four times as much on defence. Still Prussia won. That victory has sometimes been attributed to economic factors: Prussia’s superior railways or higher iron and steel production. The reality is that these played a minimal role in the battle of Königgrätz. In 1870 too, France had the advantage over Germany in terms of military personnel, population and military expenditures. Yet France lost. In the Russo-Japanese War, Russia enjoyed a massive economic advantage: double the amount of military expenditure, treble the population, nearly four times the energy consumption, nine and a half times the military personnel and thirty-two times the iron and steel production. Japan won.42

  Nor should we forget the enormous achievements in destruction and conquest of the German-led coalitions in the two world wars. Of course, Germany and her allies lost in the end. Nevertheless, the extent of the destruction they were able to wreak serves as a salutary reminder that economic disadvantage can be compensated for by military capability and efficiency in mobilization. It is fortunate indeed that victory in war does not go to the side that inflicts the highest number of casualties: for in both wars the ‘net body count’ went heavily against the Allied side, despite the fact that the Allies enjoyed overwhelming economic superiority.

  At the beginning of the First World War, the differential between the Entente Powers and the Central Powers in terms of GNP was at least 60 per cent. In terms of Kennedy’s measure of ‘industrial potential’, the ratio of advantage to the Entente was around 1.5 to one. In terms of population, the ratio of advantage was a massive 4.5 to one. Moreover, Germany’s net national product contracted by around a quarter during the war, while the economies of Britain and Italy achieved real growth of the order of 10 per cent between 1914 and 1917, and Russian output rose 20 per cent in the three years to 1916. Though the index of industrial output for Britain shows a fall of the order of 13 per
cent, for Germany the figure is 31 per cent. German steel output fell by 14 per cent; in Britain it rose by 25 per cent. German grain production slumped by nearly half between 1914 and 1918; in Britain it rose. This was partly due to the impact of the British naval blockade and interference with German trade with neutrals, which reduced German imports (including those of fertilizers) by more than the German U-boats could cut British imports. The Germans also lost a large part of their merchant marine and overseas investments. Lack of access to external finance, and the relative weakness of the internal capital market, led to a greater reliance on monetizing short-term government debt and a larger monetary expansion than in Britain. By these measures, it could be said, the defeat of the Central Powers was economically inevitable.

  Yet the First World War was not a foregone conclusion. Germany and her allies managed to kill 35 per cent more enemy soldiers than they lost of their own men: a ‘net body count’ of approximately 1.4 million. Their military superiority was sufficient to defeat Serbia (in 1915), Romania (in 1916), Russia (in 1917) and very nearly Italy too. The French army was brought to the point of mutiny in 1917; and the British were forced to fall back on the Americans for economic and ultimately military support. This was in large part due to German military superiority, which was only slowly and painfully eroded; but it was also due to a relatively successful response to the organizational challenges of total war on the home front. The Germans allocated labour more efficiently than their enemies. Britain allowed vital skilled workers to volunteer for front-line duty and did not bring as many women into the workforce as the Germans. The Germans also managed to discipline labour better: wages did not rise ahead of output and fewer days were lost to strike action. Finally, it seems clear that the imperial regime – despite the shortcomings of the Kaiser himself – retained legitimacy in the eyes of a majority of its subjects until remarkably late in the war. It was only in August 1918, when it was clear that Germany could no longer win the war, that the morale of the German army began to crumble, a shift manifest in the tenfold increase in the number of prisoners taken by the British. And it was not for another three months that the domestic situation, so often stressed by historians as the key area of German weakness, slid into revolution.43