THE CASE FOR STRETCHING
The question has frequently been asked, and deserves repetition: would it not be desirable for the United States to depose tyrants like Saddam and impose democratic government on their countries? The idea of invading a country, deposing its dictators and imposing free elections at gunpoint is generally dismissed as incompatible with American ‘values’. A common argument is that the United States could never engage in the kind of overt imperial rule practised by Britain in the nineteenth century. Yet it is often forgotten that this was precisely what was done in Germany and in Japan at the end of the Second World War, and with great and lasting success. The historian Charles Maier has argued persuasively that American policy after 1945 was a form of imperialism, not different in essence from the European imperialisms of the nineteenth century, based as it was on domestic political consensus, mastery of new communications technology and the export of a particular political economic model which he calls corporatism.93 With commendable candour, Maier argues that
we [the US] relied on something ‘very like’ an empire in the postwar period, that it provided an undergirding of ‘peace and prosperity’, and that we shall need some equivalent territorial ordering to emerge successfully from current turmoil…. Civil society and markets alone did not assure the stabilization of Western democratic societies after 1945. Nor did self-sufficient nation-states.94
There is an obvious link between this argument about post-war stability and Charles Kindleberger’s thesis that the inter-war disaster was due in large part to the failure of the United States to pick up the hegemonic mantle relinquished by Britain.95 In a similar vein, Robert Gilpin has maintained that Western economies only flourished after 1945 because they were underwritten by American military power. In Gilpin’s view, US hegemony in the West has been weakening since the end of the Cold War as rival power-blocs (such as the EU or the Asia–Pacific Economic Cooperation forum) have grown more self-confident.96 Maier’s fear is simply that a laissez-faire approach to the post-Cold War world will not deliver enduring stability.
The evidence of American disengagement from the informal imperialism of the post-war world is hard to miss. Consider the fact that the United States spends just 0.1 per cent of GDP on overseas development aid; or the fact that the plans are well advanced to develop a National Missile Defence system, in breach of the 1972 Anti-Ballistic Missiles Treaty. These are the symptoms of a deep-rooted insularity which is the very reverse of what the world needs from its wealthiest power.
Far from retreating like some giant snail behind an electronic shell, the United States should be devoting a larger percentage of its vast resources to making the world safe for capitalism and democracy. This book has tried to show that, like free trade, these are not naturally occurring, but require strong institutional foundations of law and order. The proper role of an imperial America is to establish these institutions where they are lacking, if necessary – as in Germany and Japan in 1945 – by military force. There is no economic argument against such a policy, since it would not be prohibitively costly. Even if the Kennedy thesis is right, imposing democracy on the world’s rogue states would not push the US defence budget much above 5 per cent of GDP. There is also an economic argument for doing so, as establishing the rule of law in countries like Iraq would pay a long-run dividend as their trade revived and expanded.
The reasons this will not happen are threefold: an ideological embarrassment about being seen to wield imperial power; an exaggerated notion of what Russia and China would do in response; and a pusillanimous fear of military casualties.97 Perhaps that is the greatest disappointment facing the world in the twenty-first century: that the leaders of the one state with the economic resources to make the world a better place lack the guts to do it.
Conclusion
Those two essential questions of history: (1) What is power? (2) What force produces the movement of nations?
TOLSTOY, War and Peace1
In the majestic concluding chapter of War and Peace, Tolstoy scorned the attempts not only of popular historians, memoir-writers and biographers, but also of Hegelian idealists, to explain the world-shaking events of 1812. The role of divine providence, the role of chance, the role of great men, the role of ideas – all these he dismissed as insufficient to explain the Napoleonic invasion of Russia and its ultimate failure. Historians, he argued, ‘ought to be studying not the manifestations of power but the causes which create power … If the purpose of history is the description of the flux of humanity and of peoples, the first question to be answered … will be: What is the power that moves nations?’2
In physics, power is measured only in watts; in history, however, it is measured in many different units. Stalin asked of the Pope: ‘How many divisions has he?’ It certainly seemed true in the 1940s that the Pope’s spiritual power, devoid as it had become of territorial power in the course of the nineteenth century, was as nothing compared with the vast military power at Stalin’s disposal – and indeed at the disposal of all the major combatants of the Second World War. In 1944 there were more than 12 million men in the Red Army, around a fifth of the entire Soviet workforce. Of course, the impotence of Pope Pius XII – indeed his systematic appeasement of fascism throughout Europe3 – was not solely due to his lack of divisions. It also reflected his ideological sympathy with a superficially conservative movement which he believed would defend the Church against Communism. Nevertheless, the situation of the Vatican during the Second World War was something like the epitome of material impotence. Territorially minute and defended by a handful of pantomime pikemen, it was like a caricature of an ex-power, shrunk to the point of irrelevance.
Yet events less than half a century later in Poland revealed that the Holy See retained a kind of power which, under the right circumstances, was superior to that of the Red Army. What happened in Poland during the 1980s revealed that the Pope’s power was in fact more durable than that of Stalin’s successors, the would-be Popes of Marxism-Leninism. For there is no question that the visit of John Paul II to his native land in 1979 was one of the critical events in the collapse of Communist power there. Ultimately, the spiritual authority of John Paul II over millions of Catholics transcended their fear of the Red Army, with all its divisions.
Tolstoy’s question was: ‘What is the power that moves nations?’ Substitute the word ‘mobilize’ and the question is perhaps easier to answer. Clearly, it is something more than purchasing power. Economic resources are important, of course, but they are not the sole determinant of power. A state’s means of destruction consist of more than the output of its steel industry. As we have seen, a state can defeat an economically superior foe if it has better strategic, operational and tactical ability. Nor is the effectiveness of military mobilization sufficient. We also need to take into account a state’s financial sophistication: its ability to appropriate resources from taxpayers and to borrow from investors. And in major conflicts a state must also be able to mobilize civilians optimally. The right balance must be struck between the different sectors of the economy in order to maximize war-making resources without undermining domestic well-being. The quality of bureaucratic organization in both the state and the private sector can therefore be as important as the quality of military organization.
This book has emphasized the importance of four institutions as the bases of financial strength: a tax-collecting bureaucracy; a representative parliament; a national debt; and a central bank. These were what I called the ‘square of power’ in the Introduction. Sections One and Two of the book suggested that Britain was the first power to develop these, in the eighteenth century; but that they were subsequently adopted by all Western powers, including the United States. War was the driving force behind institutional innovation. It was the unpredictable fluctuations in military expenditure that forced states to develop elastic sources of revenue. In the realm of taxation, it was impossible to rely exclusively on indirect taxation. However, to secure adequate revenue from direct taxation
, representative assemblies were advantageous. Even more important was a salaried bureaucracy: such an institution proved itself markedly superior (i.e. less costly) to the system of tax farming used in ancien régime France.
Figure 37. Circles of interest
But tax alone was not enough. To smooth out the costs of wars – to spread the expense into the years of peace – a system of sustainable government borrowing was necessary. Public debts of the sort which began in medieval Italy were the answer. As Chapter 4 suggested, it was not the absolute or even the relative size of a country’s debt that mattered so much as the cost in present (and future) debt service in relation to revenue from taxation. A state like Hanoverian Britain could sustain a very large national debt provided the interest on the debt was kept down. Chapters 5 and 6 considered reasons for differentials in such interest rates, showing how not only past experience but also fears of future defaults and inflations tended to push up a country’s bond yields and hence the cost of new borrowing. In the absence of modern financial indicators, investors tended to infer the risk of default or currency depreciation from political events like wars and revolutions. There was also a form of ‘feedback’, in that rising yields could increase the likelihood of political crises, by reducing a state’s fiscal room for manœuvre.
The key to understanding how well these institutions function is to recognize the wide range of social outcomes they can deliver; this was the subject of Chapter 7. The Venn diagram above (Figure 37) gives one example of a state in which the electorate has been expanded to its maximum (universal suffrage), most but not all voters are taxpayers (meaning direct tax payers), there is a relatively large category of pensioners (which includes the recipients of all transfers, including debt interest) and a relatively small group of government employees (including military personnel as well as civil servants). But this is only one of an infinite number of different combinations. If one were to draw an analogous model of the old Soviet system, for example, the circle of voters would be tiny (in effect, the Politburo), but the circle of government employees immense. It would probably be wrong to think in terms of one unique optimal balance between the four categories; however, it is not difficult to think of examples of unsustainable imbalances – for example, a situation in which the number of taxpayers is small relative to the number of pensioners and government employees.
In democratic systems, when the circle of voters is the largest of the four, it has long been tempting for politicians to use financial institutions to enhance their own chances of re-election. Chapter 8 showed the way calculations about tax rates, government employment (especially the public sector wage bill), increased borrowing, interest rates and inflation came to be dominated by the pursuit of popularity. Yet this ‘political business cycle’ was relatively short-lived, not least because voters did not behave in the Pavlovian way predicted by the simple ‘feelgood’ theory. In Britain, for example, the 1980s saw a gradual breakdown of the supposedly deterministic relationships between leading economic indicators and government popularity.
Democratic governments today are more likely to seek re-election through propaganda – creating the perception of prosperity – than through prosperity itself. But this too has financial implications. With dwindling memberships and rising expenditures on electioneering, political parties are today in a perilously weakened state, stigmatized if they rely too much on wealthy donors, yet corrupted in another sense if they become dependent on state funding. Chapter 9 suggested this as one of the ways in which the relationship between capitalism and democracy could be disharmonious.
The fourth and final section of the book extrapolated the ‘square of power’ model to the global level. In many ways, the globalization of Anglo-American financial institutions and the liberalization of trade since the 1980s signal a return to the pre-1914 world. The periods before and after the age of total war have much in common. However, there are differences. There is less mobility of labour than in the nineteenth century, for instance, and this is one reason why financial globalization is leading to less convergence of incomes around the world than was the case a century ago. Nor has the world today evolved a system of international monetary ‘architecture’ comparable with the gold standard after circa 1870. Indeed, the experiment with a single European currency seems to swim against a tide of monetary fragmentation. Chapter 11 suggested that EMU is also likely to create conflicts of interest between the member states because of the differing generational imbalances in their fiscal systems, which remain the domain of national governments.
Does economic globalization imply the globalization of democracy? The answer offered in Chapter 12 was sceptical, since both economic growth and political democratization seem to be dependent more on the existence of education, the rule of law and financial stability than on one another. Moreover, democratization has tended to be associated with the fragmentation of multi-ethnic states. Chapter 13 suggested that the political fragmentation which has characterized the past half century does not necessarily have positive economic implications. At the same time, there is little reason to take seriously the idea that supra-national institutions will be more powerful in the twenty-first century than they were in the twentieth. In purely financial terms, institutions like the United Nations and the International Monetary Fund are in no stronger a position than their inter-war precursors.
The final chapter argued that the biggest difference between the past and the present is the absence of an authentic global hegemon – that is to say an imperial power. As a capital-importing democracy which has enjoyed a handsome ‘peace dividend’ since the end of the Cold War, the United States lacks the will to play the policing role played a century ago by the United Kingdom, despite the fact that it manifestly has the economic means to do so. Yet the British experience illustrates strikingly the dangers of ‘understretch’. It was not the excessive cost of empire that undermined British power; but failure to prepare adequately for the defence of that empire. The two states which mounted the greatest challenges to Britain’s power in the twentieth century, Germany and Japan, were not her equals in institutional terms. In both world wars, Germany’s financial structure proved unable to sustain the military projects her leaders undertook, collapsing on two occasions into hyperinflation. Nevertheless, her military performance shows how much damage a regime based on authoritarian mobilization can inflict on ill-prepared democratic states. This is not to say that the United States will face anything like so serious a challenge in the near future; but rather to argue for a precautionary assertion of American power to impose democracy and the market economy on ‘rogue’ states while the going is good.
What is power? Ultimately, of course, it is impossible to give a purely materialistic answer to Tolstoy’s question. The legitimacy of a state in the eyes of its citizens is not determined by the rate of income tax, the franchise, the interest rate or inflation rate, any more than it is determined by the butter ration. The institutional model I have tried to construct is simply the framework within which people individually and collectively make up their minds. No matter how efficient the tax system, no matter how representative the parliament, no matter how liquid the bond market and no matter how well managed the currency, in the end the legitimacy of a state is bound up with such intangibles as tradition (the memory of past benefits), charisma (the appeal of present leaders), popular belief (faith in future rewards, material or spiritual) and propaganda (the state’s use of available media to bolster all these). Though Carlyle feared that modernity would turn all human relations into economic relations, the true homo economicus – constantly aiming to maximize his utility with every transaction – remains a rarity, and to most of us rather a monstrous one. Every day, men and women subordinate their economic self-interest to some other motive, be it the urge to play, to idle, to copulate or to wreck.
In that sense, the cash nexus is no more than one link in the long and tangled chain of human motivation. The true end of War and Peace, after all,
is not the Second Epilogue, but the First. In the Second, Tolstoy philosophizes around in circles, and ultimately fails to answer his own question about power, drifting off instead into a laboured argument about the illusory nature of free will. In the First Epilogue, however, we see Pierre and Natasha, anti-hero and heroine, united at last in domestic happiness. True, Pierre still has his dreams. But the striking thing about his latest idea – ‘to give a new direction to the whole of Russian society and to the whole world’ – is its naïvety:
You see, I don’t say that we ought to oppose this and that. We may be mistaken. What I say is: ‘Join hands, you who love the right, and let there be but one banner – that of active virtue.’… My whole idea is that if vicious people are united and constitute a power, then honest folk must do the same. Now that’s simple enough.4
A higher reality is symbolized by Natasha, hurrying off to feed their son; and by his nephew’s dream about his lost but idolized father, Prince Andrei. ‘Oh, Father, Father! Yes, I will do something with which even he would be satisfied …’ Of such stuff is made up the inner power that moves men.
Yet the peace Pierre and his family have attained is the product of war, the protracted and well-nigh global conflict unleashed by the French Revolution. And to understand what it was that mobilized the Grande Armée – what got it to the gates of Moscow, but what ultimately forced it to retrace its steps in ignominy – we must look beyond the Russian winter or the Emperor’s blunders. Inglorious though it may seem, the key to Napoleon’s defeat lies in the fundamental institutional weaknesses of the Imperial regime.
Until we understand the mechanics of power – in this case, the reliance of the Napoleonic regime on extortion from occupied territory, its undemocratic character, its shallow bond market and its crudely mercantilist monetary policy – we cannot begin to make sense of the outcome. In that sense, the cash nexus provides not a sufficient explanation of the modern world, but a necessary one.
The Cash Nexus: Money and Politics in Modern History, 1700-2000 Page 50
