The Cash Nexus
Niall Ferguson
Allen Lane £20, pp576
Buy it at a discount at BOL

'The Cash Nexus' sounds like one of those dreadful phrases dreamed up by publishers to sell a book about 'Money' whose contents have not been quite thought out. In fact, it's a dreadful phrase which Carlyle almost dreamt up in 1839 in his pamphlet, 'Chartism', which attacked materialism and laissez-faire. The noun nexus (from the Latin verb 'to bind') dates in English from 1663 and Carlyle referred to 'Cash payment... the universal sole nexus of man to man'.

Books about money are two a penny, but the professor of political and financial history at Oxford has attempted something more ambitious, no less a subject than 'Money and Power in the Modern World, 1700-2000'. He confesses that the book was originally intended to be a history of the bond markets, for which he received a grant to conduct research at the Bank of England, where a man's word is traditionally his bond. While inspired by the bond markets, Ferguson felt fettered by them. At all events, the history of the bond markets was confined largely to one sensational chapter; having defaulted on his bond with the Bank, Ferguson broadened his scope, thereby raising the return for the general reader.

Much of the book constitutes old wine in new bottles, but is no less tasty for that. It is no great revelation that taxation and warfare are closely related, and that raising money via the bond market is, for governments, a form of deferred taxation. Nor is it earth-shattering news that via warfare, revolution, reform and necessity, we have arrived at a position where the modern nation contains a 'square of power': first, a tax-gathering bureaucracy; second, parliamentary institutions which authorise taxation; three, a system of national debt; four, a central bank that manages that debt. But the story of how that 'square of power' evolved is brilliantly sketched.

There is nothing new about governments being fearful of those markets. During the Napoleonic wars, Britain had a debt to gross domestic product ratio that would not have gone down well with the modern markets. Ferguson also takes a neat swipe at the modern view that public sector borrowing is guilty, unless proved innocent, of 'crowding out' borrowing by the private sector. Indeed, so far from 'crowding out' the private sector, the development of the government bond market created new opportunities for corporate borrowers to capitalise on.

Ferguson almost puts himself on the side of anti-globalisation protesters in taking issue with the fashionable view, as expressed by the New York Times commentator, Thomas Friedman, not only that the financial markets have become the supreme power, but that this is a good thing. As he avers: 'To say financial markets rule the world is to say the plankton rule the sea.'

He is good on the parallels and differences between the current phase of heavy international trade and investment and the period before the First World War, and he places Friedman's view that the interlocking trade and investment relationships of 'globalisation' diminish the chance of war firmly in historical perspective.

Economic rationality does not discourage war. Indeed, one of the purposes of this book is to point to the limits of the 'cash nexus' in human motivation. Thus, the 'profits' of war have usually been less than the costs of the war that secured them. Ferguson also emphasises that Germany after the First World War paid far less in reparations than had been demanded. He seems to be surprised that Germany embarked on territorial expansion again, but then Mein Kampf demonstrated that the humiliation of Versailles had a huge impact on Hitler.

The book draws towards its conclusion with a passionate plea that '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 safer for capitalism and democracy'.

Ferguson is, to my mind, much too sceptical about the potential for Europe. On the day I read the above passage, he was rightly questioning British support for the latest bombing of Iraq by the Americans. There is a moral here somewhere.