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[Book reviews]

Cash crazy
Two books for the money era

BY MICHAEL FREEDBERG

THE CASH NEXUS: MONEY AND POWER IN THE MODERN WORLD, 1700-2000
By Niall Ferguson. Basic Books, 380 pages, $30.
BASIC ECONOMICS
By Thomas Sowell. Basic Books, 378 pages, $30.

The historian Paul Johnson, at the close of his magisterial Modern Times: The World from the Twenties to the Nineties, writes that politics has lost its credibility. The search for a single, unifying means to bring mankind to a better destiny, has, however, not ended. Today it is economics that rules our hopes, and for good reason. With the collapse of Soviet and Eastern European communism and the marketization of European socialism, capitalism rules all.

Americans are especially aware of this development. No matter who, of late, has occupied the presidency, it’s been Federal Reserve chairman Alan Greenspan who’s made the important decisions. That’s because Greenspan — with the aide and advice of two committees, the Federal Reserve Board of Governors and the Federal Reserve Open Market committee — controls the nation’s interest rates and its money supply. And the Fed’s management can make or break the economy we live and work in. In an age when no world wars loom, most of us find that our day is tethered to our wallets. In such a state, who needs politics?

Thus, in Thomas Sowell’s Basic Economics and Niall Ferguson’s The Cash Nexus: Money and Power in the Modern World, 1700-2000, money, not people, is the protagonist. Sowell has been a widely syndicated conservative political columnist for more than 20 years; Ferguson is the author of a two-volume history of the House of Rothschild, the most successful private bank ever, and one of the longest-lasting. Here each writer is true to his reputation. Sowell wants to demonstrate that the free market is an almost perfectly self-correcting mechanism in which the basics of life work best. Ferguson too has little good to say about how governments handle money as he compares the relative success that America and Europe have had in moving from the simple mechanisms of a mercantilist or command economy to the infinite complexities of capitalism.

Sowell talks about what feels like the private life of prices: over and over he reminds us that “economics is the allocation of scarce resources which have alternative uses.” To him everything is a scarce resource: your labor and mine, the taxi driver’s cab, the farmer’s cows, the widget maker’s wood. He illustrates how prices, in a free market, regulate the use of scarce resources. In his self-regulating world of unimpeded pricing, it’s a simple matter how each person among us is to buy, save, and sell, and to know when to do each. And Sowell really does mean “each person”; in his private economy, combinations of people (labor unions especially) rig the market, causing artificial shortages and surpluses of everything — including labor.

Sowell’s views add little to the free-market, politically individualistic agenda developed by conservative think tanks (such as the Heritage Foundation) building on the work of economist Milton Friedman, but he embraces this dossier passionately. An example of his personal testimony to individualism (he’s an African-American) is the surplus of labor he asserts has been caused by minimum-wage laws. “Some workers who would ordinarily be hired in a free market become ‘unemployable’ when there are minimum wage laws,” he writes. “In a free market, low-productivity workers are just as employable at a low wage as high-productivity workers are at a high wage.”

Ferguson takes an almost opposite tack. “From the Warfare State to the Welfare State” is his theme, as he relates the history of public finance, political change, and the rise and fall of international money flow. Whereas Sowell is essaying a kind of how-to money manual for every householder, Ferguson writes for the government official, the central bank manager, the bond analyst and underwriter. There is high drama in his vast story of how Great Britain created, in the 18th century, the modern structure of a permanent, revolving national debt. It is instructive for Americans, who sometimes think of the US national debt as our own invention, and a burden, to discover that when Britain was confronted by Napoleon, the war-financing power of the national debt was an irresistible instrument of total victory.

And yet among the big statements in Ferguson’s wide-angled book one discovers perspective and even humor. He illustrates the demonetization of gold that has become international policy since the 1950s by imagining how Ian Fleming’s Auric Goldfinger would react to it:

In 1959 Goldfinger would have been stealing precious metal worth $35 dollars an ounce. It seems reasonable to assume that the disappearance of such a large quantity of gold from the US reserves would have driven the dollar price of gold up sharply, thereby destabilising if not demolishing the Bretton Woods system of fixed exchange rates. In the event, however, there was no need for a Goldfinger to bring this about. Bretton Woods disintegrated just over a decade after Fleming’s book was published. . . . By January 1980 the price of gold had reached an historic peak of $850 an ounce. More than forty years on, it is tempting to wonder if it would now be worth Goldfinger’s while to rob Fort Knox, with the price of gold down to around $260 per ounce.

That Goldfinger wanted to make gold radioactive rather than steal it may unsettle the reader about Ferguson’s knowledge of James Bond, but it does not spoil one’s enjoyment.

Issue Date: March 22-29, 2001