War to the knife and fork on the wildest frontier of all

By Christopher Fildes

THE wildest frontier of them all runs north and south through the Savoy Grill. It serves as the dividing line between the City and Westminster, finance and politics. Dealers and traders from the two sides meet for lunch and bargain for advantage. This is war to the knife and fork.

Niall Ferguson is just the man to write about it. He is an historian of warfare (First World War) and of money (the Rothschilds). He had withdrawn into the Bank of England to write a history of the bond markets when it occurred to him that he was dealing with the relationship between money and power. The Cash Nexus* is something new on the menu.

Markets have power, as politicians discover. President Clinton's campaign manager, James Carville, noticed it: "I used to think that, if there was another life, I would want to come back as the Pope or a baseball big hitter. But now I want to come back as the bond market. You can tell everyone what to do."

advertisementAt much the same time the currency market was telling a British government what to do. Its leaders had gone nap on Europe's exchange rate mechanism, putting the pound in and swearing that it would be there for ever. One September day the market threw us out. The economy never looked back and the ruling party's fortunes never looked up.

More recently the idea got round that markets were benevolent, or would at least respond to being tickled in the right places. Alan Greenspan at the US Federal Reserve could set the markets purring. He was dealing with a new economy which promised a new paradigm of endless growth and instant fortunes, electronically driven. Even Gordon Brown felt emboldened to promise that there would be no more boom and bust.

Then some of the gloss came off the new economy, and its chosen market, Nasdaq, arched its back and spat. Even so, the idea persisted that markets would spread peace and prosperity around the world, on a free-flowing tide of money and capital, and that there was no stopping them. Like the new paradigm, this was a pleasing discovery, so how lucky or clever we were to have made it.

History had reached a happy ending, wrote Francis Fukuyama, prematurely. There would be no war, wrote Thomas Friedman, between countries which had branches of McDonalds. Then the US Strategic Air Command started bombing the McDonalds in Belgrade, and the theory was called into question.

Not for almost a century have money and capital flowed so freely round the world as they do now. So much depended on them then that nobody, surely, would want to upset them. The delicate interdependence of international finance, wrote Sir Norman Angell in 1913, meant that a war between the great powers had become almost impossible. A year later the great powers called his theory into question, too.

The unpleasing truth is that wars can pay, although of course they cannot pay everyone. If they do not pay the winners, they may still pay the commanders. Napoleon and Goering helped themselves to the masterpieces of Europe, and even Wellington returned from Spain with some fine pictures, which a grateful Spanish government urged him to keep.

Wars have always been expensive. Historically, rulers and governments have needed money to finance the warfare state, and have raised it as best they could, from their own resources or their subjects'. Some were richer than others but some managed their finances better. They knew how to tickle the markets.

France in the eighteenth century was twice as rich as Britain (in terms of the two countries' total outputs of goods and services) but the British war effort was better financed, and came off best. The French monarchy lived from hand to mouth, farming its tax collection out and mortgaging its revenues. In the end it ran into an investors' strike, which soon proved fatal to it.

By contrast, the British government's credit was good. It could fund its debt in the market, it had an effective central bank, it collected its own tax revenues, and its spending plans were scrutinised in Parliament, which would not vote the money if it did not like them. These were and are the four corners of what Niall Ferguson calls the square of power.

They stood foursquare for the best part of two centuries. What broke the British square was the transition from the warfare to the welfare state. Finding their debts burdensome, the governments of the time inflated their way out of them, destroying the value of their promises to pay. In the end, their investors struck, too.

Certainly the welfare state has turned out to be every bit as expensive as its predecessor. When we could afford a navy twice as big as the world's next two biggest navies put together, governments spent less than 10pc of the nation's income. Now the nation's defence is low on the Chancellor's shopping-list, but he still wants to pre-empt two-fifths of our income for as far ahead as his forecasters can see.

This must put the square of power under strain. It establishes millions of economic dependants whose interest is to keep public expenditure high. It also distorts the balance between representation and taxation. There are now 17 voters for every 10 payers of income tax. No prizes for guessing which way the odd seven will vote.

Every so often, governments seek to tie markets down. Two years ago the governments of Continental Europe tried the effect of abolishing its biggest market, in foreign exchange. They had tried it before, with the Latin Monetary Union, which was supposed to lead (this was 1865) to a European Commission and to European union. It came apart under the pressure of events.

The new model has made a bumpy start, and has yet to be tested in hard times, but the government has set itself a timetable for making up its mind about joining, and the argument is on again. Of all the bad reasons for putting the pound into the European single currency, the worst must be the one most often heard: that it is somehow inevitable. It cannot happen unless we will it to happen.

Marx thought that the collapse of capitalism was inevitable. Nowadays we are more likely to hear that its triumph is predestined. Niall Ferguson does not believe in these forces of historical predestination. He is a believer in choice and in chance. He cites Harold Macmillan's idea of the principal danger to governments: "Events, dear boy, events."

War has always been a recurrent event, and we now spend less on defence than at any time since the Wars of the Roses. We shall just have to hope that the skirmishing will be confined to the Savoy Grill's wild frontier.

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