The book starts with the discovery of the Americas. What impact did this have on Europe’s economy?

It was hugely transformational. Silver and gold flooded Europe, pushing up prices. This was a great stimulus to business activity: if you are opening a shop in an environment in which prices are rising, there’s a big incentive to trade. In many ways, the discovery of the New World kickstarted Europe’s economy.


You argue, however, that there were also less desirable results of this boom.

Spain relied on these endless flows of silver and gold, and its industry and agriculture fell behind as its people became addicted to these imports. The thing about becoming rich is that you are aware of your money, so spend it: the fact that Spain was extracting riches from the Americas, causing prices to rise, meant that they had to spend more money.

This influx of wealth coincided with the military revolution, when the hardware of fighting became much more expensive. So while Spain was getting richer the cost of its endeavours ballooned, and it borrowed money to try to meet the shortfall.

At this point, politics became involved. Charles V of Spain inherited a vast empire through a series of dynastic alliances made by his grandfather and his parents. The big question in the Europe of the early 16th century – the backdrop to all that’s familiar to us in British history – was how to accommodate this superpower. For his part, Charles had to spend a lot of money to maintain armies in several theatres of war, which put heavy strains on his kingdom.

More like this

Was it this international rivalry that led Spain to overspend?

It was all about strategic dominance of Europe. What drove Spanish spending was its bid for hegemonic mastery, while the other powers in Europe tried to drag it down. In a sense, that’s what British foreign policy of the period was about: an attempt to limit the mighty powers in Europe. This pattern was repeated through the 17th century, with the burgeoning power and military campaigns of Louis XIV and beyond.

Do you see the whole history of finance as being cyclical in this way?

Repetition is a key theme of the book. The model starts with stability, and then – for whatever reason – a country has to fight a war. The problem with wars is that they’re bloody expensive, so the only way nations can buy what they need is by printing their own money – which leads to inflation and instability. So they say “forget all that gold standard stuff – we’re going to borrow as much paper money as we can, and spend it”. Once they’ve financed this course of action, they realise that they’re in a bit of bother, and revert to fiscal orthodoxy – and so on.

What was the financial impact on Europe of the First World War?

The First World War was probably the big watershed in terms of financial history, because during the 50 years preceding it the gold standard – by which each currency was linked to a fixed quantity of gold – had become established in the western world. Economists sometimes describe this period a one of proto-globalisation: a liberal world in which capital and people could move freely.

The war changed all that. Early in the conflict, the UK stopped paying gold – unlike the US where, as a result, a lot of financial muscle went. Britain, which for the century up to 1914 had essentially been running balanced budgets, became debt-financed. It left the gold standard, and borrowed – and, essentially, printed – lots of money with which to buy what it needed to win the war.

You argue that the 1930s were more important in financial history than the 1929 crash. Why?

The 1929 crash captured the public imagination, but the 1930s were important because governments were trying to deal with the aftermath. After the economy juddered to a halt in 1929, the orthodox view was that spending needed to be cut. Later, in 1936, the economist John Maynard Keynes asserted that in fact governments should be spending money. But I’d argue that governments in the 1930s, particularly the Nazis, had already arrived at that conclusion. Hitler and Roosevelt were Keynesian financiers before Keynes’ General Theory: they were spending and borrowing lots of money, and motivating their people to work.

Did the Second World War shift the balance of economic power to the US?

My view is that the US became top dog after the First World War, but no one really admitted it. After the Second World War, it was obvious that the US was the pre-eminent military and financial power. It was a rare and fascinating situation in which one nation had such a vast share of the global economy.

Which powers do you see as emerging most strongly on the postwar stage?

China is obviously the big story of the past 25 years, and will continue to be. The other big story is the introduction of the euro. It was a long project, not one dreamt up in the 1980s and 90s; whether you love or loathe the EU, you have to admire the strategic vision of the single currency. One of the things I try to tease out in the book is that British politicians don’t really have that strategic view that their European counterparts have. We think they keep coming up with these madcap schemes, but there’s method to the madness. It’s part of a much bigger, much longer story, a larger architecture than we’re conscious of as politicians in Britain.

What new view of money would you like readers to leave the book with?

The most important thing is that, if you think that an event may have a historical precedent, then it probably has. This is largely a function of human nature, because people and nations tend to employ the same techniques to survive. The story that I tell in this book is a classic case in which the past does inform, and give us an idea of, what’s going to happen in the future: states are greedy, they spend money, they like borrowing money, and they go to war. These demands have shaped the world for centuries, and understanding the dynamic between them is vital in anticipating what the future might bring.

War and Gold: A Five-Hundred-Year History of Empires, Adventures and Debt by Kwasi Kwarteng (Bloomsbury, 2014)


This content first appeared in the July 2014 issue of BBC History Magazine