Niall Ferguson argues that most historical studies neglect economic forces. He wants to reverse that trend. Sean Coughlan reports

Money. We all deal with it every day, and we could all do with more of it. We are influenced by money, but can we recognise its shaping hand in the character of our society?

Niall Ferguson, fellow and tutor in modern history at Jesus College, Oxford, believes that the importance of economic forces has been badly neglected in mainstream studies of modern history. It is an oversight that he intends to right with the publication of The Cash Nexus: Money and Power in the Modern World 1700-2000 .

His previous work - The Pity of War , which challenged the received wisdom about the origins and conduct of the first world war - was one of the most widely discussed of recent modern history books. With a pithy prose style underpinned by masses of statistics, he achieved the difficult act of balancing accessibility and academic rigour.

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Now Ferguson is turning his attention to economic history. He says it has for too long been looked down on by the middle ground of historians, who have seen it either as a refuge of greying Marxists or a specialist academic branch that is closer to economics than to history.

Of course, money, power, politics and ideologies are inextricably interwoven, each one an aspect of the other and each contributing to an understanding of modern history. But in The Cash Nexus, Ferguson seeks to focus on the role of money in modern history to show how the development of institutions and ideas has owed as much to hard cash as to political belief.

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"If you are to understand modern history, you have to understand how political institutions have come about - and to do this you have to understand the importance of the role of money," he says.

This is not to say that money alone makes the world go round, Ferguson says. Governments can be blown off course by anything from wars to scandals, and individuals are as likely to be motivated by sex and soap opera as by the exigencies of the economy. But allowing for all this - and Ferguson laments a society in which "people pay more attention to the words of Nigella Lawson than the archbishop of Canterbury" - he says that the importance of money as a political force should not be underestimated.

He looks at how the structures of modern states, such as parliaments, civil services, public services and central banks, have grown up side by side with the practical needs to raise and administer taxes, to have a professional tax-gathering bureaucracy, to borrow for wars and to provide for the repayment of those debts.

We might see tax as one of those grim inevitabilities that we would rather ignore, but Ferguson's book makes lively reading out of the story of how the levying of funds to pay for the armies of medieval autocrats evolved into the brown envelopes of the Inland Revenue.

Ferguson's greatest achievement is in using this narrative to make us rethink the connections between cash and power. For instance, we might think of raising taxes as a function of government - a task done to gain the funds needed to enact the programme of government voted for by an electorate.

But The Cash Nexus invites us to look at this arrangement in reverse - so that the government becomes a function of the tax system. When countries wanted to fight wars, they needed an efficient and widely accepted way of gathering tax - parliamentary democracy and its civil service might be seen as just such a consensual money-raising arrangement, providing the legitimacy and good governance necessary to bring in the cash.

For hundreds of years, this raising of cash was a matter of national life or death. Ferguson quotes Cicero's description of money as the "sinews of war" and shows how economic mobilisation has been as vital as guns or manpower - and it is open to debate whether the rise of mass-participation democracies reflects their promotion of individual liberty or their success in getting the brass in the bank to pay for the bayonets.

The Cash Nexus is not a blow-by-blow narrative. It hurtles across its own broad canvas, throwing out ideas in all directions, trying to cast light on the interplay of politics, power and money.

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One example, the chapter on how economics has been entangled in party politics, "The myth of the feelgood factor", should make for some nervous reading among the Labour government as we head towards a general election.

This myth, which Ferguson seeks to debunk, is the prevailing belief that elections are won and lost depending on the state of the economy - summed up in the motto of Bill Clinton's first presidential campaign: "It's the economy, stupid."

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Ferguson argues that there is no longer any clear correlation between the supposed feelgood factors of a rosy economic outlook and success at the polls - a fact that Al Gore might still be puzzling over long after the pregnant chads have been forgotten.

As evidence, he charts the most widely quoted economic indicators - unemployment, interest rates and inflation - and shows how these compare with the popularity of British governments in the past century. He finds that there is no obvious link, that public approval for governments often rose as the economy faltered.

This might be "counterintuitive", Ferguson says, but looking to his trusty statistics, he shows how Harold Wilson and Margaret Thatcher experienced surges in popularity at times when all the economic indicators were looking bleak, while John Major took a thrashing at the polls when the economy was showing strong signs of improving.

Trying to discern a pattern, Ferguson reveals that there are different expectations of Labour and Conservative governments -voters are less tolerant of high unemployment under Labour, while the Tories are punished if interest rates rise. And there is a suggestion that economic growth is more reliably linked to political popularity than any other indicator, but these are still far from clear-cut connections - and Ferguson's overall conclusion is that it is not necessarily the economy, stupid.

Another big idea that the book presents for discussion is the extent to which economic power can and should be translated into global political and military influence. In particular, Ferguson argues that the engagement of the United States in international events is much more limited than that of the British Empire, when it had the equivalent money and muscle to play the role of the global policeman, and that this disengagement raises questions as to how willing democracies will be to defend themselves in the future.

Ferguson uses the phrase "understretch" to describe the reticence with which the US has approached overseas involvement since the Vietnam war. Historically, a power in such a dominant position - revelling in the cold war's end and economic supremacy - might have been expected to assert itself much more strongly, Ferguson says. He contrasts this withdrawal with the country's self-confidence in forcibly democratising Japan and West Germany after the second world war, when, acting like great powers always have, the US used its military and economic force to impose its will.

The suggestion is that we are in uncharted waters in which, Ferguson says, economic superpowers choose to "stay at home, racing around in their four-wheel drives" rather than to assert themselves on the world stage.

The book also raises the question of to what extent our affluent, western postwar world is fundamentally different from its predecessors - with comparisons with earlier eras no longer working as models for the future.

Ferguson talks of the switch from "warfare to welfare", when, for the first time in history, providing welfare and services has become the major occupation for governments seeking to satisfy electorates with expectations that rise every year.

Despite the book's attempts to rehabilitate economics as one of the driving forces of history, the bigger picture drawn by The Cash Nexus is perhaps a surprising one - and that is that there are definite limits to the influence of money on political power.

Rejecting economic determinism, Ferguson argues that in the grand sweep of human affairs, which takes in our appetites for violence, altruism, personal power, lust and idealism, money is only one player, but one that we would be mistaken to ignore.

The Cash Nexus: Money and Power in the Modern World 1700-2000 is published next week by Allen Lane, ?20.00.

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