（A modern nation-state is a massive tax-collection apparatus. Parliament oversees it, while the government and bureaucracy manage its expenditures. The central bank maintains the stability of the currency that underpins domestic economic circulation. Law enforcement agencies guarantee the stability of power and society. The military and intelligence agencies are responsible for national security. And on the international stage, the nation tries to promote practices that serve its own commercial interests as international law. The United Kingdom was the first to accomplish all of this in the most comprehensive manner. In this chapter, we will trace the process by which the various institutions of the modern state took shape in the United Kingdom.
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The source text is “In Search of Lost Modernity” by Akio KAWATO.
The English edition of this book (originally written in Japanese) is on
https://docs.google.com/document/d/1hiRK7kjbX0Hxd2NOxPqtQlVWgjDHgKCr/edit
https://docs.google.com/document/d/1MB0Me9P5Lpa2HGceuJUdMqqQ2CRHQSxa/edit)
(The copyright belongs to the author, Akio Kawato)
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The Growth of Bureaucracy in Britain
In sixteenth-century England, during the reign of Elizabeth I, there were only about 500 paid government officials—265 of them working in customs and finance. Much of the local judicial work was done on a voluntary basis. Britain’s modern bureaucracy began to take shape toward the end of the seventeenth century, driven by the need to rapidly expand its military—especially the navy—in order to fight wars against Spain, the Netherlands, and France.
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To fund this buildup, Parliament introduced property and consumption taxes, strengthened excise taxes, and began issuing government bonds. Tax collection, which had previously been outsourced to private agents, was brought back under direct government control. By 1688, over 2,500 new officials had been hired for this purpose. In contrast, France continued outsourcing tax collection to private contractors, which led to inefficiencies. When Louis XVI tried to resolve the resulting revenue shortfall through tax hikes, it triggered public outrage and ultimately cost him his life in the French Revolution.
The British Parliament also established the custom of approving government spending every year. By the 1730s, this practice had evolved into the formal annual “budget.” In 1833, a dedicated department was created under the Chancellor of the Exchequer—forming the foundation of today’s Treasury.
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By 1714, there were 114 commissioners (equivalent to directors of department) heading 18 government offices. In the 1720s, the number of full-time government employees had reached about 12,000. The fastest growth occurred in revenue-related departments: from 1690 to 1782/83, the number of revenue officials tripled, reaching around 8,300 by the end of the American War of Independence.
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Even the British Bureaucracy Was a Den of Iniquity at First
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When you read about it like this, it may sound as if everything developed in the upright and proper manner of a British gentleman—but that wasn’t the case. People are the same everywhere. John Brewer’s “The Sinews of Power: War, Money and the English State, 1688–1783” vividly describes the reality as below. Interestingly, similar patterns also appeared in contemporary Russia after the collapse of the Soviet Union.
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–There was corruption. The labyrinthine state system housed all kinds of characters: deadbeats, parasites, sharks, and “greedy half-bird, half-beast” types. Because it took so long to transfer funds, state money could be diverted into private investments. Taxpayers, litigants, and government suppliers were offered favors in exchange for gratuities, entertainment, or outright bribes. It could take as long as eighteen months for land taxes collected in northern England to reach the Treasury.—
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Early on, political appointments and personal connections dominated the British bureaucracy, leading to fierce and dirty rivalries among officials. A more structured civil service only began to emerge at the end of the seventeenth century. Civil servants started to receive regular salaries in cash.
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Still, the idea of lifetime employment and departmental independence was slow to take hold. Government officials often moved between public and private sector jobs—and even between ministries. They relied heavily on the patronage of nobles and politicians, and rarely considered themselves permanent employees of any one department (today’s ministry). When they retired or were dismissed, it was common for them to take the documents they’d been working on—perhaps to keep them from becoming evidence of misconduct.
In the 18th century, bureaucratic working hours weren’t standardized. Most worked from around 10 or 11 in the morning until 4 in the afternoon. Some who held public titles even paid a portion of their small salaries to agents to perform their duties for them. The 18th-century government was, in one observer’s words, “a strange patchwork of old and new, useless and useful, corruption and loyalty.”
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However, from the 1690s onward, bureaucracy began to bureaucratize. Offices that set rules and work quotas grew in number. Tasks were assigned more clearly, working hours were standardized, and inter-departmental turf wars intensified—like the ongoing clashes between the Customs and Excise Departments or between the Navy Board and the Admiralty. As rule-based governance expanded, officials became less willing to accommodate citizen requests that didn’t fit neatly into the system.
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The Development of the British Tax System
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There’s a saying: “Taxation is the state.” Looking at Britain’s modernization process, this becomes strikingly clear. Without money, there can be no functioning government.
As described earlier, Britain was relatively heavily taxed. In 1715, taxes amounted to 17% of GDP. By 1800, during the Napoleonic Wars, that figure had risen to 24%—though it fell to 10% by 1850.
In contrast, France’s tax revenues were only 11% of GDP in 1715, 10% in 1775, and 10% in 1803. But in Britain, only the central government collected taxes. This meant that although national taxes were high, the British public kept more of their income than citizens in countries like France, where lords and the Church levied additional dues.
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Between 1750 and 1800, indirect taxes—like excise duties—made up more than 70% of British tax revenue. This system was easier to manage than income tax, since the government collected money from a relatively small number of merchants and distributors rather than from individuals.
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In France, by contrast, the tax rate was lower, but feudal dues and Church levies took a large toll. Furthermore, national tax collection was outsourced to private contractors, who often embezzled part of the revenue. Where bureaucratic systems are weak, tax collection naturally gets pushed outside—and invites abuse.
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A similar pattern emerged in medieval Russia under Mongol rule. The Mongols outsourced tax collection to the Grand Duchy of Moscow (one of several self-styled principalities), which siphoned off funds and gradually gained power—eventually driving out the Mongols altogether.
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In the 18th century, the British East India Company assumed tax collection responsibilities in India. This allowed it to infiltrate local ruling structures and ultimately led to British colonization. Once again, “taxation is the state.”
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What’s also interesting is how tax revenue was used differently in France and Britain. In France, higher taxes typically strengthened the army. In Britain, they went instead to the navy. In the mid-17th century, some factions in the British Parliament even pushed to abolish the standing army altogether, fearing it would both increase the financial burden and consolidate the king’s power.
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From Mercenaries to Standing Armies
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A standing army—military forces maintained by the state, from generals to foot soldiers—is one of the essential features of a modern state. It enabled countries to defend territory and build overseas empires. But keeping this money-devouring machine alive required centralized taxation and a dedicated bureaucracy. In many ways, the rise of the modern state began with the military.
Let’s look at how early modern Western European states transitioned from using mercenaries to maintaining standing armies.
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In the 17th century, mercenary armies started evolving into forces under the direct control of kings. A key turning point came with the army of the famous mercenary general Wallenstein, employed by the Holy Roman Emperor during the early years of the Thirty Years’ War. Wallenstein’s independent tax-collection system and private army alarmed the emperor, who eventually had him assassinated and brought both under imperial control.
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Even so, the Holy Roman Empire never truly developed a strong standing army. This was likely because it effectively dissolved into a patchwork of sovereign states after the Thirty Years’ War. Standing armies instead became prominent in France and Prussia.
At first, these national armies were still a patchwork of mercenaries simply placed under royal command. Former mercenary leaders became officers reporting directly to the sovereign, and the costs of food, uniforms, and housing were, in principle, paid by the state. All soldiers wore the same government-issued uniforms.
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But there was still no conscription system. The core of the military was made up of professional soldiers, and the armies relied heavily on foreign recruits. In Louis XV’s French army, foreigners made up about one-eighth of the troops in peacetime, and a full quarter during wartime. In 18th-century Prussia—even under Frederick the Great—foreigners made up about half of the peacetime army. By 1806, more than 1,000 of Prussia’s 7,000–8,000 officers were foreign-born.
This gave rise to the famous saying: Prussia was not a country with an army—it was an army with a country. And in these armies, regimental and company commanders still held considerable autonomy. Many continued the medieval mercenary tradition of enriching themselves by pocketing their companies’ expenses.
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Expansion of Army Size
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In 16th-century Europe, military tactics began to change. Firearms started to be used on a large scale, and armies increasingly relied on massed infantry firepower instead of cavalry. British historian Andrew Roberts notes that “in the second half of the 16th century, Philip II of Spain ruled Europe with an army of 40,000 men, but by the 17th century, Louis XIV of France needed 400,000.” This massive expansion of armies led to the use of questionable recruitment tactics—such as getting young men drunk in taverns and enlisting them without their knowledge—and to the gradual development of farmer-based militia systems.
In France, the King’s Militia System was established in 1688. In Prussia, the Canton System began in 1732, assigning each regiment to a specific district (or canton) for recruitment. Desertion was harshly punished.
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Still, as mentioned earlier, the backbone of standing armies remained professional and volunteer soldiers. Many craftsmen, farmers, and servants volunteered to serve for a few years, and by 1716, such volunteers made up about 85% of the total force. In the German states as well, soldiers typically served multi-year terms. Since there weren’t enough military barracks, they were often quartered in private homes in nearby towns.
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As mentioned above, foreign mercenaries continued to play a role in national armies. The British famously used German mercenaries in the American War of Independence. Spain employed Swiss, Irish, and other mercenaries until the early 19th century. Even Napoleon used foreign troops. In some battles, Swiss mercenaries ended up fighting each other on opposite sides.
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The British Regular Army
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As a unique case, let’s consider the British Army. In the 17th century, Britain stayed out of the Thirty Years’ War, and—as previously mentioned—Parliament opposed creating a standing army, fearing it would strengthen royal authority.
Nonetheless, Britain’s army expanded. In the latter half of the 17th century, King James II, hoping to create an absolutist regime like Louis XIV’s France, increased the standing army to 40,000—four times its previous size. His successor, William III, who came from the Netherlands and used the British military in campaigns against France, further strengthened the army. The cost reached £5 million annually, prompting increases in customs duties and consumption taxes, and the introduction of a land tax in 1692. John Brewer’s “The Sinews of Power” vividly describes the situation as follows:
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–Between 1680 and 1780, both the British Army and Navy tripled in size. Over that century, Britain fought the Nine Years’ War (1688–97), the War of the Spanish Succession (1702–13), the War of Jenkins’ Ear and the War of the Austrian Succession (1739–48), the Seven Years’ War (1756–63), and the American War of Independence (1775–83).–
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During the Nine Years’ War, the British Army reached a peak of 87,500 men. For the first time, it surpassed 100,000 during the American War of Independence. However, the composition of the army varied greatly from time to time, with professional soldiers and foreign mercenaries making up the majority. During the American War of Independence, German mercenaries also joined the British army.
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Although troop levels were reduced in peacetime, many soldiers were stationed in Ireland—and the costs were shouldered by Irish taxpayers. In this way, a standing army was maintained outside of direct parliamentary oversight.
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Between 1739 and 1763, foreign mercenaries received £17.5 million—about 21% of the army’s budget. In the War of the Spanish Succession at the start of the 18th century, Britain not only employed mercenaries but also funded its allies’ forces.
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The Navy was equally powerful. During the wars against Louis XIV, its manpower reached about 40,000 and eventually exceeded 100,000. The total tonnage of British warships doubled between 1714 and 1760.
Moreover, until 1858—when India came under direct royal rule—the British East India Company maintained its own army. By 1800, this “Company Army” numbered 200,000 men, more than twice the size of Britain’s domestic army. Most officers were British, while most rank-and-file soldiers were Indian.
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In summary, although Britain did not adopt conscription—doing so only in 1916 during World War I—it still fielded a military force strong enough to maintain a global empire. In many ways, the modern state emerged first and foremost as a war machine.
Police and Intelligence: “Agencies of Power”: Police and intelligence agencies are also essential pillars of modern governance. Because they wield coercive power, in Russia they are collectively known as the “organs of power,” alongside the military. These agencies report directly to the president, bypassing the prime minister. In countries with underdeveloped economies, raw power often becomes essential for maintaining national unity.
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In Western literature, the power of these institutions is often highlighted—for instance, Inspector Javert in Les Misérables by Victor Hugo represents the force of the French police and Ministry of the Interior.
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After Japan’s defeat in World War II, the Ministry of Home Affairs of Japan and its affiliated police agencies were dismantled, giving the appearance of decentralization, and the intelligence agency was completely abolished. As a result, modern Japanese citizens tend to underestimate the influence of the police—except, perhaps, for the tax office.
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But politics cannot run on beautiful ideals alone. Sometimes, suppressing opponents or intimidating troublemakers is necessary—and in those moments, the “agencies of power” become extremely useful.
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The Central Bank: The Nation’s Accountant
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The central bank also emerged as a vital institution in modern governance. Its early role was essentially to help finance war by selling government bonds. To do so effectively, it had to keep market interest rates low; otherwise, the cost of repaying national debt would soar. In this way, the central bank’s mission became the stabilization of interest rates—that is, controlling inflation.
Government debt was not a new idea.
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Cities in the medieval Mediterranean had already issued similar instruments as official bonds, and some even had proto-central banks to manage them. In Venice, a system of perpetual annuities allowed the government to collect money from wealthy citizens in exchange for lifetime interest payments. Collected money was often used to fund wars.
The concept of the annuity likely evolved from practices dating back to the Crusades, when kings and nobles mortgaged land to raise funds, pledging a share of their land revenues to creditors as annuities (or rentes). In Venice, these annuities were tradable assets. However, between their introduction in the 12th century and 1500, their market value had fallen by half. The original interest rate was around 5%.
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The Venetian institutions that handled these payments began as the Monte Vecchio, then evolved into the Monte Nuovo and finally the Monte Nuovissimo. These can be seen as early forms of central banks. Genoa’s Casa di San Giorgio, founded in 1407, served a similar role.
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In France, King François I created government bonds (rentes) backed by revenue from the Paris City Hall in 1522. Spain also issued national bonds in the 15th century, known as juros (or flos), backed by portions of royal revenue. German merchants like the Welsers and the Fuggers were major buyers—until their bankruptcy.
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After that, large Genoese merchants stepped in and subscribed to vast quantities of Spanish bonds. These were traded in Besançon and, after 1579, in Piacenza. In the 17th century, Amsterdam took over as Europe’s primary bond trading hub.
In the 17th century, the Netherlands and, later, Britain began issuing government bonds and selling them to the Bank of England to raise funds. Britain used this money to wage wars against France and other powers.
France, on the other hand, failed to establish a central bank. Its attempt to finance wars through ever-increasing taxation instead led to the French Revolution of 1789.
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In the 19th century, the Bank of England became a stabilizing force for an economy that had expanded dramatically due to the Industrial Revolution. Its responsibilities grew to include auditing private banks, maintaining credit, and providing emergency support during financial crises.
In 1844, the Bank of England was granted a monopoly on issuing banknotes. The value of these notes was backed by gold. While this system prevented inflation by limiting the amount of currency in circulation, it made deflation more likely. If exports declined, the economy would contract. This rigidity contributed, as mentioned earlier, to Britain’s prolonged economic slump in the second half of the 19th century, especially between 1873 and 1896.
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FRB as a product of “conspiracy” at Jekyll Island
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In the United States, a full-fledged central bank did not emerge until the creation of the Federal Reserve System in 1913. At the time of American independence, the power of the individual states was strong, and many issued their own banknotes as if they were sovereign nations. However, the Constitution designated the dollar as the national currency, so states could not freely print unlimited amounts of it. Regulations, including gold reserve requirements, limited currency issuance. For large-scale transactions within and between states, bills of exchange were also commonly used. Even today, dollar bills are printed at six regional Federal Reserve Banks, which determine issuance volumes individually—though nationwide interest rates are unified, so the volume of currency is adjusted accordingly.
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Several early attempts to establish a central bank in the U.S. failed. The Bank of North America (1781), the First Bank of the United States (1791), and the Second Bank of the United States (1816) were all short-lived, partly due to opposition from states determined to preserve their monetary autonomy.
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Nevertheless, the U.S. entered a period of rapid economic expansion in the late 19th century, known as the “Gilded Age,” without a central bank. This era saw repeated financial crises. Currency values would plummet, sparking bank runs, sudden gold shortages, and the collapse of private banks.
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Initially, powerful financial groups like the Morgan conglomerate stepped in to rescue failing banks, but even these giants grew reluctant to bear the burden alone. In November 1910, Senator Nelson Aldrich, Assistant Treasury Secretary Andrew Piatt, and representatives of five major banking houses—including Morgan, Rockefeller, and Kuhn Loeb—met secretly at Jekyll Island, a resort in the American South.
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Together, they drafted a proposal for the Federal Reserve System. The key architect was Paul Warburg, a German-Jewish émigré and expert in European central banking. A bill based upon their proposal passed Congress in 1913, and President Woodrow Wilson signed it into law. As its origins suggest, the Federal Reserve was originally designed more as a mutual assistance institution for private banks than a full-fledged government bond underwriter.
During the Great Depression, which began in 1929, the Federal Reserve initially tightened monetary policy to cool the economy, but later reversed course and began easing credit to encourage recovery. During World War II, it played a major role in financing the war by purchasing large quantities of Treasury-issued bonds.
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That said, many countries have functioned—at least temporarily—without a central bank. Even the United States fought the Civil War, the Spanish-American War in 1898, and the subsequent suppression of the Philippine independence movement without one. During the Civil War, the Union government issued various forms of “greenbacks”—paper money not backed by gold—to cover war expenses. At first, this led to inflation, but in 1879 the government ceased new issuance and made the existing paper currency convertible into gold, thereby stabilizing prices. This was only possible because the economy was growing.
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Today, central bank’s role has expanded from stabilizing interest rates and preserving the currency’s value to maintaining employment and supporting the economy. In the United States, this dual mandate is enshrined in law. But these goals can be contradictory. For instance, fighting inflation typically requires raising interest rates—yet doing so too aggressively can slow the economy and reduce jobs. In Japan, employment is not a formal responsibility of the Bank of Japan, but strong public and political pressure ensures that economic conditions are still taken into account.
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“International Law,” “Comparative Advantage,” and “Free Trade”: Rules Made by the Strong
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The term “international law” may sound lofty, but in reality it’s just a set of rules born out of conflict between modern nation-states. In practical terms, when the dominant power of the era declares, “This is how the rules of navigation should be,” others follow—and before long, it becomes accepted as global “law.” Unlike domestic legal systems, international law lacks a constitution, civil or commercial code, or enforcement bodies like police and prosecutors. The International Criminal Court, created in 2003 to prosecute war criminals, lacks the authority to arrest or extradite anyone to its headquarters in The Hague.
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Modern international law began taking shape in the 17th century as nations of relatively equal strength competed for overseas influence. In 1609, Dutch jurist Hugo Grotius published “Mare Liberum (The Freedom of the Seas)”, arguing that the oceans should be open to all nations for trade.
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While it appears to be a scholarly treatise, in reality, it was a demand that the Netherlands be granted access to the spice trade routes in Southeast Asia, which were monopolized by Spain and Portugal. Grotius cleverly wrapped his argument in Roman legal concepts like dominium (ownership) and imperium (sovereignty), earning him the title “father of international law” and giving birth to what is now called jus gentium—the law of nations.
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Terms like “free trade” and “comparative advantage” may sound equally impartial, but they too are tools used by powerful countries to serve their interests. “Free trade” essentially means a system of trading goods without tariffs. While the idea seems elegant in theory, it was invented by industrialized nations like Britain to secure export markets for the surplus goods produced during the Industrial Revolution. It became a kind of spell that powerful countries cast over developing ones. If taken at face value, developing nations would never be able to cultivate their own industries.
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The “principle of comparative advantage” was developed by David Ricardo to justify the liberalization of trade—especially around the time of the Methuen Treaty between Britain and Portugal in the early 18th century. The theory is simple: Portugal is better at producing wine; Britain is more efficient at manufacturing goods. If each country focuses on its strength and trades with the other, both will prosper.
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In reality, however, Portugal remained locked in the role of an agricultural exporter, and British capital eventually came to dominate its wine industry. In other words, free trade and comparative advantage often lead to the economic powers monopolizing the most profitable sectors of the global market.When I served as ambassador to Uzbekistan, I saw firsthand how European ambassadors invoked this outdated theory to pressure local bureaucrats. But a country that only produces wine will never achieve widespread prosperity.
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After the defeat in World War Ⅱ Japan broke away from the production and export of low-margin miscellaneous goods and entered the automobile manufacturing industry, where it did not have a comparative advantage. There, it enjoyed the benefits of “free trade” led by the United States, expanded exports, and achieved a rapid rise in living standards. Even today, it is in Japan’s national interest to continue to fly the banner of free trade (with restrictions maintained in a few areas), but it is important to fully understand what this means and what you are actually saying.
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Even now, international law does not govern all aspects of global politics and economics. Although the UN Charter sets the framework for political relations, the frequent use of veto power in the Security Council often prevents decisive action. And even when resolutions are passed, the UN lacks the military power to enforce them. In practice, the only areas where international law has real teeth are in limited areas like maritime law and select treaty-based rules. The principle that “international law reflects the balance of power at any given time” remains unchanged from the beginning of history.
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The United States, as a global superpower, is deeply resistant to international oversight. This is partly because it is powerful, and partly because many international institutions were created under U.S. leadership after World War II. That resistance has intensified under President Donald Trump, who was re-elected in 2024. His push to raise tariffs could effectively dismantle the World Trade Organization (WTO)—an institution that grew out of the U.S.-backed General Agreement on Tariffs and Trade (GATT) after WWⅡ. In this sense, international law stands today at a major turning point.
