“The Modern Midas,” pages 49-62
[A footnote attached to the title of this chapter notes that the essay dates from 1932; In Praise of Idleness was published in 1935.]
Russell opens Chapter Four by recounting the King Midas tale, referencing (as he did in Education and the Good Life) Nathaniel Hawthorne’s Tanglewood Tales. The world is slow to digest (hard food for Midas!) the moral of the story. The Spanish hoarded Peruvian gold, raising prices but not increasing their consumption – though perhaps the increase in nominal incomes gave Spaniards a psychological boost through money illusion. The eastern seaboard of North America, left to the secondary powers of Holland and England, was less prized because of its lack of gold, but proved to be much more valuable.
Though we can see the folly of thinking of gold as real wealth when we examine historical examples, the deception continues to trip up governments: look at the indemnity imposed upon a defeated Germany in the wake of the Great War. The German reparations had to be paid in goods, but this implied that Germany was required to maintain what is considered to be a favorable balance of trade with the Allies; that is, the Allies were doing what their economic thinking took to be a favor for redeveloping Germany. Further, domestic producers in the Allied nations did not welcome competition from those German repayments-in-kind. The Allied view was that Germany had to pay, but any particular method of payment was unacceptable to the Allies. [Later, on pages 52-53, Russell presents a single-individual, Robinson Crusoe version of the Allies’ behavior, to sharpen its absurdity.]
“To this lunatic situation a lunatic solution was found [p. 51].” The Allies lent Germany the money to pay the reparations. No domestic industries were directly hurt, and the notion that Germany was being punished for its transgressions was maintained. The cycle was extended when Germany was loaned funds with which to make the interest payments on its earlier loans. When the limits to these sorts of machinations were reached, bankruptcies spread throughout the system, and the global depression, which had many other stimulants, ensued.
The Allies first took the viewpoint of consumers when they pressed for German reparations, but then they realized that Allied producers might not be so enthralled with the whole idea. Their shift in roles resulted in the crazy pay-only-in-a-useless-fashion compromise, one that would be seen as evidence of insanity in an individual, but is taken to be wisdom when pursued at the national level. Robinson Crusoe would welcome the option to specialize in the production of some goods and to trade for others – his living standards will be low if he must make himself everything that he consumes. But somehow nations feel they need to have domestic capacity in all industries. A rational plan for production, one that included retraining for workers departing from declining industries, would avoid this costly devotion to autarky – but such rationality is “contrary to business orthodoxy [p. 53].”
The mythologies connected to gold are surprisingly common. French enmity for Britain forced the British off of the gold standard, which was the proper economic policy, but one that was widely viewed as shameful in Britain. The whole “dig up gold in one place so it can be stored underground elsewhere” industry is quite absurd. [Russell reiterates this observation in Unpopular Essays.] “Nevertheless it is still supposed that, by some hocus-pocus, everybody’s financial stability depends upon a hoard of gold in the central bank of his country [p. 55].” Sometimes the gold can be in one country’s vault, but designated as being owned by another country. It would be simpler just to pretend that the gold had been mined without disturbing it from its original resting place. [Echoes here of "The Island of Stone Money."]
The notion that a gold standard commits governments to prudent monetary policy is misplaced; in a pinch, a government will adjust or suspend the standard, and override the commitment. All the warring parties in Europe depreciated their currencies post-conflict and hence diminished the real value of their debt, sometimes to the point of hyper-inflation making debt payments worthless. The Russians were forthright about debt repudiation, while the depreciating or inflating nations paid lip service to propriety. Countries, like people, repay debts when and only when it serves their interests. Domestic debt is particularly susceptible to strategic governmental behavior, as the nominal value of the domestic currency can be manipulated by the state. Repudiation of international debt is held in check, imperfectly, by the threat of hostile reactions from the debtor nations.
Ownership of property is generally due to military might. Look at how New York changed hands between Native Americans, the Dutch, the English, and the Americans. Natural resources discovered in poor countries have a tendency to fall under the control of powerful nations, with arms either directly or tacitly involved. Similarly, powerful nations, if they are debtors, can get away with not repaying. The only path to currency stability is not a tenuous gold standard, but a world government with military capabilities. Such a global state could provide stable money by guaranteeing the price of a standard commodity bundle, and would have a direct interest to do so. [I believe that Russell’s belief in the stability of such a currency is misplaced; see this paper by Paul Krugman -- RBR.] The fact that business people do not support a single central bank and a world currency is evidence that they are willing to trade their own prosperity in exchange for keeping foreigners poor.
Our psychological responses to buying and selling seem to ignore the fact that we cannot directly consume money, and that it is consumption, not production, that is the ultimate goal. “In almost every transaction, the seller is more pleased than the buyer [p. 58].” The psychic superiority of selling comes from our love of power, which for many, but by no means all people, exceeds our desire for pleasure. Those who do desire power more than pleasure, however, set the tone in our competitive times. Governments inherit these skewed ideas from the movers and shakers, with the nonsensical result that all countries desire to sell but not to buy.
Sellers care about consumers and competitors. But consumers are numerous, while competitors are few and known, so producers end up focused on their competitors, who, after all, are a source of harm. When those competitors are foreign, the focus is, if anything, more intense. Other countries are viewed more as economic foes than as potential customers, lending a stimulus to the imposition of tariffs. Countries are like a butcher in a small town, whose enmity for the other butchers in town is so outsized that he embarks on a successful mission to turn the entire town into vegetarians – and ruins himself along with the targets of his wrath. Hatred of foreigners similarly renders countries unable to see that those foreigners who sell to them also, directly or indirectly, are their customers.
In Britain, the longstanding conflict between the rich and the poor has shrouded the fact that rich bankers have interests that also are opposed to the interests of rich industrialists. The political success of the financial sector in the banks v. manufacturers rivalry almost ruined the country.
The divergence between the interest of the finance sector with that of society is a more general phenomenon. [Russell noted this disconnect in 1919 in Proposed Roads to Freedom.] Running a country to promote the interests of financiers is like running a museum to benefit the curator, who might profit most by selling off the holdings. The profit motive, in many instances, serves society’s interests, but the profit motive within the financial sector now does not do so, even if it has done so in the past. Regulation is needed to ensure that finance serves the interest of industry – which generally is more closely aligned with the public interest – instead of serving its own, parochial desires.
Superstitions are used by the powerful few to control the subordinate many. In the past, superstitions have been promulgated to aid the power of priests and kings. Now, the superstitions surrounding gold protect the rule of the financiers. Ordinary people are dazzled by the jargon, and associate larger gold reserves with more security. The subservience to financiers is protected by more than just the gold standard, however. They are wealthy, and wealthy people are in a position to influence academic and public opinion, and serve as natural leaders for those who fear communism. The superstitions concerning gold might be crucial to the insulation of the financial sector from normal democratic scrutiny.
Economics is of fundamental importance, but schoolchildren are not taught economics, and even most college students do not study it. Those who do usually receive the finance-biased, fanciful version which leads to support for the status quo: “superstition and mystery are useful to the holders of financial power [p. 62].”
Proficiency in finance is unfortunately akin to proficiency in arms, in that those who possess such expertise tend to have views that are not consonant with the public interest. They are obstacles to progress, not consciously, but because their profession biases their judgment. Broader and improved economics and social science education can help to counter the influence of these biases. Presumably such an educational reform would be welcomed by any friend of democracy, though such friends now appear to be rather scarce.