THE MODERN MIDAS by Bertrand Russell

THE story of King Midas and the Golden Touch is familiar to all who were brought up on Hawthorne's Tanglewood Tales. This worthy king, being abnormally fond of gold, was granted by a god the privilege that everything he touched turned to gold. At first he was delighted, but when he found that the food he wished to eat became solid metal before he could swallow it, be began to feel worried; and when his daughter became petrified as he kissed her, he was aghast, and begged the god to take his gift away again. From this moment he realized that gold is not the only thing of value.
      This is a simple story, but its moral is one that the world finds very hard to learn. When the Spaniards, in the sixteenth century, acquired the gold of Peru, they thought it desirable to retain it in their own hands, and they put all sorts of obstacles in the way of the export of the precious metals. The consequence was that the gold merely raised prices throughout the Spanish dominions, without making Spain any richer than before in actual goods. It might be a satisfaction to a man's pride to feel that he had twice as much money as before, but if each doubloon only purchased half what it used to purchase, the gain was purely metaphysical, and did not enable him to have more food and drink or a better house or any other tangible advantage. The English and Dutch, being less powerful than the Spaniards, were obliged to content themselves with what is now the Eastern United States, a region that was despised because it contained no gold. But as a source of wealth this region has proved immeasurably more productive than the gold-producing parts of the New World which all nations coveted in the time of Elizabeth.
      Although, as a matter of history, this has become a commonplace, its application to present-day problems seems to be beyond the mental capacity of Governments. The subject of economics has always been viewed in a topsy-turvy way, and this is more true now than at any previous time. What happened at the end of the war, in this respect, is so absurd that it is difficult to believe that the Governments were composed of grown-up men not in lunatic asylums. They wanted to punish Germany, and the time-honoured way of doing this was to impose an indemnity. So they imposed an indemnity. So far, so good. But the amount that they wished Germany to pay was enormously greater than all the gold in Germany, or even in the world. It was therefore mathematically impossible for the Germans to pay except in goods: the Germans had to pay in goods or not at all.
      At this point the Governments suddenly remembered that they had the habit of measuring a nation's prosperity by the excess of exports over imports. When a country exports more than it imports, it is said to have a favourable balance of trade; in the contrary case, the balance is said to be unfavourable. But by imposing upon Germany an indemnity greater than could be paid in gold, they had decreed that in trade with the Allies Germany was to have a favourable balance of trade and the Allies were to have an unfavourable balance. To their horror, they found that they had unintentionally been doing Germany what they considered a benefit by stimulating her export trade. To this general argument, others more specific were added. Germany produces nothing that cannot be produced by the Allies, and the threat of German competition was everywhere resented. The English did not want German coal when their own coalmining industry was depressed. The French did not want German iron and steel manufactures when they were engaged in increasing their own iron and steel production by the help of the newly acquired Lorraine ore. And so on. The Allies, therefore, while remaining determined to punish Germany by making her pay, were equally determined not to let her make the payment in any particular form.
      To this lunatic situation a lunatic solution was found. It was decided to lend Germany whatever Germany had to pay. The Allies said in effect: 'We cannot let you off the indemnity, because it is a just punishment for your wickedness; on the other hand, we cannot let you pay it, because that would ruin our industries; so we will lend you the money and you shall pay us back what we lend. In that way, the principle will be safeguarded without harm to ourselves. As for the harm to you, we hope that that is only postponed.'
      But this solution, obviously could only be temporary. The subscribers to German loans wanted their interest, and there was the same dilemma about paying the interest as there had been about paying the indemnity. The Germans could not pay the interest in gold, and the Allied nations did not wish them to pay in goods. So it became necessary to lend them the money to pay the interest. It is obvious that, sooner or later, people were bound to get tired of this game. When people are tired of lending to a country without getting any return, the country's credit is said to be no longer good. When this happens, people begin to demand the actual payment of what is due to them. But, as we have seen, this was impossible for the Germans. Hence many bankruptcies, first in Germany, then among those to whom bankrupt Germans owed money, then among those to whom those people owed money, and so on. Result, universal depression, misery, starvation, ruin, and the whole train of disasters from which the world has been suffering.
      I do not mean to suggest that German indemnities were the sole cause of our troubles. The debts of the Allies to America contributed, and so, in a lesser degree, did all debts, private and public, where debtor and creditor were separated by a high tariff wall, so that payment in goods was difficult. The German indemnity, while by no means the whole source of the trouble, is, however, one of the clearest instances of the confusion of thought which has made the trouble so difficult to deal with.
      The confusion of thought from which our misfortunes have arisen is the confusion between the standpoint of the consumer and that of the producer, or, more correctly, of the producer under a competitive system. When the indemnities were imposed, the Allies regarded themselves as consumers: they considered that it would be pleasant to have the Germans work for them as temporary slaves and to be able themselves to consume, without labour, what the Germans had produced. Then, after the Treaty of Versailles had been concluded, they suddenly remembered that they were also producers, and that the influx of German goods which they had been demanding would ruin their industries. They were so puzzled that they started scratching their heads, but that did no good, even when they all did it together and called it an International Conference. The plain fact is that the governing classes of the world are too ignorant and stupid to be able to think through such a problem, and too conceited to ask advice of those who might help them.
      To simplify our problem, let us suppose that one of the Allied nations consisted of a single individual, a Robinson Crusoe living on a desert island. The Germans would be obliged, under the Treaty of Versailles, to offer him all the necessaries of life for nothing. But if he behaved as the Powers have behaved, he would say: 'No, do not bring me coal, because it will ruin my woodgathering industry; do not bring me bread, because it will ruin my agriculture and my ingenious though primitive milling apparatus; do not bring me clothes, because I have an infant industry of making clothes out of the skins of beasts. I do not mind if you bring me gold, because that can do me no harm; I will put it in a cave, and make no use of it whatever. But on no account will I accept payment in any form that I could make use of.' If our imaginary Robinson Crusoe said this, we should think that solitude had deprived him of his wits. Yet that is exactly what all the leading nations have said to Germany. When a nation, instead of an individual, is seized with lunacy, it is thought to be displaying remarkable industrial wisdom.
      The only relevant difference between Robinson Crusoe and a whole nation is that Robinson Crusoe organizes his time sensibly and a nation does not. If an individual gets his clothes for nothing, he does not spend his time making clothes. But nations think that they ought to produce everything that they need, except where there is some natural obstacle such as climate. If nations had sense, they would arrange, by international agreement, which nation was to produce what, and would no more attempt to produce everything than individuals do. No individual tries to make his own clothes, his own shoes, his own food, his own house, and so on; he knows quite well that, if he did, he would have to be content with a very low level of comfort. But nations do not yet understand the principle of division of labour. If they did, they could have let Germany pay in certain classes of goods, which they would have ceased to make themselves. The men who would have been thrown out of work could have been taught another trade at the public expense. But this would have required organization of production, which is contrary to business orthodoxy.
      Superstitions about gold are curiously deep-seated, not only in those who profit by them, but even in those to whom they bring misfortune. In the autumn of 1931, when the French forced the English to abandon the gold standard, they imagined that they were doing the English an injury, and the English, for the most part, agreed with them. A sort of shame, a feeling as of national humiliation, swept over England. Yet all the best economists had been urging abandonment of the gold standard, and subsequent experience has proved that they were right. So ignorant are the men in practical control of banking that the British Government had to be compelled by force to do what was best for British interests, and that only French unfriendliness led France to confer this unintended benefit upon England.
      Of all reputedly useful occupations, about the most absurd is gold-mining. Gold is dug out of the earth in South Africa, and is conveyed, with infinite precautions against theft and accident, to London or Paris or New York, where it is again placed underground in the vaults of banks. It might just as well have been left underground in South Africa. There was, possibly, some utility in bank reserves so long as it was held that on occasion they might be used, but as soon as the policy was adopted of never letting them sink below a certain minimum, that amount was rendered as good as non-existent. If I say I will put by £100 against a rainy day, I may be wise. But if I say that, however poor I may become, I will not spend the £100, it ceases to be an effective part of my fortune, and I might just as well have given it away. This is exactly the situation as regards bank reserves if they are not to be spent in any circumstances whatever. It is, of course, merely a relic of barbarism that any part of national credit should still be based upon actual gold. In private transactions within a country, the use of gold has died out. Before the war it was still used for small sums, but people who have grown up since the war hardly know the look of a gold coin. Nevertheless it is still supposed that, by some mysterious hocus-pocus, everybody's financial stability depends upon a hoard of gold in the central bank of his country. During the war, when submarines made it dangerous to transport gold, the fiction was carried still further. Of the gold that was mined in South Africa, some was deemed to be in the United States, some in England, some in France, and so on, but in fact it all stayed in South Africa. Why not carry the fiction a stage farther, and deem that the gold has been mined, while leaving it quietly in the ground?
      The advantage of gold, in theory, is that it affords a safeguard against the dishonesty of Governments. This would be all very well if there were any way of forcing Governments to adhere to gold in a crisis, but in fact they abandon gold whenever it suits them to do so. All the European countries that took part in the late war depreciated their currencies, and in so doing repudiated a part of their debts. Germany and Austria repudiated the whole of their internal debt by inflation. France reduced the franc to a fifth of its former value, thereby repudiating four-fifths of all Government debts that were reckoned in francs. The pound sterling is worth only about three-quarters of its former value in gold. The Russians frankly said that they would not pay their debts, but this was thought wicked: respectable repudiation demands a certain etiquette.
      The fact is that Governments, like other people, pay their debts if it is to their interest to do so, but not otherwise. A purely legal guarantee, such as the gold standard, is useless in times of stress, and unnecessary at other times. A private individual finds it profitable to be honest so long as he is likely to wish to borrow again and to be able to do so, but when he has exhausted his credit he may find it more advantageous to abscond. A Government is in a different position towards its own subjects from that in which it finds itself towards other countries. Its own subjects are at its mercy, and it therefore has no motive for honesty towards them except desire to borrow again. When, as happened in Germany after the war, there is no longer any prospect of internal borrowing, it pays a country to let its currency become worthless, and thus wipe out the whole internal debt. But external debt is another matter. The Russians, when they repudiated their debts to other countries, had to face war against the whole civilized world, combined with a ferocious hostile propaganda. Most nations are not in a position to face this sort of thing, and are therefore cautious as regards external debt. It is this, not the gold standard, that affords what security exists in lending money to Governments. The security is poor, but cannot be made better until there is an international Government.
      The extent to which economic transactions depend upon armed forces is not usually realized. Ownership of wealth is acquired, in part, by means of skill in business, but such skill is only possible within a framework of military or naval prowess. It was by the use of armed force that New York was taken by the Dutch from the Indians, by the English from the Dutch, and by the Americans from the English. When oil was found in the United States, it belonged to American citizens; but when oil is found in some less powerful country, the ownership of it comes, by hook or by crook, to the citizens of some one or other of the Great Powers. The process by which this is effected is usually disguised, but in the background lurks the threat of war, and it is this latent threat which clinches negotiations.
      What applies to oil applies equally to currency and debt. When it is to the interest of a Government to debase its currency or repudiate its debts, it does so. Some nations, it is true, make a great fuss about the moral importance of paying one's debts, but they are creditor nations. In so far as they are listened to by debtor nations, it is because of their strength, not because they are ethically convincing. There is therefore only one way of securing a stable currency, and that is to have, in fact if not in form, a single world Government, possessed of the sole effective armed forces. Such a Government would have an interest in a stable currency, and could decree a currency with a constant purchasing power in terms of the average of commodities. This is the only true stability, and gold does not possess it. Nor will sovereign nations adhere even to gold in times of stress. The argument that gold secures a stable currency is therefore from every point of view fallacious.
      I have been informed repeatedly, by persons who considered themselves hard-headed realists, that men in business normally desire to grow rich. Observation has convinced me that the persons who gave me this assurance, so far from being realists, were sentimental idealists, totally blind to the most patent facts of the world in which they live. If business men really wished to grow rich more ardently than they wish to keep others poor, the world would quickly become a paradise. Banking and currency afford an admirable example. It is obviously to the general interest of the business community as a whole to have a stable currency and security of credit. To secure these two desiderata, it is obviously necessary to have only one central bank in the world, and only one currency, which must be a paper currency so managed as to keep average prices as nearly constant as possible. Such a currency will not need to be based upon a gold reserve, but upon the credit of the world Government of which the one central bank is the financial organ. All this is so obvious that any child can see it. Yet nothing of the sort is advocated by business men. Why? Because of nationalism, that is to say, because they are more anxious to keep foreigners poor than to grow rich themselves.
      Another reason is the psychology of the producer. It seems like a truism that money is only useful because it can be exchanged for goods, and yet there are few people to whom this is true emotionally as well as rationally. In almost every transaction, the seller is more pleased than the buyer. If you buy a pair of shoes, the whole apparatus of salesmanship is brought to bear upon you, and the seller of the shoes feels as if he had won a little victory. You, on the other hand, do not say to yourself: 'How nice to have got rid of those nasty dirty bits of paper, which I could neither eat nor use as clothing, and to have got instead a lovely new pair of shoes.' We regard our buying as unimportant in comparison with our selling. The only exceptions are cases in which the supply is limited. A man who buys an Old Master is more pleased than the man who sells it; but when the Old Master was alive, he was no doubt more pleased to sell pictures than his patrons were to buy them. The ultimate psychological source of our preference for selling over buying is that we prefer power to pleasure. This is not a universal characteristic: there are spendthrifts, who like a short life and a merry one. But it is a characteristic of the energetic, successful individuals who give the tone to a competitive age. When most wealth was inherited, the psychology of the producer was less dominant than it is now. It is the psychology of the producer that makes men more anxious to sell than to buy, and that causes Governments to engage in the laughable attempt to create a world in which every nation sells and no nation buys.
      The psychology of the producer is complicated by a circumstance which distinguishes economic relations from most others. If you produce and sell some commodity, there are two classes of mankind who are specially important to you, namely, your competitors and your customers. Your competitors harm you, and your customers benefit you. Your competitors are obvious and comparatively few, whereas your customers are diffused and for the most part unknown. You tend, therefore, to be more conscious of your competitors than of your customers. This may not be the case within your own group, but it is almost sure to be the case where an alien group is concerned, so that alien groups come to be regarded as having economic interests adverse to our own. The belief in protective tariffs is derived from this source. Foreign nations are regarded rather as competitors in production than as possible customers, so that men are willing to lose foreign markets to avoid foreign competition. There was once a butcher in a small town who was infuriated by the other butchers who took away his custom. In order to ruin them, he converted the whole town to vegetarianism, and was surprised to find that as a result he was ruined too. The folly of this man seems incredible, yet it is no greater than that of all the Powers. All have observed that foreign trade enriches other nations, and all have erected tariffs to destroy foreign trade. All have been astonished to find that they were as much injured as their competitors. Not one has remembered that trade is reciprocal, and that a foreign nation which sells to one's own nation also buys from it either directly or indirectly. The reason that they have not remembered this is that hatred of foreign nations has made them incapable of clear thinking where foreign trade is concerned.
      In Great Britain, the conflict between rich and poor, which has been the basis of party divisions ever since the end of the war, has made most industrialists incapable of understanding questions of currency. Since finance represents wealth, there is a tendency for all the rich to follow the lead of the bankers and financiers. But in fact the interests of bankers have been opposed to the interests of industrialists: deflation suited the bankers, but paralysed British industry. I do not doubt that, if wage-earners had not had votes, British politics since the war would have consisted of a bitter struggle between financiers and industrialists. As things were, however, financiers and industrialists combined against wage-earners, the industrialists supported the financiers, and the country was brought to the verge of ruin. It was saved only by the fact that the financiers were defeated by the French.
      Throughout the world, not only in Great Britain, the interests of finance in recent years have been opposed to the interests of the general public. This state of affairs is not likely to change of itself. A modern community is not likely to be prosperous if its financial affairs are conducted solely with a view to the interests of financiers, and without regard to the effect upon the rest of the population. When this is the case, it is unwise to leave financiers to the unfettered pursuit of their private profit. One might as well run a museum for the profit of the curator, leaving him at liberty to sell the contents whenever he happened to be offered a good price. There are some activities in which the motive of private profit leads, on the whole, to the promotion of the general interest, and others in which this is not so. Finance is now definitely in the latter class, whatever it may have been in the past. The result is an increasing need of governmental interference with finance. It will be necessary to consider finance and industry as forming a single whole, and to aim at maximizing the profits of the whole, not of the financial part separately. Finance is more powerful than industry when both are independent, but the interests of industry more nearly coincide with those of the community than do the interests of finance. This is the reason that the world has been brought to such a pass by the excessive power of finance.
      Wherever the few have acquired power over the many, they have been assisted by some superstition which dominated the many. Ancient Egyptian priests discovered how to predict eclipses, which were still viewed with terror by the populace; in this way they were able to extort gifts and powers which they could not otherwise have obtained. Kings were supposed to be divine beings, and Cromwell was thought guilty of sacrilege when he cut off Charles I's head. In our day, financiers depend upon the superstitious reverence for gold. The ordinary citizen is struck dumb with awe when he is told about gold reserves, note issues, inflation, deflation, reflation, and all the rest of the jargon. He feels that anyone who can converse glibly about such matters must be very wise, and he does not dare to question what he is told. He does not realize what a small part gold really plays in modern transactions, though he would be quite at a loss to explain what its functions are. He feels vaguely that his country is likely to be safer if it contains a great deal of gold, so that he is glad when the gold reserve increases and sorry when it diminishes.
      This condition of unintelligent respect on the part of the general public is exactly what the financier needs in order to remain unfettered by the democracy. He has, of course, many other advantages in dealing with opinion. Being immensely rich, he can endow universities, and secure that the most influential part of academic opinion shall be subservient to him. Being at the head of the plutocracy, he is the natural leader of all those whose political thought is dominated by fear of Communism. Being the possessor of economic power, he can distribute prosperity or ruin to whole nations as he chooses. But I doubt whether any of these weapons would suffice without the aid of superstition. It is a remarkable fact that, in spite of the importance of economics to every man, woman and child, the subject is almost never taught in schools and even in universities is learnt by a minority. Moreover, that minority do not learn the subject as it would be learnt if no political interests were at stake. There are a few institutions which teach it without plutocratic bias, but they are very few; as a rule, the subject is so taught as to glorify the economic status quo. All this, I fancy, is connected with the fact that superstition and mystery are useful to the holders of financial power.
      Finance, like war, suffers from the fact that almost all those who have technical competence also have a bias which is contrary to the interest of the community. When Disarmament Conferences take place, the naval and military experts are the chief obstacle to their success. It is not that these men are dishonest, but that their habitual preoccupations prevent them from seeing questions concerning armaments in their proper perspective. Exactly the same thing applies to finance. Hardly anybody knows about it in detail except those who are engaged in making money out of the present system, who naturally cannot take wholly impartial views. It will be necessary, if this state of affairs is to be remedied, to make the democracies of the world aware of the importance of finance, and to find ways of simplifying the principles of finance so that they can be widely understood. It must be admitted that this is not easy, but I do not believe that it is impossible. One of the impediments to successful democracy in our age is the complexity of the modern world, which makes it increasingly difficult for ordinary men and women to form an intelligent opinion on political questions, or even to decide whose expert judgment deserves the most respect. The cure for this trouble is to improve education, and to find ways of explaining the structure of society which are easier to understand than those at present in vogue. Every believer in effective democracy must be in favour of this reform. But perhaps there are no believers in democracy left except in Siam and the remoter parts of Mongolia.

First uploaded Rae West 11 Sep 2020, my own version scanned from Unwin Books, 1970 edition. I don't think there are errors, but there may be.   First published in Harper's, where the original paper-bound magazine is still purchasable.