Economics and currency are something every leader, every country, and every person struggles with in one way or another. One may even make decisions and not realize the effects it has. A perfect example is King Midas.
In Greek mythology, King Midas, after being a lovely host, was granted one wish. Like any good host, he politely accepted. He wished that everything he touched would turn to gold. Of course, the Midas Touch turned out to be a curse. Everything he touched, including food, drink and his daughter turned to gold. It’s a great story and if you have any interest in Greek mythology, Ovid will give you the complete version.
However, the common lesson from King Midas tends to be transformed to fit the Judeo-Christian warning against greed. In the end, a quick bath in a magical river cures Midas’ curse, and he’s left with ridiculous amounts of gold. This is excellent for him, but there is an important fact the myth leaves out: Midas must have irreparably debased the currency. One tends not to focus on these things in myths, but the Midas touch would have turned a kingdom with a healthy economy into a Weimar-Germanic-style panic economy.
Here is the problem. In Midas’ kingdom, we can imagine that 1 gold coin would be worth 1 cow. Midas, as a responsible leader probably held about 10% of the currency in reserve, to ensure a stable economy and a princely standard of living. Then, King Midas gets his golden touch and goes about his court touching everything except himself. Now he has statues and pillars and food and even a daughter made entirely of solid gold. King Midas is suddenly a much richer man, and he has just doubled the amount of gold in his kingdom! Twice as much gold in the land!
He hasn’t even realized the inflationary pressure he’s put on the gold! He’s doubled the amount of gold in only a few days. Yet, there are the same number of cows in the kingdom. Actually, old Bessie died, so there’s one less cow in the kingdom. When there’s twice as much gold, but the same (or less cows), now the people who are selling cows, can get more gold because there is so much more gold in the kingdom! There has been such a great economic change, ‘a cowmonger in the court’ has become a common phrase. One can now get 2 gold coins for a cow instead of one, because the ratio of cows to gold in the country has shifted.
This wouldn’t be a problem for cow buyers in the kingdom if everyone had suddenly doubled the amount of money they had. If every person’s gold doubled in a few days, essentially no one would be any richer – but that’s not what happened. All the extra gold went to King Midas, everyone else had the same amount of gold. So now, because King Midas added so much extra currency to the system, the value is inflated and all the other goods (like the cows) are worth more, in comparison to the gold. Yet, now everyone’s gold is worth half. King Midas is happy, because after creating so much wealth for the kingdom, now he has 55% of the gold, and no one else has lost any gold!
The reason I like this side of the fable so much, is because what many governments have been doing to ease their debts they’ve taken out during the recession. It’s called quantitative easing. Of course, no one can turn something to gold with a touch, but governments have the ability to turn paper into money. This Paper-Midas Touch is essentially what ‘quantitative easing’ means. Governments borrow large amounts of money to keep the economy going. Then, they start printing money, because the same thing happens, as happened in Midas’ kingdom. If there is more gold, it’s worth less: if more money is printed, it becomes worth less. By doing this, governments can borrow money in their own currency, then inflate their own currency, so their debts are worth less.
If this sounds like a bit of satyrical magic, it is. It’s a very dangerous game to play, it’s as risky as Midas’ wish, and can have very serious consequences. This is where a more modern leader, Margaret Thatcher, is perfect to introduce.
Controversy, and political leanings aside, one must look objectively at Margaret Thatcher’s economic policy related to this subject. Her objective was to control inflation. For decades, Britain had been borrowing money, and inflating the currency, as a financial policy. Inflation frequently rose over 20%. This means, a loaf of bread would be £1.00 one year, £1.20 the £1.44 the next, and £6.19 after ten years. A typical, low North American inflation rate might see a loaf of bread $1.00 the first year $1.22 – $1.50 ten years later.
Thatcher’s main argument was that this was a ridiculous policy; she argued extremely high inflation was essentially a slap in the face for anyone who saved money. This kind of inflation meant that anyone who saved will be penalized, because the money they save will be devalued in the process. Imagine putting your money in a savings account, and it being worth less when you take it out. Eventually, Thatcher took tight control over the economy and battled to bring inflation down, and succeeded. This is one of her legacies, and one of the crucial successes in modern British economic history.
This still a crucial issue, which still hasn’t been resolved in modern, western democratic industrial economies: What can and should we do to our currencies? The US and UK have been printing money, and quantitatively easing very high debts. It’s been successful, because inflation is at higher rates in both countries (although it’s much higher in the UK, for a variety of economic reasons).
The important thing is to remember King Midas. If someone is creating gold, dollars or pounds, it’s changing the value of every single other ounce of gold, dollar, or pound in existence. When this happens you need to think: where is the new currency going? Who will benefit from the value of the currency changing? What happens as a result of this golden touch?
Unfortunately, this is an area that is impossible to answer perfectly. Yet it’s a realm which affects everyone. One needs to understand the process, and persistently ask informed questions of those making decisions, and doing the printing.