“Go into the street, and give one man a lecture on morality, and another a shilling, and see which will respect you most.” Samuel Johnson said that in the 18th century, but the general preference for money over preaching is sufficiently strong and timeless that his wry quip remains pertinent. Most economists take Johnson’s sentiment too seriously. They assume that people always want more shillings and always resist wealth-denying morality. That is a serious error.
For once, investors have got it right. In 2008, their panic turned a financial crisis into a long multinational recession, but they have mostly yawned right through the drama in Nicosia. They hardly twitched at a stream of warnings from investment banks and pundits: bank deposits are no longer sacrosanct; the European Union has been exposed as despotic and incompetent; the Russians are coming; the Russians are going; capital controls will destroy everything; “bail in” (taking losses on loans that cannot be repaid) is the end of the world as we once knew it.
Don’t make promises you can’t keep. Wise parents tell small children that, and wary lovers use that command as a taunt. But in the world of finance, unrealistic promises are the norm, and they are too often broken. Depositors in the banks of Cyprus may be learning that lesson.
Monetary policy these days is complicated, ineffective, and quite possibly immoral. The complexity is inevitable; there is no simple way to ensure that the supply of money and credit is appropriate in a large modern economy. The ineffectiveness is evident: central bankers let that supply grow too fast before the 2008 financial crisis, and have unable to return monetary conditions to normal since then.
“It has been computed by some political arithmetician that if every man and woman would work for four hours each day on something useful, that labour would produce sufficient to procure all the necessaries and comforts of life … and the rest of the 24 hours might be leisure and happiness.”
Institutions need to evolve over time. Institutions must rely on their traditions. These two statements may sound irreconcilable, but institutions – companies, hospitals, government agencies, schools, political systems, churches – can only thrive if they manage both to change and to remain true to their principles. In his surprising resignation, Pope Benedict XVI has given an example of the right balance.