Gold fetishism has had its day

Harold James is professor of European Studies at Princeton. Brendan Greeley is a PhD student there and a former FT Alphaville writer. Here they look to history to explain Russia’s gold fetishism, and to the nature of money to explain why that fetish will fail to deliver on its promise.

Putin’s war on Ukraine rested on two premises: that a massive show of force would demoralise Kyiv; and that Russia’s $630bn in financial reserves would deter anyone who might question the value of the rouble. But both premises evaporated, because they depended on decisions that were beyond Putin’s control: whether Ukrainians would flee before a column of tanks, and whether the world would continue to grant Russia the privilege of money. Never has money appeared more political.

Like Macbeth, Putin thought that his castle’s strength would laugh a siege to scorn. But money is not like a castle in one important way: it only works when everyone else agrees that you can use it. There was nothing intrinsic about the value of Russia’s reserves, even the $142bn in gold held in Russia itself. They only had value when they were still tied into the global financial system.

Gold has long been fetishised in Russia and elsewhere. But the fetish of gold — Keynes’ “barbarous relic” — is the last gasp of a view that money has an intrinsic value in itself, constituted just by the fact of its existence.

At the end of the 19th century, successive tsarist finance ministers imposed immense hardship on the Russian people to accumulate reserves, eventually taking Russia on to the gold standard. Gold was supposed to lend credibility, and international stature. After 1917, the Bolsheviks called their new currency the chervonets, using the old word for the gold coins that had circulated in Imperial Russia as part of an effort to build linguistic confidence in the new regime. Stalin regarded Russia’s gold as his greatest asset, and one of the principal reasons he refused to take the Soviet Union into IMF membership was that it would have required disclosure of statistical information on Russia’s gold reserves and gold production (then largely achieved by the use of gulag labour). 

In the 1990s, Russian nationalists, including many — such as Alexander Dugin — who would exercise an influence on Vladimir Putin, took up the gold theme in a big way. Gold offered a way of resisting the world of the US dollar and international finance; it stood for real value; it carried the historic connotations from the golden religious icons of the Orthodox faith. But if gold cannot be moved in order to be traded, it too is useless. If it is stuck in the vaults of the Bank of Russia, it might as well not exist.

The very names of Ukraine and Russia’s currencies tell another, older history: one not of impregnable strength, but of constant trade. The word for Ukraine’s currency — the hryvnia — is derived from the name of a standardised six-sided ingot of silver. Medieval trade routes moved the ingots from mines in central Europe through the Baltic for wax and furs, then down to the Black Sea for luxuries, and ultimately to what is now China. A rouble, then, was simply a smaller piece of silver along these trade routes. Think of hryvnia and roubles as ingots and shards, inseparable from their role in global trade.

There was nothing mystical about the silver. It was used for decoration, but that doesn’t mean it had what we’d today call an intrinsic value. It was useful because of mining law in Bohemia, because of hundreds of years of informal custom among Baltic traders, because of decisions about money made in Ming China. Silver only had value only because of a series of agreements that moved it from one place to another.

The rouble now, instead of preserving a secure regime, offers a path to opposition. In past conflicts the ability to sell government debt was always regarded as a critical vote of financial confidence, and central banks manipulated interest rates in order to get citizens, whether patriotic or not, to buy national securities. It is clear that Putin has failed that critical vote of confidence. Meanwhile, Ukraine has been able to raise $277mn through a sale of bonds that pay 11 per cent and, more important, are denominated in hryvnia. In the midst of an active, horrific, confusing war, investors are making a political, moral decision with monetary consequences. The greater the international solidarity for Ukraine, the more attractive the bonds will be to investors across the world.

For protesters, it’s dangerous to take to the streets in Russia. The oligarchs don’t even dare voice any open dissent, as the remarkable scene of acquiescence in the Kremlin’s grand Hall of St Catherine demonstrated. But, like the Russians who abandoned the front during the first world war, citizens can still vote with their feet, and move out of the rouble. The lines in Moscow to get dollars — or roubles, before they collapse further — are their own form of protest.

There is now also an intriguing new possibility of how money as a voting mechanism works. Electronic private currencies offer a way of expressing dissent, of rendering a financial vote of confidence. The dramatic surge in the bitcoin price since the imposition of Western financial sanctions — up 15 per cent against the dollar so far this week — is an indication of the movement out of Russian funds and assets, the dramatic flight of capital from a regime that has lost credibility.

People often mistakenly see money as an asset — that’s the old fetishism. But money represents a value, one that needs to be earned. What ultimately makes a currency secure is credibility: the confidence of others. That will depend on whether a government observes laws and conventions. Money isn’t a shared illusion. It is rather a series of agreements and customs among and within countries. Violating some of those agreements can shatter the rest, destroying the privilege of money. A massive violation of norms can produce a massive loss of value. And a fortress of reserves offers no protection.