by John Browne
In the middle of the sixth century BC, during the rule of King Croesus, the Lydians discovered a method for separating electrum into almost pure gold and pure silver by heating it with salt. Croesus became the first ruler to issue coins of pure gold and silver, stamping them with the symbols of the Lydian Royal House, the opposing figures of a lion and a bull, representing the opposing forces of life and death.24 These overcame the big drawback of electrum coins which were only accepted locally; the pure gold and silver coins, struck with the royal stamp, became accepted internationally and that was important for Sardis. Situated between the Aegean Sea and the River Euphrates, it was perfectly placed to take advantage of the growing international east to west trade routes. Croesus’s coins improved the efficiency and reliability of the growing number of international transactions and his coins soon spread around Asia Minor. Gold was no longer purely a store of wealth for the rulers, but it had been placed into the hands of merchants. As international trade grew, so did the amount of gold and silver changing hands.
As for Lydia, its wealth was frittered away on luxury goods and on Croesus’s ever more ambitious wars. In 546 BC Croesus attacked Cyrus the Great’s Persian Empire, but this was a step too far.25 Within a year he was defeated, but his legacy lived on as his coinage was used by the Persians as they pushed westward. Croesus’s invention had turned gold and silver coins into standards, the use of which would, in time, spread across the entire world.
Symbols of civilisation
In my library I have a book of very large engravings made by Giovanni Battista Brustolon based on paintings by Canaletto. One of these images shows crowds thronging on all sides of St Mark’s Square, beaten back by men with sticks and dogs. At the centre sits the Doge of Venice, on his pozzetto, a type of sedan chair. He has just been inaugurated inside St Mark’s Basilica and that forms the backdrop for the scene. And as he is carried through the square, the Doge throws hundreds of gold and silver coins into the crowd, resulting in a scene of chaos. Here, just as in the depths of the South American jungle, men and women scrambled for gold.
That scene, drawn in the eighteenth century, was of a city that, six hundred years earlier, had become the new trading hub of Eurasia. In Venice, as in Sardis, it was gold currency that underpinned the prosperity of the city. In the twelfth and thirteenth centuries, east/west trade increased as the economy of Western Europe grew. Silk, spices and other luxurious items were brought into the trading centres of Genoa, Florence and Venice where, because of their rarity, they fetched high prices. So much gold flooded into Florence that by 1252 there was enough to start minting a new gold coin, the florin. In 1284, during the administration of Doge Giovanni Dandolo, Venice followed and minted its first gold ducat with the same weight and finesse as the florin.26 The gold ducats soon became the coins that defined value and took that role away from the silver grossi which were also minted in the city. Venice’s formidable fleet of ships, used for both trade and war, ensured the spread of the ducat throughout Europe.
The ducat became a European standard, understood and accepted everywhere, and an advertisement of the strength and power of Venice. A decree from the Venetian Senate in 1472 asserted that ‘the moneys of our dominions are the sinews, nay even the soul, of this Republic’.27 The Zecca, the mint where all Venetian coins were cast, was at the city’s centre physically and politically. Sitting on the waterfront, the three-storey building stretched along St Mark’s Basin with entrances facing towards the doge’s palace. Each doge took great pride in the Zecca and its prodigious output of ducats, on which their image was struck. Here for over five hundred years, until the end of the Republic in 1797, the Venetian ducat was minted, retaining the same weight and purity as it had always done.
However, circulating among the fine gold ducats were forgeries and debased coins whose edges had been clipped. Clippers would remove small amounts of metal from the edge of coins, then melt the clippings down and sell the metal back to the mint. Counterfeiters would simply strike imitation coins made of a different, lower valued, alloy. Clipping and forgery began to undermine trust in the Venetian currency.28 It became so prevalent that the Council of Forty, the supreme court of Venice, declared clipping a sin, abominable to God. Those men caught would be fined, have their right hand amputated and be blinded in both eyes. Women faced life imprisonment.29
Venice was not the only place to have this problem. In Elizabethan England, coin clippers could be hanged or burnt alive, but these punishments did little to deter people. By 1695, in the reign of the Stuarts, counterfeit money accounted for around a tenth of all coins in circulation in England. It was mere chance whether what was called a shilling was really ten pence, sixpence, or a groat,’ wrote Lord Macaulay, the Victorian historian.30 The following year the Chancellor of the Exchequer appointed Isaac Newton to be the Warden of the Mint. Newton is best known for his falling apples and the laws of motion but from his time at the Mint he left behind a more tangible legacy: modern coins. The position was meant to be a sinecure, but Newton threw himself into the job with immense enthusiasm. As Warden, one of Newton’s roles was to enforce the law on crimes committed against the national currency. He became both a detective and a law-enforcement official, applying his scientific genius to the pursuit of London’s criminal minds. In an effort to foil the counterfeiters, Newton recommended that all England’s currency be replaced. Many older coins in circulation were worn down and thus easy to imitate. However, the Mint had developed a sophisticated new technology for inscribing the edges of gold coins with the words Decus et tutamen, meaning an ‘ornament and safeguard’. This inscription can still be found on the edges of British pound coins.31 No seventeenth-century counterfeiters had the equipment to do this and so the Bank of England wanted to replace all the old coins with these newly protected ones. But Newton had an even more important reason for making and circulating new coins. For some time silver had been disappearing from England. Since lower denomination silver coins were needed to pay for everyday transactions, their disappearance was harming domestic business. Newton set about applying his great mind to this troubling economic problem.
A value standard
Britain’s coinage system was suffering from a phenomenon called Gresham’s law: simply that bad money drives out the good money. The relative value of an ounce of gold to an ounce of silver was fixed by law at a level that made silver less valuable domestically than it was abroad. People could net a profit by melting silver coinage down and then selling it at a higher price on the international market. In this way silver, the ‘good’ money, was being driven out of the country. Lord Macaulay wrote: ‘Great masses were melted down; great masses exported; great masses hoarded; but scarcely one new piece was to be found in the till of a shop.’32
Newton understood that mere laws would not be enough to stop the smuggling of silver bullion abroad. He had seen how counterfeiters and clippers risked death for a quick profit. Rather, he recommended the obvious: that the exchange rate between gold and silver be set closer to that prevailing abroad, prohibiting anyone from paying or receiving gold guinea coins at a value other than twenty-one silver shillings. But the adjustment was not quite enough and silver continued to leave the country. Gold coins soon dominated and Great Britain found herself using a de facto gold standard, in which the standard monetary unit is defined by a fixed amount of gold. Newton’s miscalculation had raised gold to an exalted position; just over a century later, in 1816, the Bank of England introduced the British gold sovereign.
Like the Venetian ducat before it, the gold sovereign was the symbol of the world’s most powerful trading nation and became accepted globally as the safest currency. While living in Iran in the 1950s I remember travelling with my father to a remote village to buy a Persian carpet. After bartering with the seller, we drove away with three carpets, which are still on the floor of my house today, for the price of three gold sovereigns and an old suit. Even there in the middle of a distant desert, the value of the British sover
eign was known and trusted.
The world’s dominant economy had moved on to a gold standard and other nations soon followed. The gold standard was introduced in Germany in 1872 following the Franco-Prussian War, and in Holland, Austro-Hungary, Russia and Scandinavia soon after. The Coinage Act of 1873 put the US on a de facto gold standard and France joined in 1878. By the early 1900s only China, parts of Latin America and Persia had not followed suit. These moves were made possible by the sudden growth in global gold reserves from new mines in America, South Africa and Australia. In the first six years of the Californian gold rush prospectors produced nearly US $350 million in gold (US $10 billion today). The discovery of this gold was the impetus to search for new mines across the world. Only sixty years after Marshall’s original find, world gold production had increased by one hundred times. Much as the rulers of Lydia and Venice had used a sudden influx of the precious metal to reform their currency system, the great new flows of gold across the globe were used to transform the international monetary system. That system brought many benefits to the nations who were becoming more and more reliant on trade among themselves. This demanded stable currency exchange rates which were achieved by pegging each nation’s currency to a fixed amount of gold. Governments guaranteed that anyone could convert their currency back to gold and so the movement of different currencies between different countries was made possible. The international gold standard provided the security and stability needed for the globalisation of capital and trade. It also ascribed a price to gold that was fixed and immutable.
From 1880 to the start of the First World War, the gold standard flourished. In a period of relative global peace and prosperity, the world’s reverence for gold supported global economic growth. Just as the gold coins of King Croesus and the Venetian ducat were central to the rise of two great Eurasian civilisations, so the gold standard enabled the economy of the entire world to thrive. But this was not without controversy. The US had used both gold and silver as legal tender and that created all the problems that were evident in the UK. After its civil war it went on to a mono-metallic gold standard. This constrained inflation and facilitated international trade but reduced the money supply. Advocates such as the ‘Gold Democrats’ and the mainstream Republicans talked of monetary discipline breeding prosperity while its opponents – the mainstream Democrats and the ‘Silver Republicans’ – wanted the return of silver which would inflate the money, make ‘the struggling masses’ feel more prosperous at the expense of ‘the idle holders of idle capital’,33 and benefit their local silver mining industry. All of this culminated in the great speech in 1896 of William Jennings Bryan who, arguing against monetary discipline, declaimed, ‘you shall not press down on the brow of labour this crown of thorns, you shall not crucify mankind upon a cross of gold’.34 But this great peroration was to no effect. More gold was discovered around the world and the money supply eased.
During the First World War, the gold standard was put under increasing pressure. Huge military expenditure unbalanced budgets, resulting in high inflation, with the result that many governments could no longer guarantee the conversion of currency back into gold. In both world wars, many nations took themselves off the gold standard. After the wars, large public spending for reconstruction placed similar pressures on government finances. Many governments did not want to be restrained by the gold standard, instead preferring a monetary system that allowed them to pursue domestic political aims with freedom. British economist John Maynard Keynes was clear that participating in the gold standard limited a democracy’s ability to set its own domestic policies, such as reducing unemployment.
In spite of all of these difficulties, the desire for a gold standard would not go away. The Bretton Woods Agreement was its most successful revival. In the search for stability and unity after the Second World War, the international gold standard was reintroduced in 1944. By agreement, the value of the dollar was pegged to the value of gold. The US was able to do this since its economy was in good shape, having suffered little war damage. But no currency is as enduring as gold. In the 1960s, the previously thriving US economy began to shrink. Large domestic expenditures and the mounting costs of the Vietnam War led to an increasing imbalance of payments. Inflation and unemployment were on the rise and the US’s stock of gold was rapidly shrinking. The US could no longer guarantee convertibility of its currency into gold and the Bretton Woods Agreement became a constraint on the government’s ability to strengthen the economy.
President Nixon had two options: to implement high taxes, high interest rates and extreme budget discipline, or to abolish the dollar’s tie to the value of gold and allow it to float freely in foreign exchange markets. On Friday 13 August 1971, the President went to Camp David in secrecy with his economic advisers, where he made the decision to abolish the gold standard. In the pandemonium that followed, the price of gold kept going up. By 1980 the gold price reached what was then a record high of $859 an ounce, as investors sought refuge from inflation and placed their faith in gold. And just as the price peaked, a lucky find in the Brazilian jungle once again demonstrated the lengths to which humans would go in pursuit of this alluring element.
Timeless allure
In 1980 near the small town of Três Barras in the south of Brazil, a farmer was working the land he had carved out of the surrounding jungle when he noticed a gleaming gold nugget piercing the mud. He sold the nugget at a nearby town and from there the news quickly spread. Soon 10,000 garim-peiros, gold diggers, had appeared on the farm in the hope of finding something themselves. Ramshackle settlements sprang up, much as they did during the Californian gold rush. Workers lived in insanitary and generally inhuman conditions. Crime was commonplace; murder and prostitution were rife. Between 1979 and 1980 gold production in Brazil had increased more than fourfold to 37 tonnes, in large part owing to output from the mine at Três Barras.35
In 1986, when the photojournalist Sebastião Salgado arrived at Três Barras, now called Serra Pelada, it was better organised. The site had been split into small sections, each dug by a small team of workers. The owner of a section paid a miner just twenty cents for each 50-kilogram sack of pay dirt he carried. When gold was struck in a section, each worker had the right to pick one of these sacks. Inside they may find fortune and freedom,’ wrote Salgado. ‘Their lives are a delirious sequence of climbs down into the vast hold and climbs out to the edge of the mine, bearing a sack of earth and the hope of gold.’36 The mine was in rough terrain and that meant that mechanised equipment could not be used. Salgado’s images captured the workers, looking like ants, as they scrambled up ladders against the treacherous mine slopes. His black and white images appear to be from a bygone age, more akin to the Spanish conquistadors’ mines of the sixteenth century than of anything from today. Gold offers the potential to support the development of an economy, but all too often its bounty falls into the hands of a powerful few. At Serra Pelada, a few rich landowners took away the great majority of the mine’s output, leaving thousands of workers destitute when the mine closed in 1992.37
Human use of gold has not changed greatly since the time of the pharaohs, or of the Colombian Muisca, or of Renaissance Venice. In all these different eras gold was both an adornment and a store of wealth, embodying both power and security. In times of prosperity, wealth was on display and coins changed hands; in times of insecurity gold was hoarded. During the growth of the international gold standard in the late nineteenth century, much of the newly mined gold was placed in underground vaults as bullion. In 1930, Keynes reflected on the disappearance of gold: ‘[Gold] no longer passes from hand to hand, and the touch of metal has been taken away from men’s greedy palms. The little household gods, who dwell in purses and stockings and tin boxes, have been swallowed by a single golden image in each country, which lives underground and is not seen. Gold is out of sight, gone back again into the soil. But when gods are no longer seen in yellow panoply walking the earth, we begin to rationalize them; and it is
not long before there is nothing left.’38 Keynes predicted that gold would lose its irrational allure. But recent history says something different. In August 2011, in the aftermath of the financial crisis that began in 2008, gold reached a record nominal high of near $1,900 an ounce, more than double its price only four years previously.
Miners have always gone to extreme lengths to get gold. I first visited the gold and copper mining pit at Bingham Canyon, in Utah, in 1986, when it was owned by BP. Bingham Canyon is 4.4 kilometres across and 1.2 kilometres deep; it is the biggest man-made hole on the face of the Earth, mined with equipment that made me feel like an ant in a land of giants. Copper was, at the time, of so little value that it was the gold that kept this mine going. The Tau Tona gold mine, four kilometres under the surface in South Africa, is the world’s deepest mining operation. Here the pay dirt contains only tiny traces of gold. Each year 500 tonnes of gold are mined in South Africa, requiring 70 million tonnes of earth to be raised and milled in the process. We seem to dig gold out of the ground at great cost, only to put it back under the ground as bullion.