The Power of Gold: The History of an Obsession

by Peter L. Bernstein

  In early Britain, cattle and slaves served as money. Their value was set by law-although the church, eager to discourage slavery, refused to accept slaves in payment of penances.' Pepper was popular in medieval times. In some areas, hoarding cattle to serve as wealth instead of as a food supply is a practice that has continued into modern times; this practice has led to serious ecological degradation in parts of Africa, where the sheep and goat population shrank by over 66 million from 1955 to 1976.2

  That is a rare case. In modern times, nothing useful has ever functioned as money for very long. For example, the cigarettes accepted as currency in Germany in the early days after World War II ultimately went up in smoke. Gold, in contrast, has always been useless for most practical purposes that call for metal, because it is so soft. With only 125,000 tons of it in existence, gold is also too scarce to have many uses.

  But gold has clear advantages as money compared to other kinds of useless substances that people have used for the purpose. Unlike cowrie shells, which were the main form of money for centuries in parts of Asia, gold is remarkably durable and does not easily fragment. Every single piece of gold, no matter how small or how large, is instantly recognizable everywhere as a receptacle of high value. Furthermore, every piece of gold is valued only by its weight and purity, attributes that are inconveniently applied to cattle.

  Seen from the perspective of uselessness, the electronic blips on computer screens that comprise most of the money in the modern world are the best form of money-we have no other use for them, they are readily recognizable as money, they weigh a lot less than gold or even paper, they are easily transferable, they can be broken down into any amount we choose from a penny to trillions of dollars and even beyond, they are as durable as we wish them to be, and they have a kind of magic that commands our respect.

  Yet gold endures as a standard of value. From the Golden Rule to Olympic gold, it has commanded far more respect than any other substance in history.

  But we should hesitate before admiring the sophistication of our contemporary currency while snickering about currencies in societies supposedly more primitive than ours. Consider the monetary system on the small island of Yap in the Caroline Islands, as charmingly described by an American anthropologist named William Henry Furness III, who spent several months on Yap in 1903.*3

  Furness points out, "In a land where food and drink and ready-made clothes grow on trees and may be had for the gathering, it is not easy to see how a man can run very deeply in debt for his living expenses." Nevertheless, people like some tangible representation of the labor they have expended that can be accumulated as wealth.

  The medium of exchange, or, more properly, the store of value on Yap at that time was called fei. Fei consisted of thick stone wheels with diameters ranging from saucer-size pieces to twelve-foot millstones. The stones from which these fei had been fashioned came from limestone quarries found on the island of Babelthuap, one of the Pelao Islands about four hundred miles away, and brought to Yap long ago, piece by piece, in canoes and on rafts by some venturesome natives described by Furness "as persuasive as ... the most glib book-agent."

  The smaller and more portable fei served as a medium of exchange and were handed around in payment for fish or pigs. The larger fei, however, received different treatment. The natives punched holes in the center of these fei to facilitate moving them about, but most of these big stones weighed so much that they remained permanently in one spot. On the rare occasions when a major transaction took place, the process went through with a simple acknowledgment of change of ownership while the "coin" continued to sit undisturbed wherever it happened to be.

  In fact, the wealthiest family in the community owned an enormous fei that no one could see or had ever seen. According to this family, their fei lay on the bottom of the sea. Many generations past, while an ancestor was towing it on a raft attached to his canoe, a terrible storm came up. Unlike the protagonist of Ruskin's story, this man had decided that life came first and money second: he cut the raft adrift and watched the huge stone sink below the waves. But he survived to tell the tale and to describe to everyone the extraordinary size and quality of the stone he had lost. Nobody had ever doubted the veracity of his testimony. As Furness described it, "The purchasing power of that stone remains, therefore, as valid as if it were leaning visibly against the side of the owner's house."

  Furness goes on to tell what happened when the German government bought Yap from Spain in 1898 and wanted to transform the island's rocky coral paths into proper roads for modern transports. The natives had no interest in spending their time doing that kind of work, despite repeated commands from the Germans to get busy. The Germans finally decided to levy a fine that would be lifted only when the task was completed. A German official went through the island, marking the most valuable fei with a black cross that confirmed the government's claim to that stone. According to Furness, "This instantly worked like a charm: the people, thus dolefully impoverished, turned to and repaired the highways ... that they are now like park drives." Then the government erased the crosses, and "Presto! the fine was paid, the happy failus resumed possession of their capital stock, and rolled in wealth." In other times and other places, we call this sequence of events taxation and government spending.

  This story reminds me of an experience of my own early in my career in 1940 when I went to work in the research department of the Federal Reserve Bank of New York in the heart of the city's financial district. One day, as a treat, my boss took me down to see the gold stored in the antiseptic vaults of the bank, five stories undergroundsunk below bedrock to discourage thieves from tunneling through the outside walls. We entered the area through a ponderous airtight and watertight cylindrical door of stainless steel that unlocked automatically at nine in the morning and locked automatically at five in the afternoon. Just inside was a lunchbox, replenished daily with fresh sandwiches, to provide for any hapless member of the staff who got stuck inside when the automatic locks slammed shut at the end of the day. A little further on, there was a scale for weighing the gold, a scale so sensitive that a pea would send it rocking. With gold, even dust matters.

  The gold was stored in oversized closets, about ten feet wide, ten feet high, and eighteen feet deep. The closets were filled to the ceiling with towering piles of gold bricks, each brick the size of three large candy bars. The bricks weighed about thirty pounds apiece-four hundred troy ounces-and were worth $14,000 in those days, when gold was officially priced at $35 an ounce. At those prices, $2 billion was stacked up there, a sum of money that was sufficient to buy four days' worth of the total production of goods and services in the United States at that time but was crowded into just one small space five stories below the busy New York City streets. Seeing over one hundred thousand gold bars, stacked to the ceiling and ablaze under the electric lights, is an unforgettable and chilling sight.

  That gold did not belong to the United States. It belonged to France, England, and Switzerland, and to many other countries as well. Those countries had for a long time stored their official gold holdings at the New York Federal Reserve for both safekeeping and convenience. Each bar consigned in this manner was impressed with its owner's seal or a similar mark for identification. This process was known as earmarking gold, an expression that may date back to a method of indicating ownership of domesticated beasts. Earmarking enabled each nation to avoid all the care and expense of moving gold cross-country or across the seas when one country had cause to transfer gold to another. For example, if England lost gold to France, a guard at the Federal Reserve had merely to bring a dolly to England's closet, trundle the gold to the French closet, change the earmark, and note the change on the bookkeeping records.

  These movements of just a few feet from one closet to another often reflected a major change in wealth between countries, with broad ramifications on economic well-being. Yet the citizens of each country never saw the gold to which their government held a claim.* If the gold had sunk
into the Hudson River but the bookkeeping had progressed just the same, the economic and financial consequences to each nation would have been just as far-reaching as when the gold was shifted from one closet to another.

  This procedure bears a striking resemblance to what went on at the island of Yap, with its transfers of ownership of assets that never moved and with the agitated economic activity that resulted when the Germans marked a black cross on the fei. As we shall see, the resemblance between so-called primitive and so-called modern uses of money did not stop at the shores of Yap and the cellars of the Federal Reserve.

  The fei of Yap were stores of wealth. Stores of wealth sit. Money moves. It travels from one pocket to another. A store of wealth is mass; money is measurement of wealth.

  Gold's durability, density, and glow made it a natural choice as a store of wealth long before people thought about using it as money. Like everything that has served as a store of wealth, gold in ancient times was a passion, a blatant expression of power, a means to provoke envy among enemies or people of lower status, or a vehicle for currying favor-as when the queen of Sheba showered gold on King Solomon.

  Gold deployed as money becomes something different. People who go out to spend or lend money have to be cool-headed, calculating, precise, strategic in their vision. Before gold could be used as money instead of as a store of wealth, people had to become sufficiently productive to have something to trade, travel had to become more routine, and measurement had to be defined for the purpose.

  In short, money comes into being when people are doing business. Not much business was transacted at Yap, where economic life was communal rather than commercial. We need money when we want to hire someone or because we want to offer the money to someone else in exchange for something we do not own. We use money when we want something today rather than tomorrow. Then we borrow from someone willing to wait until later to spend their money. Money moves from buyer to seller, from lender to borrower, and from borrower to lender. It seldom sits still very long and someone else is always involved.

  When gold was only a store of wealth, payments from one party to another were infrequent. The process was cumbersome and timeconsuming. Like cattle and the stones of Yap, no two gold bars or rings in ancient times were ever precisely the same size and fineness. As a result, every transaction involved testing for purity and putting the gold on a scale to determine its exact weight.

  Coins were an ingenious innovation designed to get around the tedious business of weighing and checking purity, but they did not come upon the scene until around 700 BC, a good two thousand years or more after gold was first launched on its monetary career. Although coins enabled people to skip the measurement process and get right down to business, coins could serve this purpose only if they were genuine-they had to be worth precisely what their inscriptions represented them to be worth for this purpose.

  Even at the very beginning, therefore, a widely accepted method for gauging the purity of gold and determining its weight was essential before gold could be used as money. Gold has acquired its own measuring system for these purposes, although versions of this system are now used on other precious metals and the most valuable jewels.

  We define the purity of a piece of gold in terms of its carats. For example, 24-carat gold is 100 percent pure. Carat-the word derives from the Greek word keration, qirat in Arabic, and carato in Italian-was originally a measure of weight rather than purity, however, and for a delightful reason. Carats are the fruit of the leguminous carob tree, every single pod of which weighs one-fifth of a gram.

  Today the carat has been replaced by the grain as the conventional unit of weight. Grains of barley or wheat in the middle of the ear have the same remarkable attributes as the carat-a standard weight regardless of the size of the ear. The troy ounce, which comes from the French town of Troyes where the measure was first put into use, weighs 480 grains, and twelve troy ounces equal one pound, which is the same as one sixteen ounce pound avoirdupois. Thus, troy ounces are heavier than the ounces we are used to employing. The modern convention is to express the weight of gold in grains, but the price is expressed in troy ounces.

  The Egyptians were casting gold bars as money as early as 4000 BC, each bar stamped with the name of the pharaoh Menes. The Egyptians even had a defined ratio between gold and silver. Throughout most of history, silver has been valued at only 5 percent to 8 percent of gold's value-ratios of 12 to 20 parts of silver to 1 part of gold-but the Egyptians set silver equal to 10 percent as much as gold because they had no indigenous silver supply.4 It is also possible that the arithmetic was easier at that ratio, but we have no evidence of that. In any case, this step was the beginning of a complex, incestuous, and occasionally violent cohabitation of gold with silver in the money stock, a battle that haunts most of the history of gold as money.

  The awkward process of weighing gold and checking its purity in every transaction sounds like more of a nuisance than it was in reality. These ancient civilizations bore a greater resemblance to the island of Yap than to an industrialized society like ours. When most property belonged to the monarch, when economic activity was primarily agricultural, and when transportation was so difficult that most communities were self-sufficient, long-range trade and commercial transactions were either rare or of minor importance.

  As the need for money grows, it rapidly inspires innovation to make it function more efficiently and conveniently. The Assyrians and Babylonians were more active traders than the Egyptians, and they developed more elaborate and uniform gold bars. They stamped lions on the heavier bars, about thirty pounds in weight, and put ducks on the smaller bars that weighed about half as much. The lions and the ducks were a help in signifying value, but until about 600 BC people still wanted to weigh each piece of gold rather than accept the stamped indications at face value. The Mesopotamian peoples also broke their gold monies into smaller denominations known as talents, minas, and shekels; these denominations soon became common throughout Asia Minor and the Greek cities and settlements throughout the Mediterranean basin. The shekel has survived to this day in Israel.

  The process of weighing the precious metals in each transaction was indeed a nuisance for everyone concerned, but these ancient arrangements had one great advantage that would vanish once coinage arrived upon the scene. When money was just pieces of metal of varying weights, it had no nationality. Even the Egyptian bars traded on the basis of their weights, not because they carried a pharaoh's name. In Chapter 38 of Genesis we read that Joseph's brothers sold him to total strangers from another land for thirty shekels of silver, without any concerns about rates of exchange or acceptability of the silver in the foreign country. Thus, while our ancient forebears functioned with the one form of money that was acceptable everywhere, modern expertshaving experienced the original sin of national monies-dream of a supranational currency but have no idea how to implement it.*

  The prosaic sequence of events that led from crude gold bars to a full-fledged system of coinage developed from a romantic and dramatic sequence of events that took place in the eastern part of Asia Minor, now Turkey. This story, which is admittedly part legend, begins in Phrygia, a kingdom whose capital city by that name was located on the banks of a small mountain torrent called the Pactolus. The first king of Phrygia, about 750 BC, was Gordius, a poor man with nothing to his name but a pair of oxen. Gordius was succeeded by his son Midas, thereby initiating a curious tradition for the Phrygian dynasty, who named themselves alternately Gordius and Midas.

  This first King Midas was poor like his father, but we are told that he was a good man who wanted to be generous to others despite his poverty. One stranger whom Midas invited into his home turned out to be the foster father of Bacchus. Bacchus was so impressed with Midas's hospitality to his foster father that he granted the king any wish of his own choosing.

  That irresistible offer was what got poor Midas into trouble. Midas's wish to have everything he touched turn to gold is usually held up as ill
ustrating the dire consequences that stem from being overly greedy. Money isn't everything, as the saying goes. We should hesitate, however, before assuming that money was an obsession with Midas. If, according to the story, Midas inherited from his father Gordius nothing more than two oxen, he must have been a poor man, especially for a king. If he was a good man, why then should we assume that he was greedy? Perhaps his wish simply reflected a desperate desire to find a shortcut out of his dire poverty, a choice made without regard to the consequences.

  Midas discovered his error in short order. When his food turned to gold as he tried to eat it, and even his beloved daughter became a golden statue when he embraced her, Midas begged Bacchus to throw the damned wish into reverse. Bacchus must still have held a high opinion of Midas, for he immediately obliged by instructing Midas to bathe in the Pactolus River. Midas thereby transferred his golden touch to the Pactolus, the legend continues, which is why that river turned out to be such a rich source of gold for the Phrygians and their close neighbors the Lydians. Midas thereby ended up with the best of both possible worlds-the gold in the Pactolus made him rich, but he was once more able to eat and touch his loved ones without turning everything and everybody into solid gold. The actual location of the Pactolus is no longer visible, but geographers believe that it was a stream carrying alluvial gold from the slopes of Mount Tmolus in Anatolia. By the time the Romans took over this area, perhaps half a millennium later, the mountain had been eroded by rushing water and had no more gold to yield.

  Midas did not live happily ever after. The Cimmerian, a powerful nomadic tribe from southern Russia, invaded Phrygia and overthrew Midas, who committed suicide by taking poison to escape the savage hordes at his gates. Midas was not forgotten, however, for his chariot remained tied to a post by a complex knot in the main temple of Gordium for three hundred years. An oracle predicted that whoever could untie the knot would become king of Asia; this was none other than the Gordian knot that young Alexander of Macedon would cut through with his sword in 334 BC, on his way to conquer the lands all the way from Egypt to India.'