The Power of Gold: The History of an Obsession
Page 27
The South African story has a different flavor. Yes, South Africa has its counterpart of James Marshall or Edward Hargraves in the person of George Harrison, who happened upon an outcropping of gold in 1886 while digging up stone to build a house for a widowed neighbor not far from the city ofJohannesburg. But South African gold does not appear in nuggets and little of it shows up in surface outcroppings. Instead, the gold lies embedded in an imposing body of ore in what are called reefs that average only about one foot thick and lie as deep as one mile underground. Depth is by no means the least of the miner's problem: the ore is so low-grade that a ton of it contains no more than an ounce of pure gold, which does not willingly separate itself from the raw rock.
Despite the rush that at its peak brought as many as two thousand immigrants a week to South Africa, gold mining there required so much capital that it was big business almost from the very start, with the diamond men from Kimberly leading the way.2' Even so, like the Klondike, the boom in South Africa seemed to be coming to an end within three years of Hamson's discovery at Widow Oosthuizen's farm: the high hopes lay buried in the hideous heaps of slag that piled up like grotesque mountains from which just a trickle of gold-and an equally pitiful volume of profits-had been dislodged. Despite repeated efforts with different kinds of chemical processes to extract more gold from the ore, the tons of goldbearing rock just continued to accumulate, refusing to part with their precious contents in sufficient quantity to make the business profitable.
As the ore brought to the surface of the earth appeared thinner and thinner, all the earlier excitement yielded to pessimism. The stocks of the mining companies crashed, some falling 95 percent from their previous values. One observer predicted, "Grass will grow in the streets of Johannesburg within a year."26 That was another famous flat-out prediction that turned out to be wrong almost as soon as the words were uttered. As often happens with people who yield to panic, selling goldmining shares at that moment would turn out to be a colossal error.
In late 1889, Allan James arrived on the scene, representing a Scottish corporation called the African Gold Extracting Company. James announced that his company had developed a process called cyanidation that would solve all of South Africa's problems. Although scientists in Britain, the United States, and New Zealand had experimented with cyanide as far back as the 1840s, without clear success, the process that James offered was one that worked. The cyanide was stirred and decanted after a few hours. These steps tended to separate the gold from the ores, and then zinc was applied to precipitate the gold.27
A pilot plant was erected in May 1890 that performed all the miracles that James had promised. The process made possible the profitable production of gold from newly mined ore, but that was not all: the huge piles of slag could now be attacked and profitably turned into lovely yellow metal. The African Gold Extracting Company soon negotiated a royalty with the mining firms that was the equivalent of $1.36 per ounce of pure gold, to be earned on every ton of ore that was treated with the cyanidation process; with the world price of gold at that time around $21 an ounce, this was a handsome royalty indeed.
The cyanidation process had been developed by John Stewart MacArthur, a chemist from Glasgow, who had teamed up with an unlikely pair of physicians with intense curiosity in such matters, Robert and William Forrest. MacArthur described their efforts "in a glory-hole under the consulting rooms of the Forrests.... We did most of our work between 8 PM and 2 AM when the Forrests had finished their day's work.... It was usual to have pies and pots of tea sent in from the nearest restaurant.... When we were more than usually sleepy, Dr. Robert brought out a bottle of a weird mixture labeled `kid-reviver' and gave us a dose all around to keep awake. 1128
The cyanidation process was an immediate and smashing success. The sophistication of the MacArthur-Forrest achievements turned South African gold production into one of the high-tech industries of the late nineteenth century.29 Cecil Rhodes's consulting engineer was on the right track in 1890 when he predicted that, thanks to cyanidation, the value of the annual gold output in South Africa would exceed k20 million before the turn of the century, at a time when the total world output of gold was not much more than that.30 Gold production rose from less than a ton in 1886, when the first discovery was made at Widow Oosthuizen's farm, to fourteen tons in 1889 and then to nearly 120 tons in 1898 before the outbreak of the Boer War. The 120 tons had a market value in 1889 of about L16 million.31
After four years of paying those fat royalties to MacArthur and his associates, the gold-mining companies came to the conclusion that the African Gold Recovery Company (as it subsequently came to be known) was getting too much of a good thing. The Chamber of Mines entered into negotiations to reduce the royalty rate, but MacArthur and his associates stood fast. Their greed would do them in. After four months, the Chamber gave up on negotiating and brought suit in the High Court to contest the validity of the MacArthur patents. Their argument claimed that the patentees were not the true inventors, that the process was not new when it was patented, that the final specification was faulty, and that others had used the process in South Africa before MacArthur's group had done so.32
The result was an extraordinarily protracted and expensive lawsuit. Evidence was taken from mining experts in the United States, Canada, Australia, Hungary, Korea, Japan, South America, India, and Russia. The president of the Royal Society in England and a covey of physicists and chemists in scores of universities either testified or provided affidavits. There were two years of preparation before the hearings began, and the judges did not render their verdict until November 1896, nine months after the hearings had started. The extended arguments were highly technical-fascinating perhaps to chemists but drudgery for lay readers. The decision of the judges (two in favor and one against) ran to seventy pages.
The bottom line was loud and clear: "It was found on the facts by the majority of the Court that the processes above mentioned were not novel and had been anticipated, and consequently the Court declared the said patents void.... There is nothing novel in the weakening or diluting of a well-known solvent or re-agent for the purpose of winning gold from quartz."33
Despite this judgment, MacArthur's cyanidation process has been associated with South African gold mining ever since its introduction, with only minor modifications from the original patents. In 1988, almost one hundred years after Allan James arrived on the scene with news of the cyanidatioii process, C. E. Fivaz, a metallurgical consultant to the Chamber of Mines, made the following comment on the subject in the course of his presidential address to the South African Institute of Mining and Metallurgy:
Had it not been for the invention of the MacArthur-Forrest cyanidation process, there is every likelihood that South Africa's economic development would have died before it even had a real chance to begin its true growth. I rank this invention ... along with the great ones in the mining field such as the development of explosives and the reciprocating rock drill.... [It] was the most significant technological development in the extractive-metallurgical industry during the past century.3"
So MacArthur should have ended up a wealthy and famous man. Such was not to be the case. MacArthur followed Johann Sutter into oblivion and poverty. He died a poor man in 1920. Sutter was ruined because he had too little greed at the sight of gold; MacArthur was ruined because he had too much.
In the autumn of 1857, an alarming series of articles appeared in the Parisian Revue des Mondes on the inevitable inflationary consequences of the burgeoning supplies of gold from the gold rushes in Russia, California, and Australia. The author, Michel Chevalier, was a man of some note, strong opinions, and bold ideas. He was the only professor of economics in France in his lifetime, economic advisor to Napoleon III, and author of Letters from North America, a lengthy description of his travels in the United States. Chevalier had such passionate feelings about the rights of women-that they had to be freed from the laws of fidelity in marriage if they were to achieve equality with menth
at he spent a year in jail in 1832 for "outrage to morals." At various times, he advocated a trans-Andean railroad, a trans-Siberian railroad, and a tunnel under the English Channel.3s
Chevalier also issued the warnings from his article in pamphlet form, twice the length of the newspaper series, after which his work was translated and published in London in 1859 under the imposing title of On the Probable Fall in the Value of Gold: The Commercial and Social Consequences Which May Ensue, and the Measures Which It Invites. The "probable fall in the value of gold" includes the possibility that the glut of new gold supplies would force down the price of gold relative to silver, but the outcome that most concerns Chevalier is a loss in gold's real value-namely, inflation, or an increase in the price of everything except gold.
Chevalier writes with great flair, which makes his book fun to read, but his work is above all a statistical tour de force. He is in command of a dazzling accumulation of facts about gold supplies, gold production, the banking system, the uses of gold in finance as well as in "the habits of luxury," and even crude estimates of what modern economists refer to as nominal gross domestic product, or a measure of the monetary value of a nation's total output of goods and services.
In the late 1850s, at the time Chevalier was writing his book, wholesale prices were indeed about 35 percent above the levels prevailing before the discoveries in California and Australia. The end of the decade of the 1840s, however, marked the final stage of a long decline in prices that had set in after the conclusion of the wars against Napoleon. Prices in 1857 were not much higher than the average of the preceding twenty years and were 40 percent below the peak of 1813; price performance outside the United States was even more subdued." Chevalier is well aware of these facts and goes to some length to point out the transitory influence of the recent business expansion on the price level. He emphasizes at the outset that "I shall generally reason as if these new gold mines had not yet produced any appreciable effect."37
After a sophisticated analysis of the nature of money, the magnitude of the new supplies of gold relative to the past, and the interaction between the prices of gold and silver, Chevalier concludes that "The only way to prevent a fall in the value of gold, and a consequent rise in the price of commodities, would be the discovery of a new demand, equal in extent to the increased supply [of gold] thrown upon the markets of the Western World." And then he asks: "Is the opening of such an outlet possible or probable%"3 His answer to his question is an unqualified no. He arrives at this conclusion after adding up his estimates of the increase in the demand for gold that might develop because some countries might wish to add to the proportion of metal in their currencies, because of the rising needs for gold currency impelled by the growth of business and population, and because of the necessity to offset the disappearance of gold from monetary circulation due to wear and tear, hoarding, and the "habits of luxury."39
Chevalier is at his most interesting when he reasons that "the multiplication of money which must take place in consequence of the extension of commerce" will be far too small to absorb the great glut of gold pouring into the system.4' ' He defends this position by observing that the financial system "has undergone and is undergoing continually great improvements, almost as great as those of the steam engine"-the key technological innovation of his age.41 Fifty years earlier, he informs us, a steam engine of forty horsepower would have cost (4000, but now, in 1857, as the process of manufacture has substantially reduced the necessary amount of cast or wrought iron without any loss of strength or safety, a steam engine of similar horsepower would cost only 01000. "It is the same with the instrument of exchanges," he asserts. "Formerly, [business transactions] called into requisition a large quantity of metal, gold or silver. Now for the same extent of business, a much smaller quantity suffices. 1142
Just as improved materials have reduced the cost of the steam engine, so "a number of ingenious contrivances" are reducing the amount of metal required for commercial transactions. Most transactions, in fact, are conducted without the intervention "of a single crown-piece.... Letters of credit, bills, cheques, and other instruments of the same kind are multiplied in proportion to the extension of commerce, but the specie required for these transactions experiences hardly any increase."" Even the use of banknotes had grown at a snail's pace: in the ten years from 1846 to 1856, for Great Britain-"the great seat of commerce"the circulation of banknotes increased only from k30,925,123 to ,,C31,001,027 .44
On the financial side, Chevalier reports that at the Clearing House of London, where the banks settle their accounts with one another, "[with] a mass of transactions amounting to 1,500 millions or 2,000 millions sterling annually ... not a shilling is wanted.... All is settled by the transfer of sums from one account to another in the books of the Bank of England."45
Chevalier's arguments in this connection bear a striking resemblance to conditions in the second half of the 1990s. Like the steam engine in the first half of the nineteenth century, the key technological innovation of our own age-the computer-has been continuously and dramatically reduced in price over the years, with improvements rather than deterioration in quality. At the same time, as in Chevalier's era, the breathtaking pace of financial innovations such as credit cards and other substitutes for cash have enabled the volume of business transactions to expand at a rate that has been far faster than growth in the supply of money. Exotic financial instruments such as options, futures, and swaps have revolutionized the entire world of trading financial assets by driving activity to volumes no one could have dreamed of even ten years ago.
Chevalier also explores the question of whether the demand for gold for jewelry and other forms of adornment might expand, now that such generous supplies of the metal have become available. No hope here, either, for the world appears to have changed from the days of Francis I and Henry VIII: "The age is less pompous than it is supposed to be, or rather it does not exhibit its pomp by a display of gold ornaments. "46 In England, the manufacture of articles of jewelry "is an atom in comparison with total production."47 The same is true for France. Taking Europe and "the civilised States of North and South America" together, and figuring everything on the generous side, the highest estimate for jewelry consumption that Chevalier can concoct is 25 tons a year.48
Jewelry is not the only form of adornment that involves gold, however. "Paris gilds itself not a little, and is surprisingly addicted to gold lace."49 This observation leads him to an elaborate set of calculations to demonstrate that the great malleability of gold allows a small amount of the metal to cover a huge area. For example, a ton of gold would suffice to gild an area of about 179 acres or 144,000 salons-"at least twenty times the number which are thus embellished in one year in all those cities where the houses are of a character to require their interiors to be gilded."'" As far as gold lace is concerned, a gold piece of twenty francs contains gold enough to gild a thread that would extend from Calais to Marseilles.
In short, "mankind is not rich enough, nor will it soon be, to pay so dearly for so large a mass [of gold]. To find an outlet, it is absolutely requisite that so vast a production should be accompanied by a great reduction in value."" Chevalier concludes that the only way to dispose of these masses of gold is
by coining them and forcing them into the current of circulation. This current ... receives and carries off all that is thrown into it; but the process of absorption and assimilation is on one condition, namely, that gold diminishes in value, so that in those transactions where heretofore ten pieces of gold had for example sufficed, eleven, twelve, fifteen, or even more, will be required. In a word, if gold is to enter into the circulation in indefinite quantities, it is by being subjected to the rigorous law of a continually increasing depreciation .*-52
The predictions conveyed by Chevalier's elegant, elaborate, and persuasive analysis turned out to be far wide of the mark. The actual sequence of events bore no resemblance to his dour prophecy or even to the long, grinding period of inflation that fo
llowed the sixteenthcentury discoveries of precious metals in Mexico and South America. Prices during the last forty years of the nineteenth century never rose by more than 5 percent above the levels of the late 1850s, and they remained well below those levels from 1875 to the outbreak of World War 1.51 The contrast with the 1500s and 1600s is all the more remarkable because the magnitude of the nineteenth-century discoveries was so much greater than the new supplies that opened up after Columbus first crossed the Atlantic in 1492.
One explanation for the wide difference in economic performance between the 1500s and the 1800s is in the frequency of warfare in the 1500s. Although living standards did improve during the sixteenth century, warfare mercilessly consumed much production and mercenary manpower. The hundred years from the fall of Napoleon to the onset of World War I were also marked by wars, including the American Civil War, the Franco-Prussian War in 1870, and the British expedition to the Crimea in the 1850s, but those struggles, though bloody, were relatively brief, and both the United States and Europe enjoyed peace just about all the rest of the time.
Chevalier grossly underestimated the rate of economic growth over the next fifty years-growth so impressive that it swamped the "vast production" of gold that had provoked him to push a panic button. We cannot sit in judgment of his gaping forecast error, because what happened was so far outside the bounds of what anyone had ever experienced before. If Chevalier's forecast was wrong by such a wide margin, imagine the astonishment of the authors of the Bullion Report of 1810 at how the pace of economic activity would appear to outrun the growth in the stock of gold.
Consider just the decade of the 1870s in the United States as an example-a decade marked by persistently declining prices and a serious depression that began during 1873 and was still felt to some degree in 1879. Thanks in large part to immigration, population rose by 30 percent. The miles of railroad track in operation more than doubled (the golden spike that linked the railroad system from the Atlantic to the Pacific had been driven in place in 1869). In New York State, railroad traffic by the late 1870s was for the first time exceeding traffic on canals and rivers. The number of farms rose by 50 percent and the dollar value per acre rose even as the prices of farm products were dropping-eloquent testimony to how agricultural productivity was cutting production costs. The output of coal, pig iron, and copper more than doubled; lead multiplied sixfold.54 Overall, industrial production grew at an annual rate of better than 5 percent a year from the end of the Civil War to 1900, which meant that output at the end of the century was 5'h times as great as it had been in 1865.