The Power of Gold: The History of an Obsession

by Peter L. Bernstein

  While all of this was going on, the worldwide demand for gold remained vigorous. Gold consumption doubled in the course of the 1990s, and for good reason.30 The price of gold was falling while the price of everything else was rising. As a result, gold was perceived as relatively inexpensive. The quantity of gold consumed in the production of jewelry-by far the most important component of demand-and in the electronics industry at the end of the 1990s was more than 50 percent higher than in 1980 and about a third higher than in 1994.31 Jewelry production alone was one hundred times larger than it had been in 1850, when Chevalier had warned that European demand of 25 tons for jewelry would be "an atom in comparison with total production" in the face of the glut of gold that the California discoveries were about to rain about the world.*

  The Asians, as in the past, continued to absorb large quantities of gold. The Economist reported in January 1999 that "The Indian lust for gold remains unabated.... Gold jewelery [sic] is the only form of wealth that many women can claim as their own."32 At that moment, the total amount of gold in India, estimated at around nine thousand tons, exceeded even the great hoard stowed away in Fort Knox, Kentucky.33

  Meanwhile, in response to the deteriorating economics of the business, mine production and scrap supplies from old gold increased at a much slower rate than demand. With new supply lagging and the basic demand for gold growing, the price of gold should have been expected to rise. Instead, the price fell. Was this surprising outcome due to the shrinking demand for gold as a hedge against inflation, combined with the persistent selling by banks and mining companies? Perhaps, but nothing in economics is that simple. We have no way of knowing whether the demand for jewelry in particular would have increased so much if the price of gold had not fallen so low and made gold jewelry look like a bargain.

  How can we derive meaning from this long story, when its last chapter is such a dramatic break with all that had gone before? How could such a thing happen? Is gold now nothing more than a commodity, a beautiful and symbolic bauble, in a class with diamonds and platinum? Or will gold one day regain its grandeur? The time has come to look at the grand illusion of gold in light of these questions.

  ver the centuries, gold has stirred the passions for power and glory, for beauty, for security, and even for immortality. Gold has been an icon for greed, a vehicle for vanity, and a potent constraint as a monetary standard. No other object has commanded so much veneration over so long a period of time.

  God selected gold for the tabernacle where humans should come to worship. Jason saw the Golden Fleece as the key to establishing his dynasty. For the Egyptian pharaohs, gold would confirm their magnificence even in the Afterlife. Croesus coined his golden staters and bribed the Oracle of Delphi with gold to assure himself of the security of his rule. Crassus thought gold could buy him military glory and ended with molten gold in his throat. The Byzantines clung to gold as an instrument of power and to ward off their many enemies. The Arabs used gold, along with their military zeal, to humble the world with their business skills. The Genoese, Venetians, and Florentines coined gold to articulate their financial power. The survivors of the Black Death festooned themselves with gold to celebrate their survival.

  Columbus thought gold could get people into Heaven. The Spaniards despoiled the New World's gold in a vain attempt to dominate the Old. Asians sponged up gold to protect themselves from the unknown. Isaac Newton, a scientist who spent years at alchemy, thought he understood the golden guinea and grossly underestimated its importance. The English, and then all the Europeans and the Americans, built complex financial systems on the bedrock of gold, expecting it to defend their wealth from the depredations of government and the impatient poor. The Forty-Niners ravaged Johann Sutter's farm in search of the life of kings. John Stewart MacArthur expected cyanidation to bring him great wealth and was foiled by others who were even greedier. Charles de Gaulle saw gold as a weapon to bring his rivals to their knees so that the world could enjoy the order that France would bestow upon it. The gnomes of Switzerland and the speculators in the frenzy of the early 1980s fled to gold for an invincible shield against the irrationality of the state.

  But all of that is history. At the dawn of the new millennium, gold is no longer at the center of the universe. The last vestiges of the golden fetters were discarded by Richard Nixon in 1971. When the g,,iden Humpty-Dumpty fell off that wall, no one had much interest in wanting to put him back together again. Dispossessed from its power over the world of money, gold has been emasculated. Now greed and the lust for power run down different channels. We have relegated gold to its traditional role in jewelry and adornment, although small amounts of gold fly into space and speed the motion of electronic blips. In an even more novel capacity, 22-carat flakes of gold have been sprinkled atop sashimi salads, roast lamb, and other pricey dishes.*

  Has the glorious history of gold come to an end?

  To answer that question, we must look back to the beginning of the story.

  Throughout history, gold has played two roles-adornment and money-that have strengthened and supported each other. Gold con veyed power because of its unquenchable lustre, but it spoke more loudly of power as it acquired increasing importance as money.

  Yet the seeds of gold's ultimate demise as money were sown far back in the story. Hien Tsung's inadvertent innovation of paper money in the ninth century was the first step down this path. Even more effective substitutes for hard money evolved during the Middle Ages from the increasing use of credit money such as bills of exchange, along with the associated development of banking. From the seventeenth century onward, the accelerating growth in trade and production stimulated an urgent expansion in the need for money. Gold in time became a hurdle rather than a doorway to financial transactions.

  The gold standard that emerged, almost by accident, in the nineteenth century explicitly recognized this shift in the function of gold. Gold traveled less frequently from hand to hand. Now most of the monetary gold resided instead in bank vaults as the supreme collateral for the paper monies and bank deposits employed in the burgeoning volume of economic and financial transactions. Gold was enshrined as the absolute standard and as the impregnable barrier-as an unbreakable promise that the politicians would not run riot creating the more abstract forms of money and inflationary wildness that had characterized so many episodes in the past. In 1928, George Bernard Shaw, no conservative, summed up this attitude perfectly in The Intelligent Woman's Guide to Capitalism and Socialism: "You have to choose between trusting to the natural stability of gold and the honesty and intelligence of members of the government. And, with due respect for these gentlemen, I advise you, as long as the capitalist system lasts, to vote for gold."'

  Even that critically important role for gold was doomed almost from the start. The impatience of politicians was by no means the only force that ultimately buried gold. The outcome was predestined by the increasing complexity and magnitude of world financial activity in general and the functions of government in particular. It appeared increasingly irrational to manage a global financial system with a metal whose supplies were arbitrarily determined by nature and whose major sources were in uncomfortable places such as Russia and South Africa. Gold became an anachronism.

  Measured from the 1870s to the moment in 1971 when Richard Nixon cut the last vestigial tie to gold as the barrier and the standard, the gold standard had prevailed no more than half as long as the bezant of the Byzantines. Christopher Columbus, John Locke, David Ricardo, and Montagu Norman would have been astonished to discover that their eternal verities were not so eternal as they thought.

  And yet we cannot be certain that that is the end of the story. In 1875, as we have seen, the distinguished English economist Stanley Jevons warned that "So unaccountable are the prejudices of men on the subject of currency that it is not well to leave anything to discretionary management."2 Yet discretionary management is precisely the system that the world has chosen to replace the constraints of gold. Freed at
long last from the golden fetters, all the countries in the world now function with monetary systems convertible into nothing except from one nation's money into another nation's money, all of which is costlessly produced with the touch of a computer's keyboard. We no longer have money that can be tested with a touchstone to determine whether it is the genuine stuff.

  Many people believe that the dollar is the glue that holds the system together, as gold did in the past. Today, in other words, the U.S. dollar appears to be playing the same role in the international arena that Britain played in the nineteenth century. But after World War II, Britain's gold stock had been long since exhausted, and as the supply of pounds sterling far outran the demand for them, their value sank.

  The dollar is no more metal than sterling was and no different from any other nation's currency. It just happens to be the kingpin of the system at the end of the twentieth century. No kingpin has survived forever, not even gold.

  There is a perception that the dollar has ruled the roost not just because of America's stunning economic power but also because of the extraordinary skill of the money managers at the helm of the American central bank-the Federal Reserve System. An article by Floyd Norris in the New York Times of May 14, 1999, carried a headline that read, "Who Needs Gold When We Have Greenspan?" This headline reflected a widely held view of the era.

  We must recall once again Benjamin Disraeli's observation in 1895: "Our gold standard is not the cause, but the consequence of our com mercial prosperity." In the same way, perhaps the central bankers of all the major countries around the world looked good during the 1980s and 1990s because the basic economic conditions of those years made them look good. There were no major international wars to ignite the fires of inflation. The inflationary impulses that stemmed from the welfare state had been stifled by the shredding of social safety nets and the obsession to compress budget deficits, not just in the United States but in Europe and much of Latin America and Asia as well. The world economy was fiercely competitive, and American corporations were the most triumphantly competitive of all. Discovered resources to produce oil were vastly larger than in the early 1970s. In short, as the twentieth century was coming to an end, no overwhelming force had come along to test the true skills of the central bankers or to rock the dollar from its perch at the zenith.

  Remember what Marco Polo had to say about Kublai Khan's currency? "[Kublai Khan's] mint," he wrote, "is so organized that you might well say that he has mastered the art of alchemy.... The procedure of issue is as formal and authoritative as if they were made of pure gold or silver.... The money is authentic.... Of this money the Khan has such a quantity made that with it he could buy all the treasure of the world." If Marco Polo were around today, he would no doubt comment on the remarkable resemblances between the dollar and the output of Kublai Khan's mint. Yet we have no assurance that the dollar's hegemony is any more permanent than the sometime dominance of Kublai Khan's paper money, Offa's penny, the bezant, the dinar, the ducat, or the pound sterling. In the frantic inflationary fevers of the late 1970s and early 1980s, frightened and even sophisticated people turned to gold from dollars. In the inevitable moment when such turbulence reappears, that history might well repeat itself. Well-developed markets for gold are alive and well.

  As Robert Mundell, the Nobel Laureate in Economics, pointed out in December 1999 as he accepted the Prize, "The main thing we miss today is universal money, a standard of value, the link between the past and the future and the cement linking remote parts of the human race to one another." He went on to remind his audience that gold had filled this role from the time of Augustus to 1914 and that "The absence of gold as an intrinsic part of our monetary system today makes our century, the one that has just passed, unique in several thousand years."3 Mundell overstates his case, but the absence of universal money will continue to plague the world economy for as long as such a shortcoming endures.

  In March 1997, long before he knew he would be honored with the Nobel Prize, Mundell had predicted that "Gold will be part of the international monetary system in the twenty-first century."4 This was a bold and controversial statement, and perhaps an ominous one. Gold may again serve as the ultimate hedge in chaotic conditions. Its return to its traditional role as universal money is unlikely, however, unless the time should come when the dollar, the euro, and the yen have all failed to function as acceptable means of payment across international borders.

  The story of gold has a deeper message, one that has none of the transitory qualities of what we choose to use as money. Seen in this broader sense, the story of gold has no ending.

  The most striking feature of this long history is that gold led most of the protagonists of the drama into the ditch. Over and over again, the characters have been like Ruskin's passenger who drowned while clutching his gold and discovered, all too late, that the gold possessed him instead of the other way around. Midas, Jason, Croesus, the emperors of Byzantium, the survivors of the Black Death, Pizarro and his Emperor Charles V, MacArthur the chemist, Montagu Norman and Benjamin Strong, Charles de Gaulle, and the gold bugs of the 1980s-all were fools for gold, chasing an illusion. None ended up where they had hoped.

  Those who believed that gold was a hedge against the uncertainties of life failed to understand that the pursuit of eternity is not to be satisfied by gold, or by anything else we choose to replace gold-dollars, euros, whatever. Gold as an end in itself is meaningless. Hoarding does not create wealth. Gold and its surrogates make sense only as a means to an end: to beautify, to adorn, to exchange for what we need and really want.

  Perhaps the wisest heroes of our story were the simple natives of Jenne and Timbuktu who silently swapped gold for the precious salt that would keep them alive.

  PROLOGUE

  1. Ruskin, 1862, p. 86.

  2. Crosby, 1997, p. 71, citing Journals and Other Documents on the Life and Voyages of Christopher Columbus, Samuel Eliot Morison, trans. New York: Heritage Press, 1963, p. 383.

  3. Pindar, 1927, p. 613.

  4. See Ruskin, 1982, p. 86.

  5. Jevons, 1875, p. 202.

  6. International Wildlife Magazine, May June 1998.

  7. Marx, 1978, pp. 8-9.

  8. Green, 1993, p. 14.

  9. Herrington et al., p. 28.

  10. Exodus, 25, 11.

  CHAPTER 1 GET GOLD AT ALL HAZARDS

  1. Chamber of Mines of South Africa and Sutherland, 1959, p. 12.

  2. Bartlett, John, 1943. Familiar Quotations, 11th ed., Christopher Morley, ed. Boston: Little, Brown & Co. This line came from Will Rogers's last dispatch to the press, sent from Fairbanks and published on August 15, 1935, the day he died in an airplane crash.

  3. World Gold Council.

  4. Job, 31, 24-25.

  5. Sutherland, 1959, p. 57.

  6. Ibid., p. 57.

  7. Ibid., p. 57.

  8. Marx, 1978, p. 236.

  9. Encyclopedia Britannica On-Line, Egypt: History: The New Kingdom: The 18th Dynasty.

  10. Marx, 1978, pp. 48-53.

  11. Jacob, 1831, p. 55.

  12. [bid., pp. 50-59.

  13. Marx, 1978, p. 44.

  14. Jacob, 1831, p. 56.

  15. Marx, 1978, p. 193.

  16. Green, 1993, pp. 405-407.

  17. Ibid., p. 17.

  18. For the whole story, see Schwab, 1946, pp. 86-102.

  19. Schwab, 1946, p. 87.

  20. Ibid., p. 122.

  CHAPTER 2 MIDAS'S WISH AND THE CREATURES OF PURE CHANCE

  1. Jacob, 1831, p. 313.

  2. Davies, 1995, p. 43.

  3. Furness, 1910, pp. 92-100.

  4. Marx, 1978, p. 44.

  5. Ibid., pp. 138-139.

  6. Herodotus, 1992, pp. 5-35. The Histories were written about 450 Bc to 430 BC.

  7. Tassel, 1998, p. 58. This exciting article is well worth reading in full.

  8. Herodotus, 1992, p. 77.

  9. Burns, 1927, pp. 561 and 140.

  10. Herodotus, 1992
, p. 11.

  11. Ibid., pp. 11-13.

  12. Ibid., p. 35.

  13. Ibid., p. 35.

  14. Marx, 1978, p. 140.

  15. Davies, 1995, p. 62.

  16. See Burns, 1927, pp. 320-321.

  17. Head (no date), pp. 10-13.

  18. Davies, 1995, p. 63, and Burns, 1927, p. 43.

  19. Tassel, 1998, p. 60.

  20. Head (no date), pp. 18-19.

  21. Burns, 1927, pp. 321-322.

  22. Head (no date), p. 20.

  23. Herodotus, 1992, pp. 17-18.

  24. Ibid., pp. 18-19.

  25. Ibid., p. 33.

  26. Galbraith, 1954, p. 2.

  CHAPTER 3 DARIUS'S BATHTUB AND THE CACKLING OF THE GEESE

  1. Burns, 1927, p. 348.

  2. Marx, 1978, p. 147.

  3. Ibid., p. 163.

  4. The material about Philip and Alexander is from Davies, 1995, pp. 78-86.

  5. Ibid., p. 87.

  6. Sutherland, 1959, pp. 84-88.

  7. Gibbon, 1804, Vol. 1, p. 8.

  8. Ibid., footnote 35.

  9. Sutherland, 1959, p. 90.

  10. Marx, 1978, p. 197.

  11. Jacob, 1831, p. 25.

  12. Encyclopedia Britannica On-Line: Carrhae, Battle of.

  13. World Gold Council.

  14. Kemmerer, 1944, p. 9.

  15. Davies, 1995, p. 97.

  16. Gibbon, 1804, Vol. I, pp. 411-412.

  17. Davies, 1995, pp. 105-106.