Only a Hop and a Skip to Money

Gold is the most metaphysical of the metals. A couple of layers of gilding, and items of everyday experience attain perfection: golden calf, golden section, golden goal. In the form of money, gold was always the currency more of heaven than of earth. As late as 1965, President de Gaulle told a press conference at the Elysée Palace that gold was ‘eternally and universally accepted as the unalterable fiduciary value par excellence’.

This universal character rescues gold from the manuals of architecture, interior decoration, jewellery, costume and specialised numismatics and makes its history of general interest. Unfortunately, the metaphysics of gold have often been mere superstition.

The fortunes of gold have sunk low. There has been no legal-tender gold coinage in Britain since 1925 and in the United States since 1933. In 1971, the US Treasury ceased to buy back dollars for gold and with that the metal lost its last outpost in the world of money. Many central banks are selling the ingots they collected in the era of the international gold standard.

Currencies that were once mere receipts for gold now lord it over the metal. Priced in dollars, gold has lost two-thirds of its value since 1980. In the intervening decades, the cost of living has at least doubled in many countries, so that gold has lost ground against almost all other species of asset. To the question our parents asked, ‘Why on earth has gold ceased to be money?’ we would add: ‘Why did gold become money in the first place?’ Or: ‘Will gold ever be money again?’ Peter Bernstein’s history of gold as money is very much better at answering the first question than the other two.

Pecuniary anthropology is very, very perilous. In the absence of evidence, both Aristotle and Adam Smith made implausible conjectures about the origin of money. Bernstein rushes right in after them. Because gold must be mined, panned or dredged and often only with great difficulty, because it throws back light, doesn’t rust at all, is easily hammered, twisted and spun, and is all but indestructible, it enjoyed great prestige even in the earliest times. It represented power, wealth and sanctity, Bernstein says. From there, it is only a hop and a skip to money: ‘The everlasting radiance of gold, together with its scarcity, suggested such exceptional value that its route from the golden calf . . . to its use as money was probably inevitable.’

It is hard to make sense of the sentence. If Bernstein means that once it is out of the ground, gold is probably bound to be used as money, he is mistaken. In the 16th century, Spaniards in the Americas reported that neither the Mexicans nor the Peruvians used their immense hoards of gold as money. ‘Imagine,’ Montaigne wrote in bewilderment after reading the Spanish chronicles, ‘that all our kings heaped up all the gold they’d been able to find over centuries and kept it immobile.’ The clash of gold as ornament and gold as money added to the elemental character of the European conquest.

If, on the other hand, Bernstein means that if money is going to be used, it will probably be made of gold, he is again mistaken. The first coinages of China, as far as we can tell, were bronze images of domestic tools such as knives and hoes. The Sparta of the legendary Lycurgus outlawed gold and silver and used iron spits as money – they were too heavy to be easily taken out of the country. We use electronic ledger entries. The use of gold as money is no more inevitable than the use of money itself. Whatever de Gaulle had to say on the matter, gold and money exist in time and have a history.

We possess some coin-like objects, in gold, silver and an alloy of the two known as electrum, that were excavated on the coast of Asia Minor and have been dated to the end of the seventh century BC and the beginning of the sixth. We also possess the Histories of Herodotus, which attribute the invention of gold coinage to the kingdom of Lydia in what is now western Turkey. ‘The Lydians were the first people we know of,’ Herodotus writes in the first book of the Histories, with a caution we might well imitate, ‘to use a gold and silver coinage and to engage in retail trade.’ (The riches of King Croesus of Lydia are still proverbial.) A little later, gold coins are struck in Iran to the east and mainland Greece to the west. Both regions are conquered and united by Alexander. Thenceforth gold and silver coinages fan out across the world. In modern colonial times, they engulf what appear to be quite distinct types and conceptions of money in China, Japan, Siam, Africa, the Americas and the South Seas, before ceding place to paper moneys, bank liabilities and electronic book entries. That, essentially, is the history of gold as money. That those processes are sometimes obscure does not make them unhistorical.

Gold, Bernstein says, was for a long time largely the preserve of princes and priests: gold coinage ‘put gold into the hands of the masses’. This is an exaggeration. Few people in history have ever handled a gold coin. Even in the great days of gold coinage – in the Roman Empire after Constantine, among the Islamic inheritors of that empire in the Middle East and North Africa, and after the gold rushes of the 19th century – gold was too scarce and valuable for plebeian transactions. The coinages of the Roman Empire in the West, of the age of Charlemagne, and of medieval Europe were predominantly silver.

Bernstein devotes a nice chapter to Offa, King of Mercia, who ruled in England in the eighth century. Yet as far as I know, the only gold coin of Offa that we have is an imitation Islamic dinar which came to light in Rome and was probably a ceremonial tribute to the Holy See: that is, ideal or supernatural money. It is not until the 13th century that the advanced city states of Venice, Florence and Genoa feel the need to mint gold coins in quantity – ducats, florins, genoins – which are then imitated in France, Hungary, the Low Countries and England.

Even the treasure brought back from America was, after 1560, predominantly silver. The great expansion of commerce in the 16th and 17th centuries was financed less by gold than by silver, debasement and clipping, forgeries, tokens, bank money, credit and paper. Bernstein devotes a chapter to the calling in and reminting of the English coinage in 1695-96. This recoinage had nothing to do with gold and is important to the story only in so far as it gave rise to a war of pamphlets that developed several new ideas of what money had become. Those pamphlets are still awaiting proper study.

The first half of The Power of Gold contains some mistakes of fact, interpretation and emphasis, and some errors in Latin and Greek and Western and Oriental numismatics. Like Keynes’s and many other economists’, Bernstein’s is a modern mind which appears a little lost in remote ages and locations, and sometimes seems reluctant to admit them to the realm of fact. It is only with the invention of political economy in the 18th century and the widespread adoption of a gold standard in the 19th that he becomes comfortable with his material and his book gets interesting. It also has fewer mistakes.

The 18th century saw several promiscuous issues of paper money: in France during the period of the Banque Royale of 1717-20, in the course of the American Revolutionary War, in France again in the 1790s and in Britain during the so-called Bank Restriction period of the Napoleonic Wars and their aftermath. All were attended by inflations. The gold standard was not so much a restoration of a gold coinage with all its drawbacks as an attempt to control the output of token money by banks and governments. The appeal of gold for this purpose had little to do with its everlasting radiance and much to do with its supranational character. In that respect, even tin or lead might have served the purpose (or even the spent .22 cartridge cases that were the currency of my boarding school).

In the words of the Bullion Committee, which met in London in 1810 at a time when the Bank of England was excused from redeeming its notes in gold:

When the currency consists entirely of the precious metals, or of paper convertible at will into the precious metals, the natural process of commerce . . . adjusts, in every particular country, the proportion of circulating medium to its actual occasions . . . If the natural system of currency and circulation be abandoned, and a discretionary issue of paper money substituted in its stead, it is vain to think that any rules can be advised for the exact exercise of such a discretion.

There was nothing ‘natural’ about the system but it functioned. The Western world – first England, then the United States, then Germany, France, Italy, Switzerland, the Netherlands – had a single currency: gold. The currencies of individual states represented fixed quantities of that single currency. A nation, like a bank, was required to be able to meet its liabilities in gold. If a country bought more goods from abroad than it sold, it was obliged to ship out gold to extinguish the debt where it had arisen. Its money would dwindle with its gold, causing imports to slump and gold to return. Prolific new supplies of gold from California, Russia, South Africa and Australia (as well as all manner of bank instruments) kept pace with the expansion of trade. In the best passage in the book, Bernstein describes a visit to the vaults of the New York Federal Reserve in the 1940s – and the workings of the international gold standard system in its twilight years:

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 . . .

That gold did not belong to the United States. It belonged to France, England and Switzerland, and to many other countries as well . . . 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 book-keeping 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.

For all its ravishing materiality, this system was exceedingly fragile, as Bernstein makes admirably clear. Gold payments were suspended not just between 1797 and 1821 in Britain but in the United States during the Civil War and after, and by all the main belligerents in the Great War. The system finally succumbed to the Vietnam War. Even in peacetime, the movements of gold were accompanied by immense strain in labour and agricultural markets. Reading Bernstein’s account of Britain’s return to gold in 1925 at the prewar parity and its chaotic departure in 1931 is like watching a performance of Othello. One keeps thinking, how can people be so deluded?

Since the international gold standard functioned in its full form only for the period between the 1870s and 1914, its aura and prestige are a little baffling. Prices were more or less stable between the 1820s and 1914, but there were other pressures on prices besides limits on the supply of gold and money: technical innovations increased supplies of labour, falling trade barriers and so on. I suspect the nostalgia for gold is primarily social in character. Inflation alters the composition of society by favouring debtors (have-nots) over creditors (haves). As Keynes pointed out, the international gold standard served the interests of the haves.

Can gold make a comeback? According to the World Gold Council, the rather harassed alliance of mining companies, there is now quite a lot of gold on the earth’s surface: about 125,000 tonnes, of which about nine-tenths have been produced since Sutter’s Creek in 1848. If piled up, we are told, the world’s gold would fill out the Eiffel Tower. Even so, it would not be enough to finance world trade worth trillions of dollars unless tiny units of the metal were taken to represent very large units of money.

The tremendous decline in the value of gold as expressed in US dollars and general merchandise has, as it were, tarnished the metal. Central banks are selling into extremely nervous markets. It may well be that in the words of a memorandum commissioned by Winston Churchill as Chancellor of the Exchequer in 1925, gold reserves and a gold standard are ‘survivals of rudimentary and transitional stages in the evolution of finance and credit’. Independent central banks may turn out to provide precisely the discretionary control of money that was beyond the comprehension of the Bullion Committee of 1810. On the other hand, since floating free of gold on 21 September 1931, sterling has lost more than nine-tenths of its purchasing power and many other currencies have done worse. I think it would be unwise to count gold out.