The Power of Gold Read online

  Contents

  Foreword

  Acknowledgments

  Prologue

  A Metal For All Seasons

  Chapter 1: Get Gold at All Hazards

  Chapter 2: Midas’s Wish and the Creatures of Pure Chance

  Chapter 3: Darius’s Bathtub and the Cackling of the Geese

  Chapter 4: The Symbol and the Faith

  Chapter 5: Gold, Salt, and the Blessed Town

  Chapter 6: The Legacy of Eoba, Babba, and Udd

  Chapter 7: The Great Chain Reaction

  Chapter 8: The Disintegrating Age and the Kings’ Ransoms

  Chapter 9: The Sacred Thirst

  The Path to Triumph

  Chapter 10: The Fatal Poison and Private Money

  Chapter 11: The Asian Necropolis and Hien Tsung’s Inadvertent Innovation

  Chapter 12: The Great Recoinage and the Last of the Magicians

  Chapter 13: The True Doctrine and the Great Evil

  Chapter 14: The New Mistress and the Cursed Discovery

  Chapter 15: The Badge of Honor

  Chapter 16: The Most Stupendous Conspiracy and the Endless Chain

  The Descent From Glory

  Chapter 17: The Norman Conquest

  Chapter 18: The End of the Epoch

  Chapter 19: The Transcending Value

  Chapter 20: World War Eight and the Thirty Ounces of Gold

  Epilogue

  Bibliography

  Index

  Copyright © 2000, 2012 by Peter L. Bernstein. All rights reserved.

  Published by John Wiley & Sons, Inc.

  Published simultaneously in Canada.

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  Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

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  Library of Congress Cataloging-in-Publication Data:

  Bernstein, Peter L.

  The power of gold : the history of an obsession / Peter L. Bernstein.

  p. cm.

  Includes bibliographical references and index.

  ISBN 0-471-25210-7 (cloth); ISBN 978-1-118-27010-3 (paper); ISBN 978-1-118-28269-4 (ebk.); ISBN 978-1-118-28414-8 (ebk.); ISBN 978-1-118-28522-0 (ebk.)

  1. Gold—Folklore. 2. Gold—History. 3. Gold—Social aspects. I. Title.

  GR810.B47 2000

  398′.365—dc21 00-036647

  For Barbara, once again and always.

  They wonder much to hear that gold, which in itself is so useless a thing, should be everywhere so much esteemed, that even men for whom it was made, and by whom it has its value, should yet be thought of less value than it is.

  Sir Thomas More (1478–1535). Utopia of Jewels and Wealth

  Foreword

  What could be timelier than a new release of Peter Bernstein’s authoritative book The Power of Gold?

  Bernstein wrote at the turn of the century—only a decade ago, but what a contrast from today in the world of business and finance. Economic growth in the economically developed world had been sustained for a decade. Reasonable price stability had been achieved. Huge gains in the world’s stock markets exceeded past experience.

  Almost everywhere, central bankers were esteemed and trusted. Central bank independence came to be taken as the indispensable guarantor of stability. The mood was epitomized by the creation of a brand-new central bank to manage the European common currency, itself a key initiative toward closer European union. With its independence from the sovereign states of the “Eurozone” embodied in a solemn treaty, the new central bank reached a virtually unprecedented state, freed of direct accountability to a political government.

  For decades, no central bank or government had maintained convertibility of its currencies into gold. For the most part, major currencies were “floated” in exchange markets. In one of Bernstein’s apt phrases, gold had been “emasculated.” With its enduring luster, its malleability, its resistance to wear and corrosion, it could remain useful for adornment and jewelry and to a limited exchange as a tiny component of some electronic devices. Yet it had been shorn of monetary significance. In the 1990s, central banks, the custodians of national financial resources, were tending to sell from their golden hoards acquired over the decades, even at declining prices.

  All of that was a very long way from the pleading of General de Gaulle in the 1960s for the world to return to a full-blooded gold standard. Bernstein recalled his eloquence: “There can be no other criterion, no other standard, than gold—gold that never changes, that can be shipped in ingots, bars, coins, that has no nationality, and that is eternally and universally accepted as the unalterable fiduciary value par excellence.” Somehow, in his lament for the gold standard, de Gaulle neglected to note that while gold may be immutable as a metal, its price could and did change—change in the marketplace or by government decision, as he himself strongly advocated at the time.

  Here we are, only a decade or so after Bernstein wrote, in the midst of demonstrable—perhaps unprecedented—volatility in the price of gold. Neither de Gaulle nor Bernstein could have envisaged the level of the gold price as I write, 50 times the value in the 1960s and 5 times the price 10 years ago. Yet before his death, Peter had seen enough of the market turmoil to confirm his parting conclusion: in the midst of economic fears and financial uncertainty, gold would be back in demand.

  Peter Bernstein was an anomaly in the modern world of investment, a man with a deep understanding of finance in all of its up-to-date mathematical and theoretical manifestations but also a student of history. The story of gold is filled with the foibles and vulnerabilities of kings and presidents and indeed of all human judgments. More than that, Peter can write—write in a way that the arcane becomes understandable, that the history of gold becomes a fascinating story of the rise and fall of nations and civilizations.

  Now, only a few years after Bernstein’s death, our capitalist civilization is being challenged. Most of the so-called developed world is suffering through an extended rece
ssion and high unemployment. The euro and the European Central Bank so confidently launched a decade ago are in possibly even mortal crisis. Governments and central banks seem to have lost their established bearings. Distrust is rife.

  There is a yearning for solidity and stability. So, it is not entirely surprising that we hear some urging that a monetary role for gold be restored. At the very least, gold remains for some a kind of last resort, a safeguard against threats seen and unseen. If gold has lost the essential elements of money, it at least remains for some people a store of value.

  That is a very long way from restoring any approximation of the classic gold standard, including the residual role of gold in the Bretton Woods system. We have been left with a continuing, elusive challenge of combining needed discipline in our monetary and fiscal affairs with a degree of flexibility in exchange rates.

  The need for realism in the reform of our monetary system is what makes Bernstein’s story The Power of Gold so timely. It is a compelling reminder that maintaining a fixed price for gold and fixed exchange rates was difficult even in a simpler financial environment.

  There was a time when faith in a gold standard and maintenance of the fixed parities had, in Bernstein’s words, “developed all the trappings of a full fledged religion, shared beliefs, high priests, strict codes of behavior, creed and faith.” Yet even then, the classic gold standard could be maintained for fewer than 50 years, ended by force majeure: World War I.

  Persistent and valiant efforts to restore the system after that war failed when seemingly on the brink of success. By 1925, Great Britain had finally restored the gold parity for sterling that had been established more than 100 years earlier. Under the pressure of continued recession, however, sterling convertibility was ended only five years later. Bernstein reported that John Maynard Keynes, then growing in reputation and influence, was exultant: “There are few Englishmen who do not rejoice in the breaking of the gold fetters. We feel that at least we have a free hand to do what is sensible!”

  The Bretton Woods system put in place after World War II was born in an effort to restore a more workable version of a fixed exchange rate regime, gold related but dollar dominated. That system was doggedly defended by a succession of governments and financial officials in the 1950s and 1960s. I was there, a participant in the effort to maintain a fixed dollar price for gold as the pivot for the monetary system.

  Imaginative financial mechanisms such as the central bank gold pool and central bank currency swaps were developed to that end, ultimately including the creation of “paper gold”—the SDR (Special Drawing Rights). Increasingly intrusive actions, such as exchange and capital controls, were put in place even in the home of free markets, the United States. Yet the mystique was gone. Gold failed to induce needed discipline. The need for greater flexibility could not be denied.

  The concerns about the breakdown were not entirely misplaced. The felt need for greater flexibility shortly gave way to extreme volatility. The absence of discipline was reflected in the inflationary 1980s. Exchange markets had calmed down by the time Bernstein wrote, but what was not apparent then became real after the turn of the century. Economic imbalances grew unchecked between nations and within nations. Financial excesses were untamed. The end came in 2008, with a financial and institutional collapse.

  In my mind, the situation cries out for reconsidering reform of the international monetary system, just as events are forcing a rethinking of the euro, its central bank, and greater European economic integration. We do need a sense of greater financial and budgetary discipline more generally, of enforceable rules of the international monetary road, and of greater exchange rate stability, all accompanied by reinforcement of a collective commitment to price stability.

  So, some will ask, isn’t there still an important role for gold?

  Peter Bernstein was reluctant to project the story of gold into the future, but to me his message was clear.

  Yes, gold will be with us, valued not only for its intrinsic qualities but as a last refuge and store of value in turbulent times. Yet its days as money, as a means of payment and a fixed unit of account, are gone.

  To maintain a fixed price of gold as the center of a monetary system requires a strong sense of commitment, a commitment extending beyond central banks and governments to the populations at large. Can we any longer believe that our citizenry will, in fair weather and foul, support giving priority to a fixed price of gold?

  If the gold standard once took on the nature of a religion, we have long since left the Garden of Eden. We can’t return. It’s not just the greater complexity of our financial markets, the new fashions in economic policies, or even the restlessness of the citizenry. It is the fact that once the golden bond has been broken, it can no longer realistically be set out as unbreakable. And once the necessary sense of commitment to gold is lost, then we need to seek other approaches.

  Paul A. Volcker

  January 2012

  Acknowledgments

  Ninety-one years ago, Lytton Strachey observed that “Every history worthy of the name is, in its own way, as personal as poetry, and its value ultimately depends upon the force and the quality of the character behind it.”* True enough, but writing history is also hard work. It involves organizing masses of facts—many of them unfamiliar—into a coherent story, developing ideas that bear some logical relationship to the facts, and communicating the results in a fashion that will interest more people than just the writer. As a result, the task cannot be a solitary one. I know whereof I speak.

  The first of my acknowledgments goes to my wife, Barbara, who is also my business partner. Her contribution to this book was significant on all levels. Her many positive suggestions, her equally valuable criticisms, her diligent editing, and her unfailing inspiration were all essential to the completion of the task. It never would have happened without her.

  This book was my third partnership with my editor, Peter Dougherty. Peter creates a unique intellectual adventure that is challenging, exciting, and great fun. He has once again showed me how to transform a heap of jumbled ideas into a coherent whole. His brilliant insights, his ready grasp of the subject matter, and his total commitment as friend and guide to this project are visible on every page. He is the editor that all writers wish for, and I can only hope that the future holds many more of these stimulating and rewarding opportunities to work with him.

  Charles Kindleberger, my great friend and comrade-at-arms in World War II, became indefatigably engaged in this work from the very beginning. His generosity to me was boundless. He provided inestimable guidance to research sources and shared his own research materials and notes without stint. He was tireless in supplying suggestions, criticisms, and fresh viewpoints. He showered the full benefit of his extraordinary knowledge of economic and financial history upon every part of the manuscript. It was a rare privilege to have him as mentor and intellectual companion.

  I was also most fortunate in having Richard Sylla’s bountiful assistance from beginning to end. Dick’s authoritative criticisms and recommendations provided many significant improvements to the book by protecting me from oversimplifications in interpretation and omissions of essential facts.

  Throughout the entire process, Edward Klagsbrun’s counsel and support were essential in enabling Barbara and me to keep our eye on the ball.

  Myles Thompson deserves my gratitude for his unremitting enthusiasm, editorial assistance, and important support, as well as many valuable suggestions about the content and development of the undertaking.

  Three friends and colleagues were also kind enough to read the full manuscript. My two-time co-author and great friend, Robert Heilbroner, as so often in the past, gave me the benefit of his historical expertise, his deep understanding of economics, and his great talent for literary quality. Peter Brodsky led me to important clarifications in areas that suffered from undue fuzziness in the early drafts. Elliott Howard drew my attention to a long list of flaws and offered helpful
comments on the subject of gold.

  The team at Wiley under Jeff Brown’s confident leadership went to the limit on our behalf, with enthusiasm, skill, and gracious responsiveness to our needs. In addition to Jeff, this group included, in alphabetical order, Sylvia Coates, Mary Daniello, Peter Knapp, Livia Llewellyn, Meredith McGinnis, Joan O’Neil, Lori Sayde-Mehrtens, and Jennifer Wilkin.

  Everett Sims’s conscientious editing has added polish, grace, and clarity to many rough edges. I am also grateful to Ev for proposing that I should write a book about gold. Although there were many moments when I wished I had not listened to him, I am confident that no other topic would have captured my interest as this one has.

  I was fortunate to work with a group of skillful, imaginative, and indefatigable research assistants. They saved me many hours of labor and made useful contributions at the same time. Here they are, in the sequence in which they served: Michelle Lee, Susan Cohen, Steven Sherrifs, Betsy Wallen, and Linda Chang. Our business associate, Barbara Fotinatos, saw to it that the project kept moving along, not least by contributing her expert guidance in the language and habits of the Greeks.

  I am pleased to express special gratitude to Andrew Freeman, who arranged for the staff of The Economist in London to permit Barbara and me to spend several hours in the privacy of their Directors’ Room reading issues of their invaluable publication from the 1920s and 1930s. As readers will note in Chapters 17 and 18, this fascinating material brought the times to life as nothing else could have.

  The following people also provided significant assistance along the way and deserve my warmest thanks: Barbara Boehm, Ulla Buchner-Howard, Mike Clowes, Barclay Douglas, Hans Falkena, Rob Ferguson, Benjamin Friedman, Milton Friedman, Alan Greenspan, James Howell, Henry Hu, Steve Jones, Dwight Keating, Leora Klapper, Benjamin Levene, Richard Rogalski, Paul Samuelson, Ronald Sobel, and Gentaro Yura.

  Convention dictates that the author relieves all of the above from any responsibility for errors that may remain in the manuscript. Charlie Kindleberger decries this convention, pointing out that the author, after all, depended on the authority of these individuals in preparing the work and should not be expected to check out the accuracy of their suggestions. The quality of the assistance I have received on this occasion assures me that, just for once, Charlie is mistaken. All errors that remain in the manuscript are mine. May we hope that they are few and far between.