The Power of Gold: The History of an Obsession

by Peter L. Bernstein

  PETER L. BERNSTEIN

  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 ofJewels and Wealth

  inety-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 JeffBrown'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 BuchnerHoward, 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.

  P. L. B.

  PROLOGUE: The Supreme Possession 1

  A METAL FOR ALL SEASONS

  1. Get Gold at All Hazards 9

  2. Midas's Wish and the Creatures of Pure Chance 18

  3. Darius's Bathtub and the Cackling of the Geese 38

  4. The Symbol and the Faith 52

  5. Gold, Salt, and the Blessed Town 66

  6. The Legacy of Eoba, Babba, and Udd 74

  7. The Great Chain Reaction 85

  8. The Disintegrating Age and the Kings' Ransoms 96

  9. The Sacred Thirst 114

  THE PATH TO TRIUMPH

  10. The Fatal Poison and Private Money 135

  11. The Asian Necropolis and Hien Tsung's Inadvertent Innovation 158

  12. The Great Recoinage and the Last of the Magicians 175

  13. The True Doctrine and the Great Evil 198

  14. The New Mistress and the Cursed Discovery 219

  15. The Badge of Honor 239

  16. The Most Stupendous Conspiracy and the Endless Chain 260

  THE DESCENT FROM GLORY

  17. The Norman Conquest 283

  18. The End of the Epoch 306

  19. The Transcending Value 328

  20. World War Eight and the Thirty Ounces of Gold 346

  EPILOGUE: The Supreme Possession? 367

  Notes 373

  Bibliography 397

  Index 409

  bout one hundred years ago, John Ruskin told the story of a man who boarded a ship carrying his entire wealth in a large ,bag of gold coins. A terrible storm came up a few days into the voyage and the alarm went off to abandon ship. Strapping the bag around his waist, the man went up on deck, jumped overboard, and promptly sank to the bottom of the sea. Asks Ruskin: "Now, as he was sinking, had he the gold? Or had the gold him?"'

  This book tells the story of how people have become intoxicated, ob
sessed, haunted, humbled, and exalted over pieces of metal called gold. Gold has motivated entire societies, torn economies to shreds, determined the fate of kings and emperors, inspired the most beautiful works of art, provoked horrible acts by one people against another, and driven men to endure intense hardship in the hope of finding instant wealth and annihilating uncertainty.

  "Oh, most excellent gold!" observed Columbus while on his first voyage to America. "Who has gold has a treasure [that] even helps souls to paradise."z As gold's unquenchable beauty shines like the sun, people have turned to it to protect themselves against the darkness ahead. Yet we shall see at every point that Ruskin's paradox arises and challenges us anew. Whether it is Perseus in search of the Golden Fleece, the Jews dancing around the golden calf, Croesus fingering his golden coins, Crassus murdered by molten gold poured down his throat, Basil Bulgaroctonus with over two hundred thousand pounds of gold, Pizarro surrounded by gold when slain by his henchmen, Sutter whose millstream launched the California gold rush, or modern leaders such as Charles de Gaulle who deluded themselves with a vision of an economy made stable, sure, and superior by the ownership of gold-they all had gold, but the gold had them all.

  When Pindar in the fifth century Bc described gold as "a child of Zeus, neither moth or rust devoureth it, but the mind of man is devoured by this supreme possession," he set forth the whole story in one sentence.3 John Stuart Mill nicely paraphrased this view in 1848, when he wrote "Gold thou mayst safely touch; but if it stick/Unto thy hands, it woundeth to the quick."4 Indeed, gold is a mass of contradictions. People believe that gold is a refuge until it is taken seriously; then it becomes a curse.

  Nations have scoured the earth for gold in order to control others only to find that gold has controlled their own fate. The gold at the end of the rainbow is ultimate happiness, but the gold at the bottom of the mine emerges from hell. Gold has inspired some of humanity's greatest achievements and provoked some of its worst crimes. When we use gold to symbolize eternity, it elevates people to greater dignity-royalty, religion, formality; when gold is regarded as life everlasting, it drives people to death.

  Gold's most mysterious incongruity is within the metal itself. It is so malleable that you can shape it in any way you wish; even the most primitive of people were able to create beautiful objects out of gold. Moreover, gold is imperishable. You can do anything you want with it and to it, but you cannot make it disappear. Iron ore, cow's milk, sand, and even computer blips are all convertible into something so different from their original state as to be unrecognizable. This is not the case with gold. Every piece of gold reflects the same qualities. The gold in the earring, the gold applied to the halo in a fresco, the gold on the dome of the Massachusetts State House, the gold flecks on Notre Dame's football helmets, and the gold bars hidden away in America's official cookie jar at Fort Knox are all made of the same stuff.

  Despite the complex obsessions it has created, gold is wonderfully simple in its essence. Its chemical symbol AU derives from aurora, which means "shining dawn," but despite the glamorous suggestion of AU, gold is chemically inert. That explains why its radiance is forever. In Cairo, you will find a tooth bridge made of gold for an Egyptian 4500 years ago, its condition good enough to go into your mouth today. Gold is extraordinarily dense; a cubic foot of it weighs half a ton. In 1875, the English economist Stanley Jevons observed that the £20 million in transactions that cleared the London Bankers' Clearing House each day would weigh about 157 tons if paid in gold coin "and would require eighty horses for conveyance."5 The density of gold means that even very small amounts can function as money of large denominations.

  Gold is almost as soft as putty. The gold on Venetian glasses was hammered down to as little as five-millionths of an inch-a process known as gilding. In an unusually creative use of gilding, King Ptolemy II of Egypt (285-246 Bc) had a polar bear from his zoo lead festive processions in which the bear was preceded by a group of men carrying a gilded phallus 180 feet tall.*o You could draw an ounce of gold into a wire fifty miles in length, or, if you prefer, you could beat that ounce into a sheet that would cover one hundred square feet.'

  Unlike any other element on earth, almost all the gold ever mined is still around, much of it now in museums bedecking statues of the ancient gods and their furniture or in numismatic displays, some on the pages of illustrated manuscripts, some in gleaming bars buried in the dark cellars of central banks, a lot of it on fingers, ears, and teeth. There is a residue that rests quietly in shipwrecks at the bottom of the seas. If you piled all this gold in one solid cube, you could fit it aboard any of today's great oil tankers;' its total weight would amount to approximately 125,000 tons,' an insignificant volume that the U.S. steel industry turns out in just a few hours; the industry has the capacity to turn out 120 million tons a year. The ton of steel commands $550-2¢ an ounce but the 125,000 tons or so of gold would be worth a trillion dollars at today's prices.*

  Is that not strange? Out of steel, we can build office towers, ships, automobiles, containers, and machinery of all types; out of gold, we can build nothing. And yet it is gold that we call the precious metal. We yearn for gold and yawn at steel. When all the steel has rusted and rotted, and forever after that, your great cube of gold will still look like new. That is the kind of longevity we all dream of.

  Stubborn resistance to oxidation, unusual density, and ready malleability-these simple natural attributes explain all there is to the romance of gold (even the word gold is nothing fancy: it derives from the Old English gelo, the word for "yellow"). This uncomplicated chemistry reveals that gold is so beautiful it was Jehovah's first choice for the decoration of his tabernacle: "Thou shalt overlay it with pure gold," He instructs Moses on Mount Sinai, "within and without shalt thou overlay it, and shalt make upon it a crown of gold round about.""' That was just the beginning: God ordered that even the furniture, the fixtures, and all decorative items such as cherubs were also to be covered in pure gold.

  God issued those orders many thousands of years ago. What is the place of gold in the modern world of abstract art, designer jeans, complex insurance strategies, computerized money, and the labyrinths of the Internet? Does gold carry any significance in an era where traditions and formality are constantly crumbling beyond recognition? In a global economy managed increasingly by central bankers and international institutions, does gold matter at all?

  Only time can tell whether gold as a store of monetary value is truly dead and buried, but one thing is certain: the motivations of greed and fear, as well as the longings for power and for beauty, that drive the stories that follow are alive and well at this very moment. Consequently, the story of gold is as much the story of our own time as it is a tale out of the past. From poor King Midas who was overwhelmed by it to the Aly Khan who gave away his weight in gold every year, from the dank mines of South Africa to the antiseptic cellars at Fort Knox, from the gorgeous artworks of the Scythians to the Corichancha of the Incas, from the street markets of Bengal to the financial markets in the City of London, gold reflects the universal quest for eternal life-the ultimate certainty and escape from risk.

  The key to the whole tale is the irony that even gold cannot fulfill that quest. Like Ruskin's traveler jumping off the boat, people take the symbolism of gold too seriously. Blinded by its light, they cashier themselves for an illusion.

  The following chapters proceed in roughly chronological order, but the story is neither a complete history of gold nor a systematic analysis of its role in economics and culture; detailed histories of money and banking abound. Instead, I explore those events and stories involving gold that most appealed to me because they display the desperation and ultimate frustrations that have inflamed human behavior. Beginning with the magical and religious attributes of gold, the history proceeds to the transformation of gold into money. As that transformation progresses, however, we shall never lose sight of the magical qualities of gold or the ironies of its impact on humanity.

  My
hope is that what I have chosen to include will illuminate and occasionally infuriate the reader about how the fascination, obsession, and aggression provoked by this strange and unique metal have shaped the destiny of humanity through the ages.

  f gold were more plentiful on earth-say, as abundant as salt-it would be far less valuable and interesting, despite its unique physical attributes and beauty. Yet gold has been discovered on every continent on earth. That sounds like a contradiction, but it is not. Although gold deposits are widespread, in one form or another, no one area has yielded its gold easily. Finding and producing gold demands immense effort relative to the amount of glittering yellow metal that makes its appearance at the end of the process.

  For example, in order to extract South Africa's annual output of around five hundred tons of gold, some seventy million tons of earth must be raised and milled-an amount greater than all the material in the pyramid of Cheops.' The South African mines are the worst, but we are all familiar with the tales of the Forty-Niners panning day after day in the waters of California and ending up with nothing but a few driblets of gold. As Will Rogers put it after returning from a visit to the Klondike, "There is a big difference between prospecting for gold and prospecting for spinach."'

  This radically distorted ratio of effort to output appears to have done little to discourage people from pursuing the worldwide search for gold-perhaps the most telling evidence of how highly prized, vital, essential, and irresistible gold has been from the earliest of times. Even in myths, as this chapter relates, the quest for gold was gluttonous.

  Although gold does not mix with other metals, thin veins of it are scattered throughout the mountains where granite and quartz have filled in cracks in the earth's crust and have been pressed together by fierce heat over millions of years. The elements have washed, blown, and scattered these deposits over the years, but gold has retained most of its purity even as it has suffered the ravages of nature's dynamics. Much of this gold has flowed downward in mountain streams. Gold's high density and weight tend to separate it from the other material in the waters, where it drifts to the bottom as nuggets or flows along as fine as dust.