The Power of Gold: The History of an Obsession

by Peter L. Bernstein

  Not so in Asia. Contrary to Hume's hypothesis, the precious metals did "heap up" in China, India, and Japan. Hume may have been correct that fluid cannot accumulate beyond its proper level when the fluid is contained, but what about when the fluid flows into a vessel so enormous that the inflow is meaningless? A seventeenth-century English merchant, echoing a metaphor in Ecclesiastes, made an appropriate observation when he lamented that "Many streams run thither (India), as all rivers to the sea, and there stay."" The economic historian Earl Hamilton has noted that "The East [was] a necropolis of European treasure even in Roman days."' Even today, India is the largest buyer of gold in the world, where gold continues to be the most popular form of portable wealth; the Indians spend more on gold than on cars, two-wheeled transport, refrigerators, and color televisions combined.1'

  An identical replay of this phenomenon has occurred in our own times. From 1986 to 1998, Japan exported nearly 60 percent more merchandise than it imported; in 1998 alone, the excess was almost 70 percent. Even though the Japanese spent more on foreign services than foreigners spent on Japanese services, and even though the Japanese made capital investments abroad, Japan's holdings of foreign exchange-the equivalent of the gold absorbed in the 1600s-"heaped up" from less than $30 billion in 1986 to around $200 billion at the end of 1998. This put Japanese foreign exchange reserves above the total combined foreign exchange reserves of France, Germany, Italy, and the United Kingdom in late 1998. Like the Asians of yesteryear, the Japanese prefer to save their money and accumulate treasure instead of going out and spending it on imports from abroad.

  Consider what would have happened in Europe if Asia had been less happy about accumulating the precious metals in exchange for their spices and silks, and then consider what would happen today in the United States if the Japanese abruptly decided that adding to their dollar treasure no longer made sense for them. In either case, Asian goods would cease to be available to the West-no more silks, spices, Toyotas, or Sonys-unless the Asians were to reverse their habits and decide that perhaps they would like to acquire goods and services other than monetary assets from the West. That choice was just as critical in earlier centuries as it is today: without the gold and silver to ship out, Europeans would have been denied the pepper and curry, the luxurious textiles, and the magnificent china dishes on which they placed such high values.

  Why did the immense quantities of gold and silver that were shipped to China, Japan, and India accumulate instead of provoking a reverse flow of demand for goods from Europe? Did the Asians of the 1500s and 1600s have a natural predilection for the Protestant Ethic, with its focus on the virtue of saving, a set of beliefs that most of them back then had probably never heard of? Were Asians so innocent, or so neurotic, about gold and silver that the sheer joy of ownership was enough to keep them importing useless precious metals in exchange for valuable commodities that they could themselves have eaten and worn? Or was a different set of forces acting upon the Asian scene?

  One thing is certain: Asians derived much pleasure from their ownership of gold. Gold's natural attributes of malleability, indestructibility, and dazzling beauty appeal to people in any part of the world. The Asian rulers were just as convinced as Hatshepsut, Croesus, Justinian, Abbe Suger, Atahualpa, and Francis I that gold conveyed both a sense of power and a sense of magical beauty.

  Marco Polo is a revealing authority for this view. In 1271, he traveled from Venice to China, remaining in the area for twenty years. Although he did not reach Japan, he obtained descriptions of it from his Chinese contacts. Even allowing for the obvious exaggeration in his many colorful tales, the frequency with which Marco Polo refers to gold is notable. The index of my edition of his Travels contains 26 separate items in which he discusses gold, and nearly as many for silver. The amount of space Marco Polo gives to gold and silver together is much greater than the attention he gives to any of the other Asian products in greatest demand in the West, such as spices and silk.

  Most of the time, Marco Polo was in the service of the great Mongol leader Kublai Khan, a man who sent emissaries every two years to the Tartars to select between four hundred and five hundred of the most beautiful girls to join his already overflowing inventory of concubines; the Great Khan made do with thirty or forty girls whom he selected from each biennial group. These served the Khan in rotating groups of six "in his chamber and his bed, ministering to all his needs."" Those women were in addition to his four official wives, each of whom had three hundred ladies in waiting, and each one of those-according to Marco Polo"has in her court ten thousand persons."12 This may be a huge embellishment of the truth, but it contains an important hint about puzzling patterns of Asian foreign trade.

  A man supporting a household like Kublai Khan's is clearly not a penny-pinching believer in the principles of the Protestant Ethic. On the contrary, Marco Polo's descriptions of the Khan's palaces are breathtaking. He contends that the palace in the capital city of Cathay was the largest palace ever built, where "there is nothing to be seen anywhere but gold and pictures."" He also describes the magnificence of another ruler, who built a tower in his palace grounds that was covered with gold a full finger's breadth in thickness, and was so completely covered that the structure appeared to be made entirely of gold.

  The most amusing employment of gold was in a province under the rule of Kublai Khan called Zar-dandan. In its capital city of Vochan, the men -not the women-made casts of their teeth and used these casts to cover their entire mouthful of lower and upper teeth with gold. In Vochan, money talked!

  Marco Polo also reported on Japan, "a very big island [where] the people are fair-complexioned, good-looking, and well-mannered." Gold is found there "in measureless quantities," and one reason they possess so much of it is that "no trader, nor indeed anyone else, goes there from the mainland." He then- describes a palace of the island's ruler, "that is in truth a veritable marvel. Just as we roof our houses and churches with lead, so this palace is roofed with fine gold. And the value of it is almost beyond computation. Moreover, all the chambers, of which there are many, are likewise paved with fine gold to a depth of more than two fingers' breadth. And the halls and the windows and every other part of the palace are likewise adorned with gold."14 Shades of the tabernacle ordered from Moses on Mount Sinai! This is the passage from Marco Polo's Travels that spurred Columbus on when he reached Cuba and thought he was in Cipangu (Japan).

  Gold seems to have been almost everywhere Marco Polo visited. In Vochan, the town of the lovely teeth, gold was so plentiful that one ounce of it exchanged for only five ounces of silver at a time when one ounce of gold in Europe fetched upward of ten ounces of silver and the gold/ silver ratio would approach 1:14 after the big American silver mines brought about a radical increase in the European supply of silver relative to gold. 'I In Tibet, where the natives used salt for money and were "very poorly clad, in skins, canvas, and buckram ... there are rivers and lakes and mountains in which gold-dust is found in great quantity.... The province produces plenty of... cloth of gold."16 Marco Polo also mentions gold in India, where he claims it was so plentiful that it exchanged on a ratio of 1:6 for silver." In addition to modest indigenous supplies of gold, India imported large amounts of both gold and silver in the 1500s and 1600s in exchange for cotton, most of it coming in via the major trading post of Malacca in Malaysia."

  Everything that we have seen so far reveals that Asians did not perceive gold as money in the same way that Westerners viewed it. Even before Croesus, people in Europe and the Near East were using gold as money, first in bars and then in coins. For at least two thousand years before Columbus discovered America, Europeans had viewed gold coins as the ultimate expression of financial might and sophistication. Coinage, however, democratized gold, because it circulated among members of the public. Asian rulers held no such notions. They shared the Western delight in gold's beauty and what it signified in terms of power, but they considered gold too important to be used as money that would be passed
around from one dirty and ignoble hand to another. Releasing gold to public circulation would dilute the power of the state.

  As a result, most Chinese money over the centuries has been fabricated out of materials of little value.* Small amounts of gold coins were minted after the sixteenth century, but they were used primarily for ceremonial purposes, such as being thrown on occasion at professors when the students approved of their lecture. 19 China did not issue any coins of precious metals in meaningful amounts until 1890, and then in silver, although Mexican silver pesos-of all things!-circulated in some quantity in China between 1700 and 1826.211

  This conception of a monetary system had a long tradition in China. In 255 BC, when the many feudal Chinese states were united by a great general named Qin Shu Huangdi into a single political entity, Qin promptly declared himself the emperor and built the Great Wall to protect his domain (Qin is pronounced "Chin" and is the derivation of the word China). It was his tomb that was guarded by the famous terracotta army discovered by archeologists at Xian in 1974. At that time, the longstanding Chinese coinage system-which probably predated the use of coins in the West-consisted of awkward cast-bronze pieces that looked like hoes, knives, and cowrie-shaped shells. Qin replaced these forms with cast-bronze round coins punctured in the middle with a square hole. These small base-metal coins came to be known as cash, the Tamil word for money that is now the common expression reserved for ready, liquid money. Although the denominations and weights of the coins changed over the centuries, the familiar characteristic design of round Chinese coins with the square holes remained unchanged for over eight hundred years.''-'

  The holes in the coins made it possible to string together a large quantity for carrying or for trading: the coins were made out of such low-value material that a trader or his customer had to handle many coins even for transactions of modest size. If some of the coins had been minted from metals of more value-at least in the eyes of the beholders-to provide for larger transactions, fewer coins would have been needed and carrying them around would have been less burdensome. As in the West, the coins could have been carried in pockets or purses.

  Some things are never learned, as the frantic coin counting for ransoming Richard I and the sons of Francis I reminds us. The following story about Chinese money in World War II shows that even in modern times people have failed to understand simple principles about how to denominate whatever is in use as the means of payment.

  Chiang Kai-shek's embattled government in World War II was based in Chongqing (spelled Chungking in the 1940s), far in the interior of China with no access to the seas in any direction. All aid from the Allies, from food to tanks, had to be flown in over long distances, often passing through Japanese anti-aircraft fire or attacks by Japanese fighter planes. As Chungking had no facilities to print currency, all the Chinese paper money was printed in the United States, which meant that the critical materiel of warfare had to share space with currency in the cargo aircraft. China was also suffering from a vicious inflationary spiral caused by a severe shortage of the necessities of life and massive amounts of currency being paid out to troops and workers. With prices rising so rapidly, stacks of paper money were absorbing more and more precious cargo space.

  The American economic advisors to Chiang urged him to order currency in larger denominations, because what had once cost $1 was now costing $10 or more. It made no sense to keep shipping one-dollar bills when ten-dollar bills would buy what one-dollar bills had once bought, and the ten-dollar bills would take up one-tenth the cargo space-and in time one-hundred-dollar notes could replace ten-dollar notes. Yet the currency orders never kept pace with the inflation. The planes continued to be crammed with excessive amounts of low-denomination notes occupying cargo space desperately needed for food, oil, weapons, and ammunition. Similar myopia in adjusting denominations to price increases explains the stories about people running around with wheelbarrows full of currency in the German hyperinflation of the 1920s.

  About one thousand years after Qin, during the reign of Hien Tsung (806-821), a severe shortage of copper induced the emperor to use sheets of paper for money in place of bronze coins. If there was no point in making payments with useful stuff, the emperor reasoned, why not go all the way and adopt paper? This newfangled idea appears to have been more of a historical accident than a stroke of financial genius, but the long perspective of history suggests that Hien Tsung's inadvertent innovation should join printing, gunpowder, and the compass among China's most enduring contributions to the civilization of the world. Hien Tsung not only passed on his invention to posterity; his succes sors also paved the way for the inevitable route that most paper money systems have followed: overissue and uncontrollable inflation.22

  The lessons were learned in China early on. In a book called A Treatise on Coinage, published in 1149, a historian named Ma Twan-lin warned in strikingly modern terms that "Paper should never be money [but] only employed as a representative sign of value existing in metals or produce.... The government ... wished to make a real money of paper, and thus the original contrivance was perverted."23 We shall see that this argument reappears almost verbatim in Britain in the course of the Napoleonic Wars, dressed in different clothes but containing the same substance. About six hundred years had to pass, until 1455, before the Chinese decided that they could control their money supply more effectively with metallic coins than with paper money, but they were still so far ahead of the West that another three hundred years would pass before printed banknotes became common in Europe.

  Marco Polo was so impressed with the paper money of China that he considered it a kind of magic. As he characterized it, Kublai Khan's "mint ... is so organized that you might well say that he has mastered the art of alchemy. "24 The paper for the money was manufactured out of mulberry tree bark and cut up into various sizes to reflect the differing denominations; a note representing one thousand coins measured nine by thirteen inches-an awkward size but light as a feather, while one thousand coins weighed eight pounds. The proper officials then wrote their names on the papers and stamped them with the seal of the Great Khan. At that point, according to Marco Polo, "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."25

  Marco Polo reported that the Khan ordered every payment, everywhere in his empire, to be made in paper currency. Then Marco Polo delivered the punchline that exposed why this money worked as well as it did and why he thought that the Khan could buy all the treasure of the world with it: "And no one dares refuse it on pain of losing his life. "26 There's legal tender for you! But no force was involved, according to Marco Polo. Everyone was "perfectly willing" to accept these papers in payment, "since wherever they go they pay in the same currency."27 The system provided a neat system for the government to finance itself.

  The Khan did not restrict his expenditure of the paper money merely to current operating expenses of his government. He deployed his power to greater advantage. Whenever traders arrived in his domain with pearls, precious stones, gold, silver, or other valuables, or when any town possessed gems or precious metals, they were required to surrender all their treasure to the Great Khan. These people accepted the paper money in exchange for their valuables "willingly," because they could use it to pay for the goods they bought throughout the Great Khan's dominions. By this means, Marco Polo concluded, "The Great Khan acquires all the gold and silver and pearls and precious stones of his territory," and this is how the Khan "has more treasure than anyone else in the world."" This "willingness" may have had to do with more than the Great Khan's raw power, although surely that was a necessary condition for the success of the paper money. China's huge landmass may have made its economy more self-sufficient than any individual country or city-state in Europe. Thus, concerns about acceptability of the paper money abroad, if any, were at least secondary.

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p; What Marco Polo failed to point out was that the Khan thereby accumulated assets that were accepted as assets anywhere in the world, while the people who held paper money in exchange held assets that were accepted only in the Great Khan's dominions. Seen from that perspective, Marco Polo was correct that the Khan had mastered the art of alchemy. His paper money turned into gold-at least at his palaces.

  Was the exchange unfair? In 1933, the U.S. government prohibited the ownership of monetary gold by any individual, company, or political entity except the federal government itself (jewelry and works of art were excluded from this prohibition). All monetary gold within the borders of the United States or imported into the United States had to be turned over to the government and converted into dollardenominated bank deposits or everyday coin and currency. This law was still less restrictive than Kublai Khan's, because foreign governments and central banks such as the Bank of France or the Bank of England were free to convert their dollar balances back into gold-until August 15, 1971. At that moment, President Nixon joined up with the Great Khan. As the expression of the time put it, the gold window was shut down. Even foreign governments and central banks could no longer exchange dollars for gold. In his own fashion, Richard Nixon had mastered the art of alchemy.