The Power of Gold: The History of an Obsession
Page 20
Meanwhile, the story in Japan was much the same as in China. The Japanese used gold for adornment, not money. Unlike many other forms of art, the work of the goldsmith in Japan developed late and was never as notable as Japanese pottery, sculpture, or painting. When it came to money, the Japanese just copied the Chinese practice, as they had already copied art and the alphabet from China, except that the Japanese clung to metallic money rather than converting to paper.
Copper was the first metallic money, followed by bronze, which economized on the copper. When the Chinese changed over to paper money in the ninth century, they had no more use for their metal coins, so the Japanese obliged them by importing the superfluous coins. For the next few centuries, the Chinese would continue to supply the Japanese with all the bronze coins they needed. As trade was considered demeaning in Japan, and the economy was in any case less developed than in China, the demand for money was correspondingly smaller. Marco Polo himself had observed that no traders ventured from Japan to the mainland, which meant that foreign trade played no role in the Japanese economy until much later on.
Around 1600, a rising price for gold provoked a minor mining rush in Japan, to satisfy increased demand in China as well as the Japanese emperor's desire to advertise his power. Portuguese shipping was then just beginning to reach the Japanese seas, and so a modest amount of foreign trade was developing. The Portuguese exchanged Chinese silks for Japanese silver, which they then sold in Macao, Malacca, and India in exchange for spices until the Japanese spoiled a profitable triangular line of trade by cutting off the Portuguese. Why? The Portuguese had tried to convert the Japanese to Christianity.29
The Japanese finally began issuing their own coins around this time, but these home-grown specimens were still copies of the Chinese money and were even inscribed with the appropriate Chinese characters. Japan also started issuing a limited amount of gold and silver coins in oval or rectangular shapes to suggest the ingots that had circulated for a short time as money in the Middle Ages, but these had such high value-one was worth about a ton of the copper coins in daily circulation-that they were used for the most part in ceremonial transactions among the nobility."' The stones of Yap would have functioned more efficiently! Even in the latter half of the nineteenth century, after Admiral Perry's arrival, the Japanese coinage continued to copy foreign coins, this time of American and British money; yen, which means "round coin" in Japanese, was also the word they used for dollar, with sen, the word for a copper coin, standing for cent.31
To return to the main question: Why did the gold and silver of the West move in only one direction toward the East? What was going on in Asia that led people to value precious metals more than the food, clothing, and home decoration that they shipped in such volume to Europeans?
One answer has already been suggested. From the viewpoint of the Asians, the supplies of gold and silver they were importing were money only in a very indistinct sense. They did not perceive the precious metals as something that people use to exchange for something else, either now or at some point in the future. Rather, the Chinese, Japanese, and Indians considered the precious metals to be commodities-that is, goods with a genuine use value that rendered these goods worth keeping for their own sake rather than as a means of payment. Gold was for decorating a bride, for baubles, for ornaments, and, most important, for hoarding. Indeed, burying treasure in the East was akin to conspicuous consumption, similar to the insatiable demand for fancy gold watches in our own time.32 This view of gold explains why Asia was a sponge for precious metals rather than one of Hume's nations where "it is impossible to heap up money, more than any other fluid, beyond its proper level." The Asians were not playing the money game.
What, then, was the utility of gold and silver in the eyes of the Asians? As with everyone else, beauty and resistance to rust were important elements. Adam Smith charmingly observes, "A silver boiler is more cleanly than a lead, copper, or tin one; and the same quality would render a gold boiler still better than a silver one. The principal merit [of the precious metals], however, arises from their beauty, which renders them peculiarly fit for the ornaments of dress and furniture. No paint or dye can give so splendid a color as gilding. "33
That is not all: scarcity matters, too. Smith refers to rich people who never appear to themselves so rich "as when they appear to possess those decisive marks of opulence which nobody can possess but themselves. ... Such objects they are willing to purchase at a higher price than things much more beautiful and useful, but more common. 1114 Wealthy Asians were no exception to this general rule.
The strangest feature of gold is that there has never been a moment when it has ceased to be scarce. There have been moments when the supply of gold increased faster than the supply of silver, and gold's price fell relative to the price of silver (to say nothing of the dramatic drop in the price of gold after disinflation took hold in the world economy of the 1980s), but the price nevertheless has always remained high enough to indicate that gold was far from a glut on the market. Steel sells for 2¢ an ounce; gold sells for more than ten thousand times as much. '
Gold remains a definitive mark of opulence. Thus, the mystique of gold as a store of wealth, which is critically dependent on its scarcity, has added lustre to gold as a symbol of power, whether it accents the halo of a saint or covers the roof of a palace, whether it dangles from the ear or surrounds the neck, and whether it fills the room of a captive emperor or the storage cells of the Federal Reserve Bank of New York. Darius must have had great fun in his bathtub.
In the long run, the cupidity and stupidity of human beings are what motivate the drama, although nature contributes by distributing gold arbitrarily and unevenly around the globe. There was never a time when gold was not in constant demand for ostentation or for hoarding.
Hoarding is similar to buying an insurance policy. Like an insurance policy, hoarding gold has a cost, for the idle metal earns nothing. However, you sleep better knowing that you hold some kind of a hedge against the chance that the catastrophes you fear may actually occur. This motive is as powerful among poor peasants and laborers as among kings and princes. But the insurance policy can work only as long as everyone else continues to consider gold an item of highest value. For that essential condition to be met, people must continue to agree with one another that gold is scarce.
The distribution of income in Asia provides a second answer to our question about the strange equilibrium that kept gold moving in the eastern direction and useful commodities such as spices and silk moving to the west. Evidence developed by modern economists indicates that average per capita wealth in Asia in the sixteenth and seventeenth centuries was close to average per capita wealth in Europe.35 Adam Smith himself pointed out that China was one of the richest and most fertile countries in the world.36
Averages can be dangerously deceptive when the dispersion around them is wide. The per capita figure for Europe is of some value as at least suggestive, but the per capita measure for China, or any part of Asia at that time, obscures the reality that a tiny number of people lived in an environment of luxury and indulgence while the masses existed at levels that were horrible even by the standards of the poorest people in Europe. Adam Smith was eloquent on the subject. In describing conditions in Canton to illustrate his point that the poverty in China far surpassed that of "the most beggarly nations in Europe," he wrote:
The subsistence which they find there is so scanty that they are eager to fish up the nastiest garbage thrown overboard from any European ship. Any carrion, the carcase [sic] of a dead dog or cat, for example, although half putrid and stinking, is as welcome to them as the most wholesome food to the peoples of other countries.37
Under conditions like this, the gold-consuming nobility of China were aware of no loss to themselves in shipping the products of their land out to Europe, because the privileged class was so small and wielded so much power that their consumption could be, and usually was, as conspicuous as they wanted it to be wi
thout any sense of prodigality on their part. Gold and silver, on the other hand, had a limitless market in Asia, for both ostentation and insurance against uprisings and war. What looked like an irrational exchange with the Europeans at first glance thus becomes an understandable set of transactions when viewed from the perspective of class structure and tastes. Similar observations apply, with only minor variations, to Japan, India, and the island kingdoms of the Pacific.
As Marco Polo did not have a graduate degree in economics, we can pardon his hyperbole when he says that stamping the paper money of the Great Khan made the process "as formal and authoritative as if [the notes] were made of pure gold or silver.... The money is authentic." Nevertheless, his evaluation of the paper currency of thirteenth-century China was keen enough to touch on matters that will concern us repeatedly in later pages, topics such as the interaction between specie-money in metallic form-and money in its more ephemeral forms such as paper, bookkeeping entries, and computer blips. Marco Polo's respect for Kublai Khan's stamp on the mulberry currency also raises important questions about money issued by the state and its relationship to the private money that enters today into the huge volume of transferring funds, either by check or electronically, from one private bank account to another.
Kublai Khan's stamp bestowed authenticity and the attributes of gold and silver on his paper money only because Kublai Khan's state was all-powerful-in China. Marco Polo missed that essential point. No one in England would have been able to use the Chinese notes to pay for a pint of beer at the local tavern, and no French king could have paid ransoms with it. Hence, this money did not have the true attributes of gold and silver. In fact, no one outside China would even have known what to do with the mulberry notes unless they were planning to go to China to buy some silk or vases. Otherwise, the Khan's currency was valueless outside China.
People demand that their money must have value. In fact, valueless money is not even money, because it would not serve as a means of payment and would be nothing that anybody would want to accumulate or consider as wealth. Metallic money, or paper money convertible into metal, is usually considered to have more value than a system that uses paper only. As Ma Twan-lin reminded us, "Paper should never be money [but] only employed as a representative sign of value existing in metals or produce." The presumption here is that metals are more limited in supply than paper, which means that metallic systems should prevent money from becoming valueless.
Yet there is a strong superficial resemblance between Croesus's turning out great supplies of gold coins by mining the Pactolus and a Chinese emperor who turns on the printing press. Croesus and the emperor both produce an expansion in the supply of money. The difference is in the international consequences. A gold coin would buy a pint of beer anywhere when foreign paper notes would not. Nevertheless, from a domestic viewpoint, the similarities between Croesus and the emperor are much closer than they appear at first glance. The world just thinks about them differently.
The policies of the Great Khan demonstrated that the power of the state is a strategic element in establishing and sustaining value. The "continentals" printed by the government of the American colonies during the Revolutionary War became a metaphor for worthlessness, but the dollars of the federal government, authorized by the Constitution, have been acceptable for over two hundred years and throughout all our wars. Lydia, Genoa, Florence, and Venice were not just economic powerhouses but also had strong local governments before they issued their famous gold coins, but who ever heard of a gold coin issued by Manchester or Liverpool? The French have changed their monetary system on many occasions over the centuries, which is probably why French peasants have earned the reputation of being congenital hoarders of gold. The pound sterling has the longest uninterrupted history of all, just like the English monarchy. Afte the breakup of the Soviet Union, the Russians had a hard time establishing the international acceptability of the ruble, while after German unification the East Germans had the great advantage of exchanging their currency for the firmly established deutschmark.
Since we left Offa and his silver coins way back around 800, the English have played a subordinate role in our story. It is now time to move England to center stage, for developments there during the years from 1700 to 1810 materially expanded the role of gold in the financial system, formalized it, and shaped the broad structure of the world economy as we know it today. In the course of recounting these events, we shall hear an echo of Hien Tsung's inadvertent innovation of paper money, because the key incident was just as unplanned and just as historic in its consequences.
n 1661, King Charles II of England issued an Order-in-Council mandating the adoption of a revolutionary innovation in the manufacture of coins-the use of machinery in place of hammering out the coins by hand. The innovation in question was not a gadget that someone invented one day and that went into effect the next. Technological change is often disruptive to established habits. The workers and officials in the national mints who earned their living by doing things the old-fashioned way fiercely resisted the introduction of any modification in the manufacture of coins. Even with a King's Order-inCouncil to force its introduction, a full installation of the new method had to wait more than thirty years, and then came about only because a financial crisis had forced the issue.
It was in the aftermath of that crisis that, quite without warning, the markets for the precious metals in Britain suddenly decided that silver was out and gold was in as the standard for the value of the pound sterling. Without anyone having planned this sequence of events, we shall see that they led, step-by-step, from Charles's Order of 1661 to the estab lishment of a set of hallowed institutions based on a central role for gold. These institutions would rule the world economy throughout most of the nineteenth and twentieth centuries. Thus, although the story here begins by focusing on silver, the golden threads are laced through it from start to finish.
The Lydians and ancient Greeks who first introduced coins into general use hammered their coins out by hand, one at a time. In view of the millions of coins produced over the next one thousand years all over Europe and in the East, it is astonishing that nobody succeeded in developing a faster method. But no one did. Indeed, more than speed of production should have motivated a change. From the very beginning of coinage, the smooth edges of hammered coins had encouraged people to clip or file off tiny pieces of metal that could be accumulated until the quantity was sufficient to be melted down into bullion, which the clippers then resold to the mint for a fresh supply of coins. The process was too profitable to be stifled by the severe punishments dealt to the clippers who were caught at their work. In the thirteenth century, Jews were often accused of clipping even when they were innocent. In 1270 alone, 280 Jews were beheaded for the crime.'
Despite the impact of clipping on the currency, the traditional methods of minting coins continued without any semblance of change until early in the reign of Queen Elizabeth of England, when a man named Eloy Mestrell experimented with using horses to power the coin-stamping machines and using this machinery to redesign the edge of the coins so that clipping would be immediately visible. Ingenious as he may have been, Mestrell generated little enthusiasm for his efforts and was fired in 1572. That was not the last to be heard of Mestrell, for he was hanged in 1578 for counterfeiting!'
Nevertheless, Mestrell's efforts encouraged others to keep trying. In the 1620s, the chief engraver at the Paris Mint, Nicholas Briot, succeeded in introducing a workable technique for frustrating the coin-clipper. Briot's approach was to edge the coin with either a kind of graining or with inscriptions that would make the clipper's efforts immediately visible, no matter how tiny the piece he clipped. No luck: the traditionalists in the Paris Mint refused to go along, leaving Briot instead of the coin-clippers in a state of frustration.3
Briot was not ready to give up. In 1625 he went to England, where he started producing what came to be known as milled coins at the Tower Mint in London. Again there was resista
nce from the hierarchy at the Mint. As the moneyers were paid by the number of pounds of coins they struck, they were not lightly going to relinquish much of their metal to a Frenchman and his new-fangled devices.4 Briot's total output in 1631-1632 amounted to around 26 pounds of gold coins and 211 pounds of silver coins, compared with more than four thousand pounds of gold and fifty thousand pounds of silver turned out by conventional methods; by 1638-1639, Briot's silver coin production was approaching one thousand pounds, but this was still a minor effort.' The evidence also suggests that Briot's coins were turned out by hand rather than by machine .6 Briiot temporarily faded from view from about 1640 to the 1660s.
In 1645, the French, thinking better of the matter, finally eliminated the hammer at the Paris Mint and replaced it with horse-drawn machines that performed the entire job from rolling out the metal to stamping out the designs on the faces and milling the edges to foil the clippers. That success led the English Commonwealth to invite Pierre Blondeau, the chief engineer at Paris, to follow in Briot's path to London.* The authorities at the Mint permitted Blondeau to produce milled coins, but from just a small portion of a huge silver treasure that the English had plundered from a captured Spanish galleon; the rest of the silver was transformed into coinage by way of the hammer.'
This story has a happy ending. With the restoration of Charles II to the throne of England in 1660, the process of change accelerated. Briot was recalled to London, Blondeau was given a 21-year contract, and Charles's Order-in-Council of 1661 declared that "All coin [was] to be struck as soon as possible by machinery, with grained or lettered edges."' Blondeau died in 1672, before he could complete his contract, but during his employment at the Mint he had the moneyers fully subordinate to him and sworn to secrecy about what they learned from him.'