Glittering career of a heavy metal

The Power of Gold
June 22, 2001

Peter Bernstein is a fund manager and author of several notable books popularising aspects of finance. In this, his latest book, he moves away from explaining the technicalities of financial markets to tracing the history and role of gold in society, from its appearance in Greek myth to its rise and decline in the international monetary system.

As is to be expected, he writes well - indeed colourfully and entertainingly. A few chapter titles capture the flavour: "Get gold at all hazards", "The sacred thirst", and "The great recoinage and the last of the magicians". There is also a chapter on Britain's return to the gold standard in 1925, called of course "The Norman conquest" in recognition of the role of the then-governor of the Bank of England, Montagu Norman.

But despite its vividness and its sweep of history, who is this book for? Who would want to read it? The first section is a retelling of myths and biblical episodes involving gold, together with history. The history is simil-arly focused, and contains some telling facts, such as this useful reminder of the power of compound interest: "During the 34 years after Gallienus began his machinations with the coinage and Diocletian became emperor prices rose over 9 per cent a year, which means that in AD 304 prices were 20 times higher than in AD 260." It is all too easy to forget how rapidly a "modest" inflation destroys the value of money. We then scamper through history, to the 15th century and the end of the first third of the book. Interesting points and conjectures abound. We learn how three "designers and producers of silver coins", Eoba, Babba and Udd, under the protection of Offa, (who was the king of Mercia from 757 to 796), produced a silver coinage - England is short of indigenous gold - which was of high and reliable quality, and was thus rapidly adopted.

This facilitated the move from barter and thus stimulated trade and economic growth. An important lesson. No economy can grow without the rule of law, which is paramount. But a sound currency comes close behind. This necessary reminder is, however, buried among comparatively trivial information. Did you know, for example, that Charlemagne was "embalmed and buried sitting on a great gold and ivory throne"?

It may be claimed, possibly correctly, that such points help the story along. But they help it to become misleading. European exploration of the Americas in the 16th century was associated with a rising gold price and with progress in mathematics, which facilitated navigation. Bernstein dismisses the claim that the exploration would have occurred even without the thirst for gold. Maybe it is not likely, but the claim deserves to be properly refuted.

We next hear the story of gold in the East, most notably China, and then move to how England was accidentally put on the gold standard by Newton. Bernstein gives a vivid account of Newton's life and the monetary problems in England at the time. The prices of gold and silver then prevailing made it profitable to import gold to coin into guineas, then convert these to silver coins, which were in turn melted to bullion and shipped overseas. As the basic coinage was silver, this was a problem. When he became master of the Mint, Newton argued that the value of the (gold) guinea should be set at 21 (silver) shillings. Insisting on this rate would, he thought, stabilise the composition of the coinage, put an end to the export of gold, and establish a bimetallic (silver and gold) monetary system in England. He was right in part. The coinage was stabilised, but as gold. A proclamation made the gold/silver price Newton had suggested law on December 22 1717. Soon after, Britain was put on the gold standard, which persisted, with occasional interruption, to 1931. Silver had continued to flee.

Gold-silver battles make good narratives, and Bernstein returns to the theme in the late 19th-century United States. He tells vividly the story of the Bryan-McKinley presidential election campaign. Bryan, from a silver-producing state, argued for the monetisation of silver. From that campaign comes Bryan's famous attack on the gold standard. Bernstein cannot resist quoting it, and nor can I: "If they say bimetallism is good, but that we cannot have it until other nations help us, we reply that, instead of having a gold standard because England has, we will restore bimetallism and let England have bimetallism because the United States has it I we will answer their demand for a gold standard by saying to them: You shall not press down upon the brow of labour this crown of thorns, you shall not crucify mankind upon a cross of gold." Bryan lost the election, the US stayed on gold, and the gold standard was saved until Britain left it in 1931. The long decline of gold as the basis of monetary systems then started.

What happened in 1931? Bernstein rightly starts with Britain's return in 1925 after suspending the standard during the first world war and then squeezing the economy to bring prices into line with those in the US - an attempt that was only partially successful. The economy was sluggish after 1925, until Britain left the standard, but Bernstein is perhaps a little unjust on those who urged and implemented a return to gold. The economy had prospered and world trade had flourished under the gold standard. Gold's advocates were not guided by faith alone. But be that as it may, as a consequence of external pressures and internal difficulties, Britain left gold on September 21 1931. Other countries followed. Notably, none of those that broke the link experienced the severe depression that affected the United States.

This is a powerful demonstration of the ability of floating exchange rates to protect countries from monetary mistakes made overseas. It is a great pity this demonstration is being forgotten in the present haste to fix exchange rates and adopt common currencies.

The book concludes with the demise of gold in the international monetary system. President Nixon decided to end the US practice of selling gold to foreign governments or central banks at a fixed exchange rate for US dollars. This somewhat aetiolated link of gold to the dollar was broken in 1971.

Gold now plays a modest part in the foreign exchange reserves of most nations, and its "official" role is in decline. Bernstein speculates about the reasons for the rise and fall of gold, and what, if anything, might take its place. He quotes Robert Mundell, the 1999 economics Nobel prize laureate, announcing that "gold will be part of the international monetary system in the 21st century". Bernstein admits this is a pos-sibility, but his final words are somewhat more sceptical.

This is a lively and racy book, often shrewd in its judgements. It contains something for almost everybody - students of the Greek myths, of Roman history, of the history of bimetallism, of the international monetary system. Anyone with any of these interests would find some small nugget in this book. But because it ranges so widely, and so superficially, I recommend dipping in from time to time and forgoing reading the book cover to cover.

Geoffrey E. Wood is professor of economics, City University Business School.

The Power of Gold

Author - Peter L. Bernstein
ISBN - 0 471 25210 7
Publisher - Wiley
Price - £17.99
Pages - 432

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