Book Review, The Power of Gold

Peter L. Bernstein, The Power of Gold—The History of an Obsession (New York: John Wiley & Sons, Inc., 2000), $27.95.

The Power of Gold is beautifully written and amply displays Bernstein’s flair for the felicitous phrase and the incisive quote. Even the choice of words for the title is significant—”power” and “obsession”. Bernstein could have used any of the words in the “religion” or “folly” families, and in the text, does; but upon reflection, “power” and “obsession” are like Goldilocks’ porridge, not too hot and not too cold. You know you are in the hands of someone with a deep and modern perspective from reading the acknowledgements—Charles Kindleberger, Robert Heilbroner, Paul Samuelson, Milton Friedman, and Alan Greenspan, to name just the familiar famous; Paul Volcker and John Kenneth Galbraith offer their encomiums on the back cover.

Make no mistake, this is a history book and not a theoretical treatise nor a policy polemic. Bernstein only indirectly addresses the debate about whether present-day national currencies can or should be returned to a gold standard. Instead he builds the story to the historical fact of gold becoming an anachronism unsuited to the needs of modern economies. He describes every gold-based monetary system devised throughout history and why each failed. The simplest reason is that an economy that uses metal for money will always be constrained by the supply of the metal. Bernstein does not cite the data, but all the gold in Fort Knox would support only the tiniest of fractions of the banknotes and coins in circulation in the US today, and banknotes and coins are themselves only a fraction of the money supply.

Historically, gold is not the eternal verity that gold standard proponents would have us believe. From earliest days, rulers have periodically debased their currencies. The longest run of gold money of unchanging weight and value is something named the bezant, which was coined by Byzantium’s Constantine (after whom Constantinople was named) and lasted more than 700 years. It takes another millennium for the British to institute a golden age, lasting only 50 years from the end of the American Civil War to the end of WW I. During those years, the Western world had the “stability, harmony, respectability” that gave gold its mystique still nostalgically longed-for today. Along the way, Bernstein describes the development of paper money, at medieval trade fairs in Europe and by Chinese Emperor Hien Tsung in the 9th century. The Far East has always preferred to hoard gold over using it as money, and is the only black hole into which gold and silver fall, never to return. Otherwise, all the gold ever mined and not buried or lost irretrievably at sea is still among us; gold is virtually indestructible. Your necklace may once have been a Pharaoh’s adornment.

Bernstein starts with Moses breaking the tablets bearing the Ten Commandments when he came down from Mt. Sinai and found the people worshipping the golden calf. Still, God commanded that the temple built to Him be rich in gold, some 80 paragraphs of specific instructions. The stories build from there through prehistory and myth to Alexander the Great and Kublai Khan. Charlemagne plays a central role, demanding gold to illuminate manuscripts. The tales are fabulous and sometimes lurid. How and why did Spain mismanage its New World wealth (and Spain’s King Philip cause the world’s first sovereign default)? Gold from the Americas that increased the European money supply caused the first statement of monetarism—in 1568. Sir Isaac Newton transformed himself from the preeminent techno-geek of his day to Master of the Mint, and was the first to float a currency—in 1717. The British pound became the first true world currency mostly because the British debased the currency the least, and had the most advanced coinage in all of Europe as early as the year 1000, despite having no gold mines.

You learn the origin of all the names—shilling, shekel, ducat, guinea, florin, yen, dollar. At every turn Bernstein provides statistics on how many ounces, pounds and ton of gold are produced, shipped, owed and owned, and what they are worth in purchasing power terms. You probably knew that in the first millenium salt was worth more than gold in West Africa, and pepper was worth more than its weight in gold in Europe—but did you know that the cynanidation process to extract South African gold was the jazziest high technology of its day? (Its inventor died broke.) In historical terms, present-day adornment is extremely modest compared to some of the excesses of earlier ages, like fields of tents made from cloth of gold as far as the eye could see, and yet over the past 150 years, world jewelry consumption per capita has increased by twenty times.

While there are lots of juicy tidbits, this is not a collection of trivia, but rather an incoherent and messy world history made coherent through the single lens of gold. Of necessity we learn more about kings and governments of the past than we really want to remember. What is memorable is Herbert Hoover’s statement to President-elect Roosevelt in 1933: “We have gold because we cannot trust Governments.” This is what is behind the endless yearning for a universal money. Bernstein concludes that the deeper message of the story of gold is that to chase it for its own sake is folly; better to trade it for life-sustaining salt.