Bernstein, The Power of Gold

Peter L. Bernstein, who died in 2009 at the age of 90, had a full life managing money, running an economic consulting firm for institutional investors, and writing ten books, several of them bestsellers. One that I particularly enjoyed was Against the Gods: The Remarkable Story of Risk. Right up there was The Power of Gold: The History of an Obsession, originally published in 2000. Wiley has just reissued the book in paperback, with a new foreword by Paul A. Volcker, offering yet another generation of readers a chance to profit from Bernstein’s erudition and thoroughly engaging writing style.

Bernstein begins with God’s reported fixation with gold. “When Moses climbed Mount Sinai to receive the Word from God, God gave him a lot more to do than just transmit the Ten Commandments and many associated rules and obligations. God also issued precise directions for the construction of a sanctuary where the Jews were to worship Him, together with a tabernacle to go inside the sanctuary. God began right off by specifying that ‘thou shalt overlay it with pure gold, within and without shalt thou overlay it, and shalt make upon it a crown of gold round about.’ That is just the beginning: God even ordered that the furniture, fixtures, and all the decorative items such as cherubs were to be covered in pure gold.” (p. 11)

The golden-laden sanctuary and tabernacle disappeared, but the practice of “using gold to proclaim the power of the church” was repeated many times since. Gold also became one of the most common symbols of temporal wealth—robes woven in gold thread, gold jewelry, and gold dinnerware.

Most important for Bernstein’s story, gold was viewed as a form of money. The Egyptians cast gold bars as money as early as 4000 BC; the Lydians, the first retail tradesmen, minted and used both gold and silver coins beginning around 635 BC. “In a sense, the transformation of gold into money democratized it. Thanks to coinage, the ownership and use of gold after Lydia was no longer a royal prerogative. It was now literally in the hands of common citizens, even if only the most wealthy, who could touch and feel it, hoard it in their homes, buy things with it, and pay their debts with it—even as they continued to put their gold through their ears and noses and to wrap it around their necks, wrists, and fingers. Before long, they would be paying their taxes with it. The notions of power and wealth thus blended into one.” (p. 39)

The minting of gold coins was a process crying out for technological innovation. Not only was it tediously slow to hammer out coins by hand, one at a time, but “the smooth edges of hammered coins … 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. … 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.”

It wasn’t until the reign of Queen Elizabeth of England that one Eloy Mestrell tried to mechanize the minting process, “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!” It wasn’t until 1661 that Charles II ordered that “All coin [was] to be struck as soon as possible by machinery, with grained or lettered edges.” (pp. 176-77)

Bernstein, of course, recounts highlights from the history of gold, including how Sir Isaac Newton became Master of the Mint , how Napoleon conducted probably the only major war in history without currency depreciation in one form or another, and how poor Johann Sutter spent years unsuccessfully trying to reclaim his land (and sawmill) from squatters.

Fast forward to the international gold standard, which “shimmers from the past like the memory of a lost paradise, embodying all the nostalgia of the Victorian and Edwardian eras—stability, harmony, respectability.” (p. 239) In his discussion of the protracted decoupling of gold and money, Bernstein writes: “It is easy to understand the nostalgia for the prewar world that encouraged the struggle to return to gold. It is easy to understand the desire for a system whose simplicity and elegance was unmatched in the history of money. … But it is not so easy to understand that men could make such mighty decisions on the basis of obsolete visions rather than objective analysis.” (p. 326)

Bernstein’s book is a fascinating read, especially in light of the recent run-up in the price of gold. Should gold once again be viewed as a currency, as so many commentators have suggested? Were he still alive, Bernstein might laconically answer, “Read my book.”