Gold 2011

Gold: A Glittering History

Gold has had a hold on mankind since it was first mined in the Copper Age.

An Apulian red-figure calyx crater depicting Jason bringing Pelias the Golden Fleece, circa 340 BC–330 BC.
Collection of Joseph-François Tochon d'Annecy

Perseus went in search of a Golden Fleece. Croesus, among the first to mint gold coins, amassed so much wealth that the phrase "rich as Croesus" is still used by people who have no idea of his identity. South American Indians called gold "the sweat of the sun." Pizarro and other conquistadors exhausted themselves searching for El Dorado, the city of gold. The Golden Rule is still the most important rule, the Gold Medal is still the highest prize in the Olympics, and the California Gold Rush is one of the founding mythologies of America.

Throughout history, gold has been associated with:

  • Integrity: We say someone is "good as gold" or have a "heart of gold" or are "worth their weight in gold."
  • Excellence: We say someone is "going for the gold."
  • Brilliance: We say it "glitters like gold" or that it "shines like gold."
  • Success: We say someone "struck gold," or that it was a "golden opportunity," or that "everything they touch turns to gold" or someone has "the Midas touch."

Integrity. Excellence. Brilliance. Success. You could also associate gold with greed, wrath, pride, and envy—four of the Seven Deadly Sins.

Gaining Currency

In prehistoric times, payments for goods and services were done primarily by barter, but most items used for barter were not easily transferable.

Gold's glitter, malleability and portability made it attractive as money almost from the time it began to be mined. The economic historian Peter Bernstein notes the Egyptians were casting gold bars as money as early as 4,000 BCE, each bar stamped with the name of the pharaoh Menes.

The main problem with accepting gold and silver as money was making sure of the purity and weight.

That's where coins came in.

About 600 BCE in the city of Sardis,in western Turkey, several kings, but principally King Croesus, began minting gold coins. Sardis sat at the western end of a highway stretching from Egypt to the Aegean Sea to Asia Minor all the way into Persia, Babylon and Asia. Sardis was an important trading center, and the Lydians needed money, something that could be used in payment for goods and services but was also transportable.

They got the gold from deposits on the banks of the Pactolis River, which ran through the city. It was a crude form of gold, called electrum, but it was good enough.

Gold had been used as a medium of exchange before, but Croesus had one big advantage: His predecessors had established a state monopoly on electrum. In other words, the state controlled the supply of money.

Lydia grew rich by exporting its gold coins, and here Croesus added his own contribution. He recalled the electrum coins and melted them down into pure gold and silver coins. He also made sure they were a uniform weight and size.

The result: his coins were accepted immediately throughout Asia Minor and Greece. Gold became money, and it remained so for the next 2,500 years.

Gold And Empires

Every great empire minted gold coins. The Romans minted the aureus for 400 years. The aureus was replaced by another gold coin, the solidus, by Constantine in 309. They circulated for nearly 700 years.

The Byzantines — also minted the solidus. Until the 11th century, the fineness of the solidus was high — 95 percent to 98 percent pure gold. But Byzantine emperors of the 11th century began debasing the coin. At one point it had only a roughly 15 percent gold content.

Very little gold circulated in central Europe during the Dark Ages. Gold coin production did not really resume in Europe until the 13th century when Florence, at the peak of its power, began minting the florin. The dominant coin for large transactions, it was minted for almost 300 years.

The successors to the Byzantines were the Venetians, who amassed power based on maintaining a positive trade balance. They exported dramatically more than they imported, and that difference was covered by gold.

In 1204, Crusaders from Europe, allied with the Venetians, sacked Constantinople and carried off much of the gold and treasures back to Venice. The Venetians were now fabulously wealthy, particularly in gold. Like the empires before them, they minted their own gold coin: the ducat, which became the standard gold coin for the next 400 years.

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But the European economy was expanding, and more gold was needed. The supply was about to expand dramatically. Columbus set sail in 1492 to find a new route to Asia.  "Get gold, humanely if you can, but at all hazards, get gold," was the legendary instruction of the Spanish King Ferdinand to his subjects.

They got it. First they confiscated gold from the Incas, then they began new production on the backs of the enslaved natives.

The result was an enormous increase in the global supply of gold. For a short while, Spain was the mightiest empire in the world. But within a century of Columbus' voyage, the gold supply began to dry up, and the vast horde that Spain had amassed was wasted in the 16th and 17th centuries on ruinous wars with England, France and other countries.

The Spanish empire had its gold coin: the doubloon, minted in Spain, Mexico, and Peru.

The U.S. government's rocky relationship with gold

Gold In America

The U.S. government's relationship with gold (and silver) has a long and difficult history.

The U.S. tried, in early years, to make both gold and silver coins legal tender. Like all the empires before it, the United States had a widely circulated gold coin: the Eagle, minted from 1795 to 1933. It was originally 91 percent pure gold and contained 0.516 ounces of gold.

Money was a problem in the early years of the U.S. After the Revolution, the U.S. didn't have enough of it. The country imported more than it exported and its hard currency was going overseas.

altrendo images | Getty Images

The solution? Paper money. During the Revolution, the Continental Congress printed money with nothing to back it, as did the individual states. It proved worthless. That painful experience caused the Founding Fathers to insert a clause in the Constitution stating that "No State shall..make any Thing but gold and silver Coin a Tender in Payment of Debts."

After the Revolution, private banks began issuing paper money backed by gold and redeemable for gold. Before the Civil War, these private bank notes were the most widely used money in America.

Problem was, the banks expanded the money supply too much. The value of the paper money far exceeded the value of the gold held in the vaults. If all the note holders showed up at once to redeem their paper for gold—which happened many times—the bank went under.

The solution, or course, was more discipline by banks—fewer bank notes—and, ultimately, a central bank with a monopoly on bank notes.

But all that was in the future. What was needed was more credit for a growing country, and that meant a need for more gold.

California Gold Rush

The year 1848, when the mother lode was discovered in California, changed everything. In 1853 over 100 tons of gold were shipped from California to the East Coast. The rush didn't last long, but it was enough to dramatically expand the gold supply and it finally gave the United States the coinage it needed to grow its economy and launch it as a global power.

But there's a problem with tying your economy so closely to gold: any lack of it causes big problems. Gold was typically transferred from California to the eastern United States via ship that went around South America. In 1857, the steamship Central America sank off the coast of South Carolina with 21 tons of gold on board.

The loss of that gold was a factor in what became known as the Panic of 1857. Many banks went under.

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It got worse when the Civil War started. There was no central bank. Most money was still in the form of privately issued bank notes, supposedly backed by gold. The U.S. government, pressed for cash to pay for the Civil War, borrowed gold from the banks. This left the banks with a shortage of gold to back the notes. When they put a halt on the ability to redeem the notes for gold, many of the notes became worthless.

The Greenback and Fiat Money

But the government still needed more money. A New York Congressman named Elbridge Spaulding created the greenback, federal paper money that could not be redeemed for gold. It was issued by the Federal Government and declared to be Legal Tender, simply because the U.S. government said so. By the end of the war, the government had issued $400 million in greenbacks.

The U.S. resumed convertibility into gold after the Civil War, but the greenbacks still circulated. One greenback equaled one gold dollar, but the values changed—the price of gold changed, and the value of the greenback changed depending on the amount in circulation.

Despite problems created by tying a currency to gold, the U.S. and most of the world adopted the gold standard in the 19th century. Gold and silver coins circulated as money; paper money was backed by convertibility into gold. The U.S. went to a gold standard in 1873.

World War I changed everything

World War I changed everything. To finance the war, most of Europe went off the gold standard. They had to: They had spent their gold on the war, which they financed (now that they were off the gold standard) by printing money. When it was over many countries had a significant inflation problem, Germany the worst of all.

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After the war, many countries returned to the gold standard. But this was a different kind of gold standard: the U.K., for example, went back on the gold standardin 1925, but this time there were no circulating gold coins. In 1931, as the worldwide Great Depression worsened, the U.K. saw large outflows of gold to the U.S. Since the supply of money was tied to the amount of gold they held, the U.K. could not stimulate its economy by expanding the monetary supply.

Forced to choose, the U.K. abandoned the gold standard.

Germany could not go back to the gold standard since it had used all its gold in the war and for reparations. Instead, the Germans began printing money. That, too, would prove to be disastrous; it led to hyperinflation of the 1920s, and the rise of Hitler.

Unlike the U.K., the U.S. maintained its commitment to the gold standard. Gold coins continued to circulate, but the U.S. had a problem similar to the U.K. By law, the Federal Reserve was required to have gold backing 40 percent of its Federal Reserve notes. It, too, could not expand the money supply.

But this was the Great Depression, and Americans were cashing in their dollars for gold. To increase demand for dollars and defend the gold standard, the Federal Reserve raised interest rates.

This was a disastrous course of action since it likely exacerbated the Great Depression. How much it exacerbated it is one of the great questions of 20th century economic history. At any rate, the strategy was unsuccessful. The supply of money in circulation dropped as Americans cashed in their dollars for gold, leading to deflation. Even foreign investors withdrew money from U.S. banks and converted to gold.

President Franklin Roosevelt took gold coins out of circulation; holders of gold were required to turn in their supplies at a rate of $20.67 per troy ounce. In 1934, that price was raised to $35.

This was the beginning of the end for the gold standard. Gold no longer circulated as money…now the only legal tender was paper money and silver (and base metals used in coins). Most of the rest of the world followed.

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What about the gold? It was stored in vaults to back up the paper that was printed. One dollar worth of gold, theoretically, could buy so many dollars worth of paper. But demand for money continued to outstrip the supply of gold. Still, the U.S. continued on the gold standard.

After World War II, the devastated countries of Europe rebuilt their economy using U.S. dollars; they paid for those dollars in gold. Backed by gold, the dollar became the strongest currency in the world.

The new gold standard

Under the Bretton Woods Agreements, a type of gold standard was maintained. Many countries fixed their exchange rates relative to the U.S. dollar. The U.S. government, still maintaining convertibility of its currency into gold, continued to promise to fix gold at $35 an ounce.

France Ambassador to the United States, Henri Bonnet, signing the Bretton Woods Agreement , 1944.
Keystone-France | Getty Images

By the 1960s the European economies had recovered. The United States was embroiled in a costly war in Vietnam. There was a serious negative U.S. trade balance, and the government was printing money.

The large supply of overseas dollars began coming home: European countries redeemed their dollars for gold at the price of $35 an ounce. The U.S. gold supply dwindled, and the dollar weakened. In August 1971, President Nixon stopped accepting dollars for gold.

As a result, the special role of gold in the world monetary system was ended. The Federal Reserve was not obliged to tie the value of the dollar to gold, or anything else. Most of the currencies of the world now float freely against each other.

Gold, of course, is still of value as a store of private wealth. In fact, President Gerald Ford legalized private ownership of gold coins, bars and certificates in 1974.

Should the world return to the gold standard? It's attractive for some. Price stability is its one great virtue, since a government cannot change the money supply without changing the gold supply.

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But the math doesn't even come close to adding up. Do it yourself: The total amount of gold ever mined is about 165,600 metric tons. That's about 5.8 billion ounces, multiplied by $1,500 an ounce, which is about $8.7 trillion. That's just about the roughly $8 trillion that is the total value of the money circulating or on deposit — M2 — in just the United States. Even if you think the U.S. money supply is inflated, it's clear the world would have to dramatically shrink the amount of money in circulation to go back to the gold standard.

For more on the history of gold:

"The Power of Gold: The History of An Obsession" by Peter L. Bernstein. New York: John Wiley & Sons, 2000.

The History Channel's 2001 special, "Gold: the History of Man's Greatest Obsession" also mines similar territory.