Peter L. Bernstein - The power of gold: the history of an obsession

Contents

Copyright 2000, 2012 by Peter L. Bernstein. All rights reserved.

Published by John Wiley & Sons, Inc.

Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the Web at www.copyright.com . Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions .

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002.

Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our web site at www.wiley.com .

Library of Congress Cataloging-in-Publication Data:

Bernstein, Peter L.

The power of gold : the history of an obsession / Peter L. Bernstein.

p. cm.

Includes bibliographical references and index.

ISBN 0-471-25210-7 (cloth); ISBN 978-1-118-27010-3 (paper); ISBN 978-1-118-28269-4 (ebk.); ISBN 978-1-118-28414-8 (ebk.); ISBN 978-1-118-28522-0 (ebk.)

1. GoldFolklore. 2. GoldHistory. 3. GoldSocial aspects. I. Title.

GR810.B47 2000

398.365dc21 00-036647

For Barbara, once again and always.

They wonder much to hear that gold, which in itself is so useless a thing, should be everywhere so much esteemed, that even men for whom it was made, and by whom it has its value, should yet be thought of less value than it is.

Sir Thomas More (14781535). Utopia of Jewels and Wealth

Foreword

What could be timelier than a new release of Peter Bernsteins authoritative book The Power of Gold ?

Bernstein wrote at the turn of the centuryonly a decade ago, but what a contrast from today in the world of business and finance. Economic growth in the economically developed world had been sustained for a decade. Reasonable price stability had been achieved. Huge gains in the worlds stock markets exceeded past experience.

Almost everywhere, central bankers were esteemed and trusted. Central bank independence came to be taken as the indispensable guarantor of stability. The mood was epitomized by the creation of a brand-new central bank to manage the European common currency, itself a key initiative toward closer European union. With its independence from the sovereign states of the Eurozone embodied in a solemn treaty, the new central bank reached a virtually unprecedented state, freed of direct accountability to a political government.

For decades, no central bank or government had maintained convertibility of its currencies into gold. For the most part, major currencies were floated in exchange markets. In one of Bernsteins apt phrases, gold had been emasculated. With its enduring luster, its malleability, its resistance to wear and corrosion, it could remain useful for adornment and jewelry and to a limited exchange as a tiny component of some electronic devices. Yet it had been shorn of monetary significance. In the 1990s, central banks, the custodians of national financial resources, were tending to sell from their golden hoards acquired over the decades, even at declining prices.

All of that was a very long way from the pleading of General de Gaulle in the 1960s for the world to return to a full-blooded gold standard. Bernstein recalled his eloquence: There can be no other criterion, no other standard, than goldgold that never changes, that can be shipped in ingots, bars, coins, that has no nationality, and that is eternally and universally accepted as the unalterable fiduciary value par excellence. Somehow, in his lament for the gold standard, de Gaulle neglected to note that while gold may be immutable as a metal, its price could and did changechange in the marketplace or by government decision, as he himself strongly advocated at the time.

Here we are, only a decade or so after Bernstein wrote, in the midst of demonstrableperhaps unprecedentedvolatility in the price of gold. Neither de Gaulle nor Bernstein could have envisaged the level of the gold price as I write, 50 times the value in the 1960s and 5 times the price 10 years ago. Yet before his death, Peter had seen enough of the market turmoil to confirm his parting conclusion: in the midst of economic fears and financial uncertainty, gold would be back in demand.

Peter Bernstein was an anomaly in the modern world of investment, a man with a deep understanding of finance in all of its up-to-date mathematical and theoretical manifestations but also a student of history. The story of gold is filled with the foibles and vulnerabilities of kings and presidents and indeed of all human judgments. More than that, Peter can writewrite in a way that the arcane becomes understandable, that the history of gold becomes a fascinating story of the rise and fall of nations and civilizations.

Now, only a few years after Bernsteins death, our capitalist civilization is being challenged. Most of the so-called developed world is suffering through an extended recession and high unemployment. The euro and the European Central Bank so confidently launched a decade ago are in possibly even mortal crisis. Governments and central banks seem to have lost their established bearings. Distrust is rife.

There is a yearning for solidity and stability. So, it is not entirely surprising that we hear some urging that a monetary role for gold be restored. At the very least, gold remains for some a kind of last resort, a safeguard against threats seen and unseen. If gold has lost the essential elements of money, it at least remains for some people a store of value.

That is a very long way from restoring any approximation of the classic gold standard, including the residual role of gold in the Bretton Woods system. We have been left with a continuing, elusive challenge of combining needed discipline in our monetary and fiscal affairs with a degree of flexibility in exchange rates.

The need for realism in the reform of our monetary system is what makes Bernsteins story The Power of Gold so timely. It is a compelling reminder that maintaining a fixed price for gold and fixed exchange rates was difficult even in a simpler financial environment.