The Cursed Lust for Gold

Why gold? Sure it is a shiny pliant metal, useful for making flashy jewelry. But, that isn’t enough to explain why coronavirus fears would send the price of an ounce of gold skyrocketing—surely you don’t think there has suddenly been a big increase in the demand for gold jewelry, do you?

The allure of gold has little to do with its use in decoration. Gold has the allure of being something like money. Money is really useful; with enough money, you can buy whatever you want. Gold feels like some sort of supermoney, a safe money, a money that you can rely on. You can make a big pile of gold and dive right in and revel in the tactile feel of the shiny metal. Well, you’ll enjoy that last bit if you are Scrooge McDuck.

Is gold actually like money? Not anymore. In 1971, the United States abandoned the even the pretense of being on a gold standard. That was the last link of any actual connection of gold with money. Five decades later, this still surprises people. If you have a gold coin and want to exchange it for money and you take it to your local bank, they will just laugh at you. (Well, your banker probably won’t actually laugh because I am sure your banker is nice.) Banks deal in money, not gold.

Gold is now just a metal which can easily be melted down and turned into little disks if you like your metals in shiny round circles. You could make little squares or triangles or octagons of gold too, but they are not as popular; people really like it when their gold is a circle. Why? Why do people still think of gold as something like money?

Enter James Ledbetter’s One Nation Under Gold: How One Precious Metal Has Dominated the American Imagination for Four Centuries, which was clearly competing for longest subtitle of the year.

This is an extremely good book. It is in that genre of books where someone picks a commodity and tell the history of the world as reflected by that commodity. So here we have the history of the US through the lens of gold. If you like history books, this book is really fun. I have read lot of US history and I have read a lot of books about money and I still learned a lot from this book. (My students also liked it.)

My biggest surprise: I knew that once upon a time private gold ownership was banned in the US. I never learned why. It was just one of those strange mysteries that nobody ever covered in a normal history class, and there was no point in covering it in a money and banking course, and I never got around to looking it up. Why make it illegal to hold gold?

The answer: it happened during the Roosevelt Years (FDR, not Teddy). Before that, the United States was on something resembling a gold standard, which meant if you had $20.67 in US currency, you could take it back to the government and get an ounce of gold. ($20.67 is the actual number—I know it looks like a made up number, but it’s not.) Well, in theory you could redeem all your currency for gold. The US, like every other country on the gold standard, started issuing lots of extra currency and there was no longer anywhere near enough gold to redeem it all.

Then the Depression (the Big One) hit and the government started getting concerned that people might actually start swapping their money for gold. So, what do you do if you are worried that people will exchange the currency for gold but you also want to pretend you are still on the gold standard? Easy. Make it illegal to hold gold.

See how brilliant that is? The country is still on a gold standard because all the currency is backed by gold and you can exchange your currency for gold any time you want. But, it is, of course, illegal to hold gold. So, even though you are perfectly free to exchange your money for gold, you’ll then be arrested for illegal gold possession, so maybe you don’t want to make that exchange after all. Sometimes you do have to step back and admire human creativity.

The strangest part of this episode came much later: when the US went off the gold standard, it was still illegal to hold gold for another 3 years. Eventually people began to realize how silly it was to prohibit people from holding a lump of metal that had zero connection to the monetary system. The fact that it took 3 years to realize this, shows how deep the mystical nature of gold penetrated the American psyche.

A side note: if you did want gold in those days when it was illegal to hold it, there was one country that manufactured lots of gold coins. This is when South Africa was able to make the Krugerrand into the status symbol for the rich people who wanted to engage in borderline illegal activities. When you watch old movies or read old books and see people talking about Krugerrands, this is why.

Once the US went off the gold standard and it became legal to hold gold, then there was no longer any reason to think of it as a special commodity, but of course people still do. So, it times of trouble, when people want a safe asset, they automatically think of gold. It will be interesting to see how long that will last.

There are still occasional arguments that the US should go back onto the gold standard. The basic reason for the argument is that the Federal Reserve can’t be trusted to maintain control of the money supply. But if you want control of the money supply, gold is also a really lousy choice—after all, your money supply is then dependent on the activity of gold miners.

It also isn’t really all that obvious that many people liked the gold standard back when countries were on it. Having gold be the unique money is a relatively recent innovation—go back a few hundred years and all sorts of metals were used as money. Even at the heyday of the gold standard, there was constant agitation to also have silver be used as a money. You knew that—think about William Jennings Bryan’s immortal speech at the Democratic National Convention:

If they dare to come out in the open field and defend the gold standard as a good thing, we shall fight them to the uttermost, having behind us the producing masses of the nation and the world. Having behind us the commercial interests and the laboring interests and all the toiling masses, we shall answer their demands for a gold standard by saying to them, you shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold.

Ledbetter adds:

With these final lines, Bryan pressed his fingers against his temples to illustrate a crown of thorns, and stretched his arms out perpendicular to illustrate a crucifixion—a pose he held for a full five seconds. After a moment of stunned silence, the hall exploded with cheers.

A rather effective bit of rhetoric.