Earlier this month, the Bank of England sold 25 tonnes of gold, a tiny fraction of its gold holdings and less than a 0.02 per cent of the gold that exists in the world. This small piece of asset management caused a sensation.
The producers of gold, lobbying through the World Gold Council, tried to prevent the auction. Others asked why the United Kingdom was still hoarding 715 tonnes of this barbaric monetary relic. It appears that, 70 years after gold ceased to play any role in the financial life of this country or the savings of its individual citizens, the metal continues to divide spirits.
Opponents of the sale complained that Gordon Brown, the Chancellor of the Exchequer, signalled his intentions in advance and spoiled his market. The price of fine gold fell by $30 an ounce in the days before the sale and then another $26 in the course of the auction.
No doubt, the auction might have been more discreet. But if the recent history of the market for gold tells us anything, it is that it is never too early to sell gold. Gold loses its appeal when inflation is low, and, according to the British Retail Consortium, shop prices are now lower than they were in November 1997. The International Monetary Fund is planning to dispose of 300 tonnes of the metal, the Swiss National Bank yet more. Brown, who wants to reduce the Bank of England’s gold holding to 415 tonnes, may turn out to have had the best price.
In 1980, while I was working as a junior reporter in Jeddah, Saudi Arabia, the other immigrants in the city were caught up in a gold fever. Somali sub-editors, Lebanese accountants and Yemeni copy-boys were for ever slipping off at sundown to make payments on gold bricks in the souk. Those men, the last recruits of an army of speculators led by the world’s banks, drove the price of gold up to $850 an ounce, its highest ever price in dollars. At the time of writing, it is $255. That heavy fall in price does not include the income lost to individuals and treasuries that have held gold, as opposed to interest-bearing currency investments.
Whether the Bank of England should hold gold or dollars or euros as a reserve against the currency in circulation is not a question that troubles most people every day. Yet the shrillness of the gold producers is symptomatic of a more profound uncertainty about the future of gold. Has gold ceased to be money? Or, put another way, has gold shed its money aura to become just another commodity metal, like zinc or copper, in a world that has less and less use for metal? Where, in that case, will the price end up, or rather down?
Throughout history, people have thought of gold as money in a very particular sense. Together with silver, it comprised what Edmund Burke called “the lasting conventional credit of mankind”. Either God had made gold so we could have money or the ancients had settled on gold as the most moneyish substance to hand.
In practice, gold was usually too scarce and costly to be widely employed as money.
Though it is all but indestructible, all the gold that has been dredged or mined over 7,000 years would barely fill, we are told, a 20-metre cube. Of that amount, four-fifths has been mined this century. Silver and copper were preferred in everyday transactions. From the 17th century in Europe and North America, people also used paper claims on banks: banknotes.
Gold emerged as the sole monetary standard of Europe and North America only after the big gold discoveries in California, South Africa and Australia at the end of the 19th century. During the period of the International Gold Standard, paper currencies were merely receipts for so much weight of fine gold. Governments could not create money, any more than they could create gold. Much of the enthusiasm for gold as money is nostalgia for the second half of the 19th century and its unique conjuncture of falling prices, technological innovation and bourgeois luxury.
That golden era came to an end in 1914, when the belligerent governments in Europe detached their currencies from gold so they could print more money. It was resurrected after the war, and Britain rejoined the gold standard in 1925, only to abandon it in 1931. Finally, in response to the pressures of the Vietnam war, the United States ceased to convert the dollar into gold at a fixed rate.
The creation of money was now limited, if at all, only by political wishes. Currencies were no longer fixed weights of gold: gold was a varying number of dollars. Governments, which had throughout history tried to accumulate gold, now ordered their central banks to sell gold. The bear market in gold began.
Devotees of gold say it is the best guarantee of money ever devised. Governments, which borrow from the public but do not like to repay, will always devalue their money if they are permitted. Gold has always been scarce enough to limit this profligate issue of money, while new sources of metal have usually been found to prevent the scarcity hindering trade and industry.
Over time, gold has kept its value better in currencies than currencies in gold. Sterling ceased to be convertible into gold on 21 September 1931 and has since fallen to a 40th of its gold value. There was a big inflation in the 16th century that co-incided with the arrival in Europe of silver from new mines in the Americas. But the inflations of the modern era have occurred at times when currencies have been inconvertible: the Napoleonic wars, the first world war and, above all, the 1970s and 1980s.
Yet, whatever you have read elsewhere, capitalism actually abhors stable prices. If there were no inflation, as Pierre Vilar once wrote, the heirs of a man who had a penny at the birth of Christ and invested it at compound interest would long since have given up all productive activity. They would have been settled in Bournemouth long before the time of Charlemagne. As anybody who owns a computer knows, technical advance reduces the prices of objects produced. If a single stable monetary system existed, a perpetual fall in prices would long ago have discouraged anybody from making anything. In retrospect, the inflation years since the second world war were periods of technical advance. However disagreeable to pensioners and others living on fixed money incomes, the great inflations – as in France during the revolution or Britain in the 1970s – served to relieve a nation’s youth of the debts contracted by their foolish or extravagant parents.
Yet nice little inflations to oil the wheels of business often turn nasty. “There are few Englishmen,” Keynes wrote on 27 September 1931, “who do not rejoice at the breaking of our gold fetters. We have at last a free hand to do what is sensible.”
What was “sensible” turned out to be the annihilation of sterling. Anatole Kaletsky, on a good day as able an economic pamphleteer as Keynes, wrote in the Times the other day: “Genuine price stability must now be consigned to history as surely as the bubonic plague or the divine right of kings.” But his “modest positive inflation rate” will prove just as uncontrollable as his master’s and be as roundly cursed by his grandchildren.
I doubt that monetary history is proceeding towards a goal described only by economists. Monetary history is a bloody and inconclusive battle between disorganised social interests: old and young, creditors and debtors, rentiers and entrepreneurs, savers and governments, those who have and those who haven’t. In this struggle, which has marked the history of Europe and North America since the 17th century, gold, because of its scarcity, has been the chief weapon of the haves. “Gold,” Keynes wrote in September 1930, “has become part of the apparatus of conservatism and is one of the matters which we cannot expect to see handled without prejudice.”
It is clear that the inflationists, smelling blood in the water, are closing in on gold. Yet nothing lasts for ever, least of all periods of stable consumer prices. The present generation of politicians, burned by the inflations of the 1970s and 1980s, will pass away. As long as there is money, there will be inflation. As long as there is inflation, people will hanker after gold.
The author’s”Frozen Desire: the meaning of money” is published by Picador