Book Review — “The Power of Gold: History of an Obsession” by Peter Bernstein
My first memories of the financial world were market closing prices on the evening news. Next to an alphabet soup of acronyms — NYSE, NASDAQ and other indexes from around the globe — would also be the price of gold. I always found this odd.
Fast-forward 30 years. I have read about, studied and even worked in the finance industry. Money, both professionally and personally, is much more familiar. Even still, the market’s connection to gold remained mysterious — more cultural and historical, than purposeful and contemporary.
Hoping to finally fill this void, I ordered “The Power of Gold: History Of An Obsession” by Peter Bernstein. Having read most of Bernstein’s prior titles, I know he is a master storyteller, making history both interesting and relevant to the modern investor.
Our relationship with gold is a long one. From King Midas (~750 BC) through President Nixon’s dismantling of the US Gold standard (early 1970’s), Bernstein walks through our remarkable “obsession” with one of Earth’s most durable, and desirable, elements. Along the way the author describes man’s earliest attempts to standardize transactions through metal-based currency.
Not long after, governments began to control economies with it.
From the Greeks and Romans, through the Dark Ages and the Enlightenment, and up through most of the 20th Century, the history of gold follows the development of our modern economy. However, the story is packed with policy mis-steps and fundamental misunderstandings of how these increasingly complex economies operate. What unfolds is a series of trial and error by national economists and politicians.
The author explains why Spain’s strategy of stripping vast amounts of gold from South America — first from the natives, then traditional mining methods — did not result in any greater wealth for Spain (answer — Spain immediately spent it on goods produced by other countries, rather than invest it). Less than a century later we watch one of the greatest scientists of the age, Sir Isaac Newton (yes, that Newton, with the apple tree and gravity thing), commit economic blunders as Master of the British Mint, who “like many economists since then…went astray in assuming that the future would look like the past.”
Bernstein also describes each of the major gold rushes of the 19th and turn of the 20th centuries — California, Australia, South Africa and Alaska — and the impact on the international gold system. In keeping with his style, the author includes many colorful tales, including Sutter’s unsuccessful attempt to keep the discovery of gold at his California mill a secret.
Underscoring a history of entrepreneurship, we also learn more about one California gold prospector — an original “’49er” — who having failed to strike it rich in the US returned to his native Australia and noticed similar geological features in the land. On a hunch he went prospecting, and shortly thereafter Australia’s own gold rush was on.
However, and despite the backing of the gold standard to international trade, the difficulty of managing increasingly complex economies ultimately outstripped gold’s usefulness as a policy tool. Gold became an albatross around the necks of central bankers.
The suspense builds almost from the beginning, two millennia prior. Nearing the end we see poor policy decisions by governments at various critical points of the early 20th century, through WWI and later the Great Depression, which accelerated gold’s demise within modern banking. The US finally called it quits — removing the US from the gold standard — under President Nixon, a few decades later.
For those interested in economic history, and perhaps even why the price of gold remains relevant to individual investors, Bernstein’s entertaining walk, like his others, is worth the read. So much of the story is of one great theory overturned and replaced with the next. We see policy debates stretching decades, sometimes centuries. One begins to wonder whether economists ever truly understand their own day.
Bernstein himself may have held a similar view. Citing a wonderful anecdote, no doubt for its timeless insight, the author writes: Baron Rothschild “is rumored to have said…he knew of only three people who understood money, and none of them had very much of it.”
Thanks for reading.
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