The Power of Gold: The History of an Obsession [Paperback]

So writes Peter Bernstein in the prologue of THE POWER OF GOLD. This volume is a highly readable history of the element Au from the reign of King Midas to the present, and from gold's status as a commodity, as money, as a monetary standard, and back to commodity again. To the hardboiled bean counter, Bernstein's work might seem superficial. Well, since I never claim to be a deep thinker, and am relatively indifferent to the state of the world economy and the pretentious pronouncements about it made by financial experts on the morning talk show circuit, it proved to be an entertaining and educational read.

The author guides us down the Golden Brick Road from the times of the ancient Greeks, Egyptians, and Chinese, to Rome and Byzantium, further along to the Black Death-ravaged Middle Ages, on to the empires of the English and Spanish, and finally to the recently-past obsessions of the British, American and French governments. And, while THE POWER OF GOLD describes the element in all its guises - adornment, coinage, spoil of war, power display, horde in a sock - the book is, above all, a fine treatise on economics.

My only quarrel with Bernstein is that he sometimes rambles off on tangents not really germane to the topic. It's enough to know that Spain plundered the gold from the Inca Empire, transporting it back to Europe on its treasure galleons. The author's account of Francisco Pizarro's treacherous capture and murder of the Inca king was nice background, but not essential. Similarly, it's enough to know that the 19th century gold strikes in California, Alaska, Russia, South Africa and Australia destabilized the world's supply of the metal, but I didn't require Johann Sutter's sob story to appreciate the fact. Thankfully, Bernstein gave no background on President Richard Nixon, whose momentous 1971 decision to remove the U.S. $ from the gold standard seems forgotten in the glare of his China policy and Watergate.

As I sit contemplating my few British sovereigns and South African krugerrands losing value in my tiny safe deposit box, I think perhaps Prime Minister Disraeli was quite correct when he said, "Our gold standard is not the cause, but the consequence of our commercial prosperity." The wealth of a nation is perhaps better judged by its (non-gold) natural resources, and the productivity of its citizens in putting those fortuitous gifts to good use.

To make that point, the book begins with a story that Ruskin told about a man who is on a sinking ship with his gold. He gets the gold and jumps overboard, and drowns from the weight of the gold. Mr. Bernstein cites the analogy throughout the book for the fate that awaits those who are committed to their gold. The gold has them, rather than vice versa.

Mr. Bernstein does a nice job of creating an on-going story line to put the role of gold in perspective. Gold first makes its appearance as an adornment for religious or personal purposes. This application leads to gold becoming used as money. Then gold helps create trade that only money can provide. From the trade comes power, and that power expands influence. Then as the world economy outgrows the supply of gold as a monetary stock, gold becomes a brake on economic growth. At the end of the book, gold is again turning into an adornment having been cut loose from being a reserve for the monetary stock. In this context, the book is about the rise and fall of the gold-based empire. That tale is best captured in the story of how little the gold from the Americas helped Spain economically. If a shortage of gold as money can slow down economic growth, an excess of gold can create inflation in general prices. That's the essence of Mr. Bernstein's argument about gold as a mercantile asset.

Economic history is rarely so interestingly told, and Mr. Bernstein deserves a lot of credit for taking something that could have been dull and making it lively. He is an excellent story teller, and you will find what he has to say contains many new and interesting points.

I was fascinated by the number of times that the fate of countries was affected by gold. Ransoms paid in gold for French Kings beggered that country on more than one occasion. The failure of worldwide wheat crops allowed the U.S. economic expansion to continue after the Civil War, as the U.S. was threatened with a shortage of gold needed for industrial goods. The Byzantine Empire lived on much longer than it would otherwise have by being able to buy defenders with gold. The Arab expansion was aided by access to gold. After World War I, the gold standard contributed to the Depression.

Mr. Bernstein leaves us out on a limb about where our system of floating rate currencies will end. Without some form of global currency, we should see rapid distortions in economic results whenever such shifts in currency values occur. We are in the middle of one of those shifts right now between the dollar and the euro. Certainly, the universal government preference to debase the value of currencies will continue to plague us. Mr. Bernstein leaves us with no answer to the problem, except to be certain that returning to the strait-jacket of the gold standard is not it. I wonder if it is really that simple, or if we are facing a severe future disruption that will make gold look good by comparison. Certainly, a world currency seems inevitable, whatever its nature is.

Realizing that gold can be harmful, does it seem any less beautiful to you? I found that my aesthetic preference for gold was unaffected by reading this book. I think you can appreciate gold without being greedy for it. Perhaps that's the lesson here.

After you have finished enjoying this fun book, think about where else overreliance on something or some idea can be harmful. My favorite example is the desire to be popular. Most people will do foolish and harmful things that debase quality (much as they did with gold coins) to achieve popularity. One of my favorite examples is in a recent book where a CEO went on CNBC almost naked as a publicity stunt for his company's latest advertising campaign.

Enjoy all things in proper perspective and moderation!