God's Very Own Currency

By Buchan, James | New Statesman (1996), July 19, 1999 | Go to article overview

God's Very Own Currency


Buchan, James, New Statesman (1996)


Suddenly, everybody is selling gold. But don't believe those who say inflation is dead. It will be back one day, and so will gold

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. …

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