The Power of Gold: The History of an Obsession Read online

  Cyrus decided to celebrate his victory by burning Croesus at the stake as an offering to the Persian gods. As the flames were mounting, the soldiers heard Croesus call out the word Solon three times. When asked what he meant, Croesus told them that Solon was "a man I would give a great fortune to see talking with all the tyrants of the earth." Cyrus was so moved by what Croesus told him about Solon's visit that he ordered the fire put out and Croesus untied. As they sat together as friends, Cyrus pointed out to Croesus that the crowd they could see in the distance was "looting [his] city and carrying off [his] wealth." Croesus still had his wits about him, despite all he had been through. "It's not my city or my wealth they are looting," he pointed out. "None of it is mine anymore. What they are looting and leading away belongs to you.""

  With those poignant words, Croesus fades from view.

  The most challenging feature of the Croesus story is in its curious intermixture of luck and skill. Croesus was lucky enough to rule a domain on the banks of the Pactolus, blessed by Midas with an apparently endless supply of gold. As Solon reminded him, "Humans are the creatures of pure chance." Croesus was also helplessly superstitious in the critically important role of military commander-in-chief Yet he was a masterful ruler and a memorable innovator in finance who launched gold on its long career as money. He may not have earned the assets he deployed, but he used them to his greatest advantage.

  There is a sour current observation about lucky people like the Lydians: that they were born on third base and thought they had hit a triple. J. Kenneth Galbraith has phrased the same thing more eloquently: "Men possessed of money, like men earlier favoured by noble birth and great title, have infallibly imagined that the awe and admiration that money inspires were really owing to their own wisdom or personality."26 Galbraith's characteristically acerbic wit contains much truth, but Croesus and the Lydians may be the exception that proves his rule. The political and financial innovations of the Lydians were remarkable enough in their own time. Viewed from the perspective of the 2500 years since the death of Croesus, however, their accomplishments were truly extraordinary. It was their wisdom and personality that inspired the awe and admiration for their money, not the other way around. Most important, they demonstrated that you don't have to be bad just because you are rich.

  Other nations in the past had conquered their neighbors but never with the benign touch of the Lydian. Other nations in the past had developed monetary systems but never with the systematic structure and wide acceptability of the Lydian currency. The Greeks, the Persians, the Romans, and ultimately the nations of Europe and the New World all walked in the footsteps of the imperial Lydians, and most of them with a far heavier tread. Although the sun may never have set on Queen Victoria's global empire of the late nineteenth century, the Lydian model defined the character and even the shape of the political and economic relationships between the center and the colonies, including the colonial financial assets that were accumulated in deposits in the London banks and were both denominated and transacted in sterling.

  Nevertheless, without the Midas touch, the Lydians might have been nobodies. As the economists like to say, the gold was probably a necessary even if not a sufficient condition for their ascendancy. The origins of Lydian power and dominance-indeed, their views of their earthly mission-were rooted in the golden fruits of the Pactolus River and the electrum ores that coursed through the mountains around them. Other nations in other times have set out on conquests to become rich; the Lydians achieved their empire in large part because they were rich-as rich as Croesus.

  he defeat of the Lydians by the Persians greatly accelerated the transformation of gold from a means of adornment into a central role as money. Despite their remarkable innovations in coinage, the Lydians thought that it was their gold, not their money, that mattered. When Solon came to visit, Croesus did not say, "Look how much money I have!" He showed Solon his "treasure." Nor did he use his handsome golden stater coins to compensate the oracles whose services he so voraciously consumed. He sent them gifts of magnificent objects crafted from gold. Nevertheless, the services the oracles offered in return, such as rights of first consultation without a fee and front-row seats at the Pythian games, would normally be forthcoming today only in response to a monetary accommodation.

  That viewpoint was soon to come about. Croesps's ingeniously designed monetary system would lead to a profoundsocial profoundsocial profoundsocial transformation, although he was totally unaware of the genie that he was letting out of the bottle. The radiant purity, malleability, and density that made gold so appropriate for objects of worship-including its general uselessness for anything other than adornment-were precisely the attributes that made it such an extraordinarily convenient material for coins.

  The result was the development of a curious kind of feedback in the role of gold in society. Gold would never have attained its position as supreme monarch of monetary systems without its unique physical attributes, yet the demand for gold became so insatiable over time because it was used as money. The demand for gold to embellish religious objects and our own bodies has a limit somewhere; the demand for gold as money is infinite. This has caused all kinds of havoc throughout history, as men were provoked to risk the wildest deeds in search of new sources of gold or to plunder the supplies that belonged to others.

  In a sense, the transformation of gold into money democratized it. Thanks to coinage, the ownership and use of gold after Lydia was no longer a royal prerogative. It was now literally in the hands of common citizens, even if only the most wealthy, who could touch and feel it, hoard it in their homes, buy things with it, and pay their debts with iteven as they continued to put their gold through their ears and noses and to wrap it around their necks, wrists, and fingers. Before long, they would be paying their taxes with it. The notions of power and wealth thus blended into one.

  The Greeks provide a moving example of the merging of gold as adornment and gold as money. In accord with the tradition that gold imparts godliness to inanimate objects, Phidias clothed his great statue of Athena in the Parthenon in a cloak of gold, even though gold was much rarer than silver in Greece. This cloak was, in effect, the official treasure of the city-state of Athens, in full display for all to see, unlike the U.S. gold stock buried in Fort Knox-that is, until the wars with Sparta, when the Athenians had to peel the golden treasure from their goddess and convert it into money to finance their military operations.'

  Although Greek coinage was primarily silver, the use of Lydian-style gold coins proliferated elsewhere and ultimately provided the model for the coinage system that would function throughout the entire Roman Empire. Long before Rome, however, Cyrus (558-529 Bc), the victor over Croesus at Sardis, and his successor, Darius (521-485 Bc), had promptly adopted Croesus's international system of coinage and put it into operation throughout the great Persian Empire. Darius also outdid Croesus and his staters: instead of a local logo, Darius stamped his own likeness on his coins and labeled them darics. But then a monarch who calls himself the King of Kings would be likely to do something like that.

  Darius's money-and his likeness-spread far and wide. His coinage has been found from the Baltic to Africa and throughout central Asia. In addition to using their gold to mint coins that financed trade across such a wide span of lands, the Persian government was also the first in history to collect taxes in coin rather than in kind.' The world has never been the same. In fact, the kinds of money that governments have been willing to accept in payment of taxes throughout history have been a primary influence on what forms of money become most acceptable to society at large. We shall see instances in which even debased money with minimal purchasing power has enjoyed some broad acceptability when governments have permitted their citizens to use it to discharge their tax liabilities.

  The Persians emulated the Lydian system of coinage with great success, but they also knew how to use gold as a manifestation of power. For example, after Alexander the Great had finally smashed the Per
sian Empire by defeating the King of Kings at Issus in 331 BC, he entered Darius's huge field tent and examined the golden chariot, the golden throne, and the golden bathtub, all elaborate objects of great beautyand these were only Darius's traveling equipment. "So this is what it meant to be a king," observed Alexander.3

  Impressed as he may have been by Darius's golden bathtub, Alexander was already fully familiar with the use of gold as money as well as for adornment. Some time after 360 Bc, Alexander's father, Philip II of Macedon, had opened up rich sources of gold and silver in Macedonia and Thrace-northward in the Balkans toward modern Bulgaria-and was soon minting both metals into coins in sufficient number to meet all his current needs and to finance his plans for future military conquests.4

  Establishing substantial monetary wealth was just one of this brilliant man's achievements in the course of transforming the backwater countryside of Macedonia into the greatest power of his age. If Philip were alive today, he would be in constant demand as an expert consultant on both the economics and the politics of developing nations. He had an innate sense of priorities, of how to set his ideas in motion in the most effective and efficient manner, and of how to deploy power to maximum advantage.

  When Philip ascended the throne of Macedon in 359 BC at the age of 23, his mountainous kingdom consisted of a small population of mixed tribes, who were poorly fed and occupied their time primarily by making war against one another. By the time Philip was through, he had established Macedonia as a great power and himself as the dominant personality in all of Greece, even though many Athenians considered him a provincial upstart.

  He began where he should have begun: with agriculture. Through irrigation, canal construction, land drainage, and flood control, he turned the alluvial plains of his kingdom into a breadbasket. His ample and growing food supply helped him make peace among his pesky constituency, attracted a growing population of southern Greeks, led to the building of new towns, and provided an expanding pool of manpower for his armies. In addition to feeding the increasing populations, Philip's agricultural reforms significantly enhanced Macedonia's military power by generating feed and pasture for horses and cattle. Like the German panzers, Philip's abundance of horses would give his army fearsome mobility in combat. In addition, the meat from the cattle gave his men strength and endurance over his enemies, a feature that attracted Napoleon's attention many centuries later. His local campaigns around Macedonia also augmented that absolutely essential economic resource: slaves-slaves to work the mines, slaves to work the fields, slaves to keep the whole economy humming.'

  Philip also made full preparation for his succession, hiring Aristotle from Athens to tutor his son Alexander from the ages of thirteen to sixteen, the equivalent of sending the young teenager to Harvard as an undergraduate and Cambridge or Oxford for graduate work. When Philip was assassinated in 336 BC, after a reign of 23 years, Alexander reminded his people that "My father took you as nomads and paupers, wearing sheepskins, pasturing a few sheep on the mountains ... he made you inhabitants of cities and brought good order, law, and customs into your lives."

  Philip set the value of his gold coins at ten times the value of his silver coins, a convenient piece of arithmetic that differed from the unwieldy Persian ratio of 13%2:1; his choice also probably reflects the relative increase in gold supplies from newly discovered mines. He decorated his highest-value coins on one side with a chariot to celebrate his victory in the chariot race at the Olympic games of 356 BC, and with a head of Zeus on the other side; many wondered whether that head was Zeus's or really Philip's.

  Philip's keen financial instinct led him to produce more coins than he needed for current transactions and army pay. He hoarded the balance as a reserve to finance the wide-ranging military campaigns against the Persians that were on the drawing boards at the time of his assassination.

  After Philip was killed and Alexander inherited the throne from his father, he kept all of Philip's Macedonian mints busy pouring out coinage, in addition to the output of mints in Greece, Asia Minor, Syria, Egypt, and Mesopotamia. Supplying gold and silver to feed the mints was no problem. In addition to Philip's hoard and the current output of the Macedonian and Thracian mines, Alexander captured huge amounts of treasure during the course of his victorious campaigns to the east. Alexander followed his father's policy of making gold the prime monetary standard, and, being a man of action and splitter of Gordian knots, he stayed with the 10:1 relationship, adjusting the supplies of each metal from his substantial reserves in order to make the simple ratio function without difficulty throughout his immense empire.

  Although Alexander had so much gold available to him that he could afford to be prolific in minting coins, the demand for coins ran high. Alexander wanted to be certain that his men would find his coinage acceptable, no matter where they were serving. The troops under his command were primarily mercenaries, and he paid them well to discourage them from looting. He paid many of their civilian debts, gave wedding presents of money to some troops, and distributed separation bonuses when they went home. In his vision of himself as a bearer of Greek civilization rather than as a conqueror, Alexander also brought along with him scientists, engineers, and explorers, and these people had to be paid as well. In addition, he expanded his civilian rule over conquered territories by establishing more than seventy new towns in a great arc from Egypt to India; this, too, created an additional demand for acceptable money. Finally, his vision included prosperous trade among the many areas of his diversified empire, an objective that needed a common currency. Alexander was convinced that trade would promise higher living standards for all.

  Alexander and Philip both understood the propaganda and public relations value of gold coinage. Whereas Philip's philippeioi had the head of Zeus stamped upon them, Alexander stepped down a notch. He used Hercules, a god ranking below Zeus but symbolizing the greatest physical strength; like Philip's Zeus, the portrait of Hercules stamped on the coins bore a striking resemblance to Alexander himself Alexander did not change the name of the gold coins established by his father: they remained philippeioi. His followers, however, kept Alexander's designs but changed the name of the coins from philippeioi to alexanders!

  Alexander's coinage system prevailed for over 150 years, from India in the east to most of the Greek and Egyptian areas to the west, until the Roman general Quinctius Flaminius defeated Philip V at Cynocophalae in 197 Bc and brought closure to the Macedonian hegemony. Flamimus had learned his monetary lessons well: his first step to commemorate his victory was to transform some of Philip's tribute into new gold coins bearing his portrait-the first time a living person had appeared on Roman coins.

  The Romans had been using metallic money for a long time. During the fourth century BC, they were in the habit of keeping their treasure in the temple of Jupiter. This choice was made for the purpose of security, but it was also an interesting blend of temporal wealth and heavenly religion. In 390 BC, so the legend runs, the cackling of the geese that lived around the temple alerted the Romans to a surprise attack by the Gauls, who were invading Italy at that point. The Romans were so grateful for this notice of impending danger that they constructed a shrine to their goddess of warning, whose name was Moneta; moneta in turn became the derivation of "money" and of "mint."'

  That was not all in the way of money that we have inherited from the Romans. The Romans also gave us the monetary denomination of pound-libra-which is why the pound sterling is identified by the symbol £. In addition, the Latin word denarius came to stand for penny and was conventionally abbreviated as d in English usage. Finally, the term solidus, which meant that a coin was pure gold or silver, was worth one-twentieth of a pound of silver and was equivalent to twelve denari. English money was built up from these ratios. A pound was equal to twenty shillings and a shilling was equal to twelve pence-a system that lasted from Norman times until the 1980s, when Britain finally yielded and adopted the decimal denominations long in use everywhere else.*

 
Although the Romans may have started using the word moneta in 390 BC, their gold stock at that moment was small. The Elder Pliny mentions an amount in the Roman treasury that contained less than half the gold that Phidias had lavished fifty years earlier on his statue of Athena in the Parthenon and only one-seventh as much as Croesus had delivered to the oracle at Delphi 150 years earlier. Even as the Romans opened up additional gold supplies by extending their territories, and even when their victory over Carthage in the Punic Wars brought them control over the massive reserves of gold in the Spanish mountainsides, they still perceived gold as a reserve but not as something spendable.6

  The Roman need for gold grew rapidly after about 150 BC as the empire expanded at an accelerated pace, which meant rising military requirements at the same time. Gibbon's The History of the Decline and Fall of the Roman Empire reports, "The golden eagle which glittered in front of the legion, was the object of their fondest devotion; nor was it esteemed less impious, than it was ignominious, to abandon that sacred ensign in the hour of danger."7 Later, he tells us, "The Emperor Domitian [who ruled from 81 to 96] raised the annual stipend of the legionaries to twelve pieces of gold, which, in his time, was equal to about ten of our guineas. "I Ten guineas in Gibbon's time was the equivalent of about $53, or roughly $2500 in 1999 purchasing power-but there was far less to buy in Roman times and a soldier received shelter, food, and medical care in addition to compensation. Hence, $2500 was a generous annual stipend.