The Power of Gold

The History of an Obsession

Peter L. Bernstein

• Publisher: Wiley
• Year: 2012
• Print ISBN: 9781118270103
• eBook ISBN: 9781118282694
• Edition: 2
• Topic: Business
• Subtopic: Finance
• Index: Business

"The need for realism in reform of its monetary system is what makes Bernstein's story of the Power of Gold so timely. It is a compelling reminder that maintaining a fixed price for gold and fixed exchange rates were difficult even in a simpler financial environment….Peter Bernstein was reluctant to project the story of gold into the future. But to me his message was clear. Yes, gold will be with us, valued not only for its intrinsic qualities but as a last refuge and store of value in turbulent times. But its days as money, as a means of payment and a fixed unit of account are gone."
— From the New Foreword by Paul Volcker

This bestselling book reveals a record of human nature in the ubiquity of gold with a new foreword by Paul Volcker

In this exciting book, the late Peter L. Bernstein tells the story of history's most coveted, celebrated, and inglorious asset: gold. From the ancient fascinations of Moses and Midas through the modern convulsions caused by the gold standard and its aftermath, gold has led many of its most eager and proud possessors to a bad end. And while the same cycle of obsession and desperation may reverberate in today's fast-moving, electronically-driven markets, the role of gold in shaping human history is the striking feature of this tumultuous tale. Such is the power of gold.

Whether it is Egyptian pharaohs with depraved tastes, the luxury-mad survivors of the Black Death, the Chinese inventor of paper money, the pirates on the Spanish Main, or the hardnosed believers in the international gold standard, gold has been the supreme possession. It has been an icon for greed and an emblem of rectitude, as well as a vehicle for vanity and a badge of power that has shaped the destiny of humanity through the ages.

• Discusses the beginnings of gold as something with magical, religious, and artistic qualities and follows its trail as we progress to the invention of coinage, the transformation of gold into money, and the gold standard
• Other bestselling books by the late Peter Bernstein: Against the Gods, Capital Ideas, and Capital Ideas Evolving
• Contemplates gold from the diverse perspectives of monarchs and moneyers, potentates and politicians, men of legendary wealth and others of more plebeian beginnings

Far more than a tale of romantic myths, daring explorations, and the history of money and power struggles, The Power of Gold suggests that the true significance of this infamous element may lie in the timeless passions it continues to evoke, and what this reveals about ourselves.

THE PATH TO TRIUMPH

Chapter 10

The Fatal Poison and Private Money

Amonumental mass of gold and silver sailed across the Atlantic from the New World to Spain during the 1500s.* According to one authority, the total European stock of gold and silver at the end of the century was nearly five times its size in 1492.1 The volume was so enormous that the armed convoys that transported the treasure to Europe averaged about sixty ships; on occasion, the convoys included as many as one hundred ships. Each of these vessels carried over two hundred tons of cargo in the 1500s and around four hundred tons on larger ships in the 1600s.2 In 1564 alone, 154 ships arrived at Seville to debark their cargo of treasure.3 At the end of the sixteenth century, the precious metals accounted for the bulk of the value of everything shipped from America to Spain.

As we trace the impact of all that gold on the European economy in the course of the sixteenth century, we shall see that the story has an ironic twist at the end. Gold had to face silver as a rival for most of history, but a serious rival to both precious metals was blossoming by the end of the sixteenth century—forms of paper money as debt instruments issued by private parties instead of by governments. All the excitement about gold in the 1500s was in essence a celebration of the past. While no one was paying much attention, the future was beginning to emerge.

The Spanish government was extraordinarily effective and efficient in accomplishing the complex task of moving the treasure across perilous and hostile seas. The gold and silver were loaded on ships at Vera Cruz in Mexico, Trujillo in Honduras, Nombre de Dios on the Atlantic side of Panama, and Cartagena in Colombia. The area of the Caribbean enclosed by these ports came to be known as the Spanish Main, a name that has lingered on in romances ever since. From there, the ships traveled to Cuban waters to join together in convoys, or flotas, for the long voyage to their home port of Seville. Two to eight armed galleons accompanied the flotas as protection against the pirates and buccaneers who roamed the seas waiting to pounce on treasure-filled vessels.* The flotas also provided at least a hope of rescue, of cargo if not men, when heavy storms threatened to sink one or another of the galleons.

When vessels were forced by storms or fear of attack to put in at any port other than Seville, passengers were forbidden to land or to make any offer to trade in treasure. Once the cargo reached Seville, everything was transported under the tightest security to the House of Trade, where it was weighed and placed in special chests in a treasure chamber; both chests and chamber were provided with triple locks, with each of the three keys carried by three different officials of the House. The metal was smelted and refined right there. Some of it was then minted, but significant amounts of bullion were delivered to the creditors of the Crown, most of whom resided in other lands.

It staggers the imagination to consider the skill required to gather together, organize, control, and maintain contact with that many sailing ships on a voyage of over three thousand miles of open ocean, with no handy means of communication such as the wireless systems or radar used on the convoys sent out four hundred years later from America to Britain in World War II.* By comparison, piloting one thousand camels across the wastes of the Sahara must have been a cinch. There was another big difference between the convoys of the 1500s and the convoys of the early 1940s. In World War II, the ships carried black gold—oil—plus food and armaments to defeat the Nazis; in the 1500s, the freight amounted to nothing more useful than shiny metal ingots. People knew what to do with the precious cargoes carried through the submarine-infested seas of the North Atlantic, but the Spaniards had a far more open-ended set of options for the precious metals. More often than not, they made the wrong choices.

Although losses to the Spanish flotas from pirates were a lot smaller than losses from storms at sea—or from German submarines in World War II—the danger of attack was a constant worry. There was a rumor around Spain that Charles V cried with joy every time word came in of the safe arrival of a flota.4 Charles V, the reader should be reminded, was King Charles I of Spain through his mother, the daughter of Ferdinand and Isabella; he was also Charles V, emperor of the Holy Roman Empire (Charlemagne having been Charles I in that role). Generally known as Charles Quint at the time, he is most often referred to today as Charles V, the nomenclature that I follow here. He plays an active role in the later pages of this chapter.

As the historian Kenneth Andrews describes the times, piracy was elevated to a preferred branch of policy by Britain, France, and Holland, each of which was seeking a piece of the action in America that the Spaniards and Portuguese had claimed exclusively for themselves. Spain was also at war at one point or another with each of these countries during the sixteenth century. There were thirteen organized English expeditions to the Caribbean, and doubtless many free-lance junkets, just during 1570 to 1577.5 Nevertheless, despite all the romance about the pirates and their occasional dramatic successes, the records of the House of Trade contain many accounts of failed attacks and safe arrivals.6 Whole fleets were intercepted and defeated only three times, twice by the English and once by the legendary Dutch admiral Piet Heyn in 1628.7 More often, stragglers ran into difficulty. In March 1569, for example, 22 Spanish and Portuguese ships were brought into Plymouth, where the English happily relieved them of their precious cargoes.8

The most serious and sustained threat to Spanish shipping came from Sir Francis Drake, who made a specialty of plundering gold from the Catholics of Iberia. His efforts made his crew rich, quite aside from the fortune he kept for himself and the even bigger sum that he turned over to the English Crown. His hatred of the Spaniards was reciprocated: they referred to him as “the master-thief of the unknown world.”9

Drake kept at the task, off and on, for nearly 25 years. He even landed in Panama in 1572, aiming to capture the Atlantic-side port of Nombre de Dios and thereby interdict the north–south route of Spanish gold. A wound in his leg forced him to abandon that project, but he and his men succeeded in seizing a pack train loaded with gold en route to Nombre de Dios from Panama City on the Pacific, with £20,000 worth of coins to show for their efforts.

Drake’s famous voyage on the Golden Hind during 1577–1579 snared more than ten tons of gold, silver, and jewels from Spanish ships, first on the Atlantic side, and later, after sailing through the Straits of Magellan, on the Pacific side.10 Drake then sailed up the coast of California before crossing the Pacific. He landed at Point Reyes on the shores of Marin County on San Francisco Bay and claimed the territory in the name of Queen Elizabeth of England. In 1586, the Venetian ambassador to Madrid reported that Drake had landed on Santo Domingo, Puerto Rico, and Cuba and had “returned to England with 38 ships laden with much booty.”11 In 1595, the queen sent Drake back to Panama to capture Nombre de Dios and Panama City and hold them for ransom. This time he succeeded in taking Nombre de Dios, but he in turn was conquered by a fatal case of dysentery, along with many of his shipmates, and was buried at sea.

One might think that Spain in the middle of the sixteenth century should have been the richest nation in Europe by a wide margin. It was not. The impact of this immense and sudden addition to monetary wealth was felt throughout the rest of Europe and even out to the Far East, but in Spain no lasting payoff remained from the spectacular exploits of the Conquerors and the fountains of blood that flowed from white men and Indians. The gold came in one end and went out the other like a dose of salts.

How was it that the Spaniards were able to mismanage one of the greatest windfalls of all time? Why did so much of the fruits of history’s first gold rush end up in the hands of others? Part of the answer to these questions was local, indigenous to the character of sixteenth-century Spain. Part, and perhaps a larger part, was the result of the dynamic and restless environment of the era, in which the rigid structure of Spanish society was ill-fitted to participate.

Once the gold began arriving in quantity, the Spanish were far more proficient at spending than at producing. The massive imports of gold and silver stimulated the spending skills at the same time that they stifled Spain’s incentive to produce. Spain acted like a poor man who makes a great windfall at the gambling tables but comes to believe that the money is his destiny rather than a nonrecurring event. This event was indeed nonrecurring: copious as the shipments of gold to Spain may have been during the 1500s, they peaked in midcentury and dropped off sharply after 1610; silver shipments peaked around 1600 and fell into a steep decline after about 1630.*12

During the sixteenth century, five-sixths of outgoing cargoes from Spain, primarily to the colonies, consisted of goods grown or manufactured in other countries.13 Late in the century, the Cortes, or Parliament, declared, “The more of [gold] that comes in, the less the Kingdom has. . . . Though our kingdoms should be the richest in the world . . . they are the poorest, for they are only a bridge for [the gold and silver] to go to the Kingdoms of our enemies.” Another Spanish observer, Pedro de Valencia, wrote in 1608, “So much silver and money . . . always has been fatal poison to republics and cities. They believe money will keep them and it is not true: plowed fields, pastures, and fisheries are what give sustenance.” Still another complained, “Agriculture laid down the plough, clothed herself in silk, and softened her work-calloused hands. Trade put on a noble air . . . went out to parade up and down the streets.”14 Instead of transforming the gold and silver into new productive wealth, the Spaniards paid the precious metals out to other countries and spent so much that debts to foreigners soared. As early as the 1550s, there was a popular saying that “Spain is the foreigners’ Indies,” because so much good Spanish money was being paid over to foreigners for “puerilities”—baubles like bangles, cheap glassware, and playing cards.15

Spain had also committed a costly economic blunder in the Columbus-year of 1492, even though the decision had brought joy and pride at the time it was made. The Jews and the Musli...

Table of contents

• Cover
• Contents
• Title
• Copyright
• Dedication
• Foreword
• Acknowledgments
• Prologue
• A Metal For All Seasons
• The Path to Triumph
• The Descent From Glory
• Epilogue
• Bibliography
• Index