Read The Power of Gold: The History of an Obsession by Peter L. Bernstein Free Online
Book Title: The Power of Gold: The History of an Obsession|
The author of the book: Peter L. Bernstein
Date of issue: October 1st 2004
ISBN 13: 9780470091005
Format files: PDF
The size of the: 620 KB
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An Euro-centric Keynesian History of Gold
Gold is a chemically inert, oxidation malleable and high density metal. This rare metal is paradoxically found across all continents.
The Ancients(Egyptians, Jews to Romans) adored gold but as a display of wealth not as money. The demand for gold drove the demand of mining. Mining is a labor intensive process and this facilitated slavery.
King Croesus(595BC) was the first to establish gold as coin/medium of exchange via state. He annulled private issuance of electrum and called all outstanding coins and minted gold & silver coins to the old. Bimetallism is seldom stable as changing supply of metal overtime causes the values to change. Croesus maintained a ratio of 10:1.
Persians and the Romans:
Persians expanded the practice of gold coin mintage and influenced gold to be accepted as the popular form of money and collect tax in gold instead of wheat/rice. The expanding roman empire experienced the shortage of gold.Shortage lead to the below.
1. Living with insufficient supply makes demand fall short and downward pressure the price aka Depression.
2. Importing gold via plunder/trade
3. Debasing currency
Constantine (337BC) used new 98 % pure gold coins "Solidus" as his conquest eastward brought him gold. This was officially the widely accepted form of money. Made gold as the only accepted medium of exchange.
The Arabs dominated and outsmarted their competitors in trade and established monopolies in Africa & this gave them access to West African Gold. Africans traded gold to salt. Salt was their primary money because of its scarcity.
Reconquista and Atahualpa:
Portuguese and Spaniards paved way for discovery of the new world. When the Spaniards arrived to South America, they invited The King of Incas Atahualpa to their quarters. Atahualpa naively accepted & he was taken hostage. Once the ransom for paid & the kingdom fell, the spaniards sentenced him to death for idolatry & adultery. Atahualpa was baptised in the honour of St. John for a quick and painless death. Mining became a serious business. Under the spaniards, the merciless labor was devastating to the natives. The death rate was so high that many africans slaves had to be imported.
Spain & Gold:
With Gold flowing back to Spain, Spain failed to become rich. The Expulsion of Jews & Muslims removed the merchant class & the scientific community. High consumption & no production along with rigid structure of society ultimately led to Price revolution of 16th Century.
Asia is hardly discussed in the book which is a huge drawback. Asians understand gold was too important to be traded as money. So they used copper & brass as medium of exchange in place of gold. The word Cash for ready liquid money is Tamil word. Hien Tsung(821AD), due to severe shortage of copper, used sheet of paper for money.
Magic Mint & New Rulers:
In 1661, Charles II of England issued an order in council mandating manufacturing of coins by machinery in-place of hammer. The new coin, guinea, equal to £1 about 8 grams or 1/4 of an ounce. In 1697, Bank of England was established as the 1st private company to do business as limited liability company in exchange for £1.2 million loan with 8% interest.
New Bank system and First Crisis:
Three forms of money were used in Britain.
1. Government minted gold coins
2. Bank Notes from BoE and other private banks
3. People deposited gold to goldsmith and got receipts.
Fear of French invasion provoked citizens to encase bank notes for gold. This resulted in Bank Restriction Act of 1797 .
The 19th Century Gold rush in Australia, California and South Africa made establishment of international gold standard possible & had the opposite effect of Price Revolution from 16th Century.
WW1 & its effects:
According to the writer, Gold standard was a symptom of stability and not the cause. Post WW I ,National debt swelled by multiples of 1914 for all. Each country owed many to many of its citizens. Allies ended up in debt to the US upto $2 Billion. France, Italy, Russia owed $500 Million to UK, The total holding of UK, France and Germany in gold was $2 Billion. Gold Standard was suspended as a result, To bring to Gold standard means higher interest rate. High interest rate means subdued business activity which in turn means higher unemployment. Higher employment keeps wages in check which keeps price in check. The gold standard of 1925 was passed subsequently.
Banking Act of 1933 prohibits hoarding of gold and silver coins and required all public to surrender the gold coins/bars. The currency which broke from gold standard devalued. The price of gold went up & price of goods & services fell down substantially.
WW2 & its effect:
After WW2, many countries were in shambles & currencies debased. In Germany, cigarettes & nylon stocking were preferred payments. USD become the only currency convertible to gold(by central bankers, national treasuries and not private individuals). USD became the preferred mode of payment over gold as it was easy convertible and earned interest. Inflation was the only vulnerability of USD.
Vietnam war, budget deficit, unemployment contributed to inflation. Nixon removed the gold standard in 1971. Floating currency system was established. This soared the price of gold & made it a hedge against chaos, inflation & uncertainty.
This is an erudite account on the history of Gold. However, it has few drawbacks. Asia's role, impact & narrative conspicuously missing. The writer takes a Keynesian approach to narrate the history of the gold instead of taking views from all school of thoughts. It is implicit from his writing that he's skeptical of gold as store of value or medium of exchange. However he is very inconclusive in his take on Gold & its role(if any) in 21st century. Highly recommended still!
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Read information about the authorFounder and President of Peter L. Bernstein, Inc., which he established in 1973 as economic consultants to institutional investors and corporations around the world.
In 1951, after teaching economics at Williams College and a five-year stint in commercial banking, Peter became Chief Executive of a nationally–known investment counsel firm, where he personally managed billions of dollars of individual and institutional portfolios. The assets under management at the firm had grown more than tenfold by the time he resigned in 1973 to launch Peter L. Bernstein, Inc.
Peter was the first Editor of The Journal of Portfolio Management in 1974, a widely-read scholarly journal for investment managers and academics in the field of finance and investments. He is now Consulting Editor of the Journal.
He served for many years on the Visiting Committee to the Economics Department at Harvard University, as a Trustee and member of the Finance Committee of the College Retirement Equities Fund (CREF), and as a Trustee of the Investment Management Workshop sponsored by the Association for Investment Management & Research’(AIMR).
He is the author of nine books in economics and finance plus countless articles in professional journals such as The Harvard Business Review and the Financial Analysts Journal, and in the popular press, including The New York Times, The Wall Street Journal, Worth Magazine, and Bloomberg publications. He has contributed to collections of articles published by Perseus and FT Mastering, among others
He lectures widely throughout the United States and abroad on risk management, asset allocation, portfolio strategy, and market history.
Peter graduated from Harvard College with a degree in economics, magna cum laude. He was also elected to Phi Beta Kappa.
After serving as a member of the research staff at the Federal Reserve Bank of New York and in a civilian capacity at the Office of Strategic Services in Washington, he joined the armed services and rose to the rank of captain in the Air Force in World War II, assigned to the Office of Strategic Services in the European theater.
He taught economics for many years as an adjunct professor on the Graduate Faculty of the New School for Social Research in New York.
Peter has received three major awards from the Association for Investment Management & Research (AIMR), the key organization for investment managers and analysts:
The Award for Professional Excellence, AIMR's highest award,
The Graham & Dodd Award, given annually for the outstanding article in the Financial Analysts Journal for the previous year, and
The James R. Vertin Award, recognizing individuals who have produced a body of research notable for its relevance and enduring value to investment professionals.
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