One Nation Under Gold Page 2
This sense of gold as an American birthright is more than just symbolic. The booming gold industry led to massive westward migration and the development of mining towns, and crowned California as a genuine global economic power. Gold was also a wellspring of economic expansion and innovation. From the earliest days of placer mining in California, gold mining has provided a laboratory for technological and business-model breakthroughs. In addition, the need to ship gold was a major reason for railroad expansion and overexpansion. This innovation did not end with the nineteenth century; gold would go on to play a critical role in many of the high-tech industries that helped define the second half of the twentieth century, from the early transistor to the space program.
It is unsurprising, then, that so many Americans, from the highest public officials to the field and factory workers, would look to gold as a creator and protector of wealth. For most of the United States’ existence, the public and private stockpiling of gold has been a powerful, if sometimes deceptive, symbol for American strength and prosperity. The sudden and sizable additions of gold to the US economy in the nineteenth century, from the early North Carolina discoveries through the California Gold Rush to the Klondike discoveries at the turn of the century, were rungs in a ladder that culminated in America’s economic domination of the globe. Alas, an enviable gold pile never provided the protection against economic contraction that governments and bankers hoped it would. But amassing quantities of gold was hardly an irrational strategy for much of America’s existence, and in the shaky global finances of the nineteenth century, it certainly helped establish a fledgling republic as a creditworthy nation.
Similarly, for much of America’s history, gold literally was money—and therefore ignited some of the most contentious political battles the nation has ever seen. The metallic basis for the dollar was one of the most heated issues in nineteenth-century politics. A reliance on monetary gold was, for example, the defining basis of Andrew Jackson’s Democratic Party. When the Northern states needed to fund the Civil War, they issued for the first time nationally sanctioned money that had no value in gold or silver; to this day, some Americans believe that these “greenbacks” were unconstitutional. Throughout the twentieth century, the role of gold as a basis for American money has diminished, to the point in 1971 when the dollar “floated” against other currencies. Nonetheless, millions of Americans today still argue that the country’s economy would be better off if we returned to a gold standard.
Economic reliance on gold has its bleaker consequences, one of which is that all major American wars have been tied up with America’s gold supply and have frequently forced a decisive break with the monetary status quo. It is not quite the case that the United States of America has ever gone to war over gold mines—which, by contrast, the Boers and the British arguably did in South Africa at the turn of the twentieth century. Nonetheless, the ties between American wars and gold are profound and complex, pulling the nation apart and together sometimes simultaneously. The discovery of gold in California in 1848 took place just as the United States was acquiring that territory at the end of its war with Mexico. The American Civil War and the states’ rights versus federal republic battle had direct analogues centered on the role of money, and indeed the North financed its war efforts by issuing, for the first time, a national paper currency not backed by gold. The ensuing market for gold owed its very existence to war, and gold speculators monitoring their investments were sometimes better informed of battlefield developments than the White House. Liberty bonds to pay for America’s participation in World War I were backed by gold. And the seemingly bottomless costs of the Vietnam War were a critical factor in the United States finally going off the gold standard in 1971.
All of those attachments to gold are centuries old. There is one further, very potent American attachment to gold that is of more recent vintage for all but the wealthiest Americans: gold as an investment. And it is impossible to understand the economics of buying gold in today’s America without understanding the political and historical forces that stretch back to the founding of the republic. Through the end of the nineteenth century, the overwhelming majority of Americans were not able to afford investments of any kind—and given that day-to-day money for many years was made out of or exchangeable for gold, it’s far from obvious that gold would also be the preferred investment even for those who could afford it. Then, beginning in 1933, it was illegal for Americans to own gold in any significant quantity for forty years. Even today, the percentage of Americans who own gold as an investment is likely quite small, and the ancillary fees for investing in it can be prohibitively high.
Nonetheless, a sizable percentage of Americans would presumably like to own gold. Gallup annually surveys Americans on their perceptions about investments. In 2011, when gold prices were relatively high, gold was deemed the best long-term investment with 34 percent preferring it (real estate was next at 19 percent).8 But as gold prices subsided, the percentage naming gold as the best long-term investment fell behind real estate and, in 2014, tied with stocks and mutual funds. Significantly, Republicans and independents have greater faith in gold’s investment power than do Democrats. In addition, the higher an American’s household income is, the less likely he or she is to pick gold as the best long-term investment—and the more likely to choose real estate or stocks and mutual funds. Gold, it seems, is the preferred investment vehicle for those who can’t afford it.
Harder to measure by any poll is the undeniable fact that gold can theoretically make you rich, even when—perhaps especially when—there are few other viable options available. Beginning in 2008, Americans went on an investors’ roller-coaster ride—mostly downhill—with the collapse of the housing market and the onset of the Great Recession. For the next several years, virtually every personal investment strategy once deemed prudent and reliable was shown wanting, leaving tens of millions of Americans feeling lost if not outright cheated. For a significant period of time, the only ones consistently smiling were those who invested in gold; its value increased sixfold between 2001 and 2011. During that period, there was effectively no legal, popularly traded investment asset class—not oil, not other commodities, not stocks, not bonds, not “emerging markets”—that even came close to gold’s performance.
Of course, as with any investment, what goes up will almost always go down. Those who bought gold in 2011 or 2012 saw their investments worth less five years later. For better or worse, however, the unfortunate reality of investment timing doesn’t appear to deter Americans from investing in gold (or real estate or stocks), and there’s little reason to think that future generations will behave differently.
In the 1950s and 1960s, those Americans who advocated gold ownership operated as renegades at the outskirts of the law, some with more than a tinge of paranoia. Even with gold ownership now legal for decades, the fear has not entirely dissipated; for some, the fear that economic collapse will lead the American government to confiscate or outlaw investment in gold—as occurred in the 1930s—remains a real, if distant, possibility. Such views may represent an extreme minority, but they are rarely far from the surface in American gold investment circles and are sometimes incorporated as a sales pitch. And thus while a small—even tiny—percentage of Americans actually own gold, the freedom to own it has a strong political resonance, akin to the freedom to own a gun.
The gun comparison is not as far off as it may seem; after all, not all American associations with gold are positive. For many Christians in the middle of the nineteenth century, the mass migrations of would-be gold miners represented mayhem, a sign of a coming apocalypse. “Oh this lust of gold! What unforeseen miseries it is destined to bring!” wailed the New York Herald in 1849.9 Those who were rushing to California were not seeking an honest living, the paper insisted. “It is to grasp the shining metal, which, for past ages, has been the fruitful cause of untold murders, and the massacres and crimes which have stained the annals of every nation on God’s earth
, that ever possessed mines—gold mines.” It might sound overwrought, but the basic point is echoed today by economists and political scientists who speak of a “resource curse.”
And while the California gold mines unquestionably enhanced the American economy, the domination of gold was far from universally applauded. Half a century after the California Gold Rush, the populists of the South and West denounced gold as the principal instrument of economic oppression. The naturalist writer Frank Norris depicted in his novel McTeague a bleak parable in which lust for gold ends in a Death Valley stalemate, in which a live man is handcuffed to a dead one, finally in possession of a gold stash he will never be able to spend. And an unhealthy, desperate attachment to gold’s unique qualities has caused even government officials with state-of-the-art technology to abandon common sense in a twentieth-century alchemy quest.
Whether Americans see in gold the country’s salvation or its damnation, it has always represented a struggle with modernity, a symbol of timeless strength yet an accelerant of economic progress. It also symbolizes the divisions that progress brings: between city and farm, between technology and tradition, and between haves and have-nots. Such struggles with modernity lead many nations to political extremes and civil wars. For the most part, American political institutions have been able to resist such dire outcomes. But our understanding of those institutions is incomplete without understanding how gold itself has shaped them, and how they continue to shape gold.
CHAPTER 1
El Dorado Comes True
At this sawmill near Coloma, California, James Marshall found gold flakes in January 1848. While it was not the first gold discovery in the United States, it altered the nation’s economic and political landscape more than any other. Courtesy Library of Congress
GEORGE WASHINGTON WAS NOT an especially successful farmer or businessman—but he was a meticulous bookkeeper. In 1779, encamped in Middle Brook for months after the stalemated battle of Monmouth, New Jersey, the Revolutionary War general unleashed his financial frustrations in a letter to his nephew. Much of the wealth he had inherited through marriage was, once the war began, loaned out to Virginia neighbors and merchants. The trouble was that by the time the borrowers paid him back, the money they used was worth a fraction of its earlier value. “I am now receiving a shilling in the pound in discharge of Bonds which ought to have been paid me, and would have been realized before I left Virginia, but for my indulgence to the debtors,” Washington complained. At twenty shillings to the pound, this implied a loss of 95 percent. Washington said in the same letter that his losses exceeded ten thousand pounds; according to one biographer’s estimate, that was approximately a year’s worth of his farm’s income.
Continuing his tirade, Washington wrote, “It is most devoutly to be wished that the several States would adopt some vigorous measures for the purpose of giving credit to the paper currency and punishment of speculators, forestallers and others who are preying upon the vitals of this great Country and putting every thing to the utmost hazard.” By the time the war ended, Washington was so disabused of worthless paper currency that he “paid his manager in produce, not money.”1
It is almost impossible to overstate the dislike that most of the Founding Fathers, and indeed most of the American ruling class, had for paper money in the late eighteenth and early nineteenth centuries. The currencies issued by most states depreciated to the point of being worthless. One historian has gone so far as to argue that the colonies themselves were so tapped out by their own useless money that they embraced the idea of a federal government just to unburden themselves of their debt: “Paper money, therefore, or rather the reaction from it, helped to secure the adoption of the federal constitution.”
With the crucial exception of slavery, no issue tormented nineteenth-century America longer or more passionately than the question of what our money should be. The money question gouged deep wounds into every major public policy concern of the era: the structure of government; economic growth and the expansion of national land; the concentration of wealth, geographically and individually; the conduct of wars, and the debt and inflation they created; and the very meaning of the Constitution, including the amendments that ended slavery itself.
As hated as paper money might have been, there were no universal alternatives. Commerce in the regions that would form the United States was for more than its first century conducted in a hodgepodge of currencies. Gold was the most enduring and in some ways the most powerful of these currencies: until the twentieth century there was never a point when gold could not be used to pay most debts, and some specific types of debt required gold. But any currency based on a physical substance will inevitably be subject to limitations, and gold—a bulky metal that must be mined, refined, measured, stamped for purity, and heavily guarded against theft—is especially limiting. In this sense, gold as a means of currency is overqualified: Because there is only so much gold in a country at a given time, how can economic activity—and, especially, economic growth—take place if no one wants to part with his share?
The answer, much of the time, is that it cannot. And thus, an abundance of alternative, sometimes exotic currencies, official and unofficial, sprang up. Silver coins were officially minted through the early nineteenth century, and were widely used until the mid-1830s, but at many points their use was rarer than their imprimatur might suggest. Market discrepancies between the prices of gold and silver meant the silver coins were often more valuable if melted down. One government official estimated that at the outbreak of the Civil War in 1861 there were, for example, probably fewer than one thousand silver dollars in circulation in the entire country.2
At various points in the eighteenth and nineteenth century, Spanish coins were widely and reliably enough circulated to constitute a semi-official currency; indeed, Spain’s “pieces of eight” were legal tender in the United States until 1857. British, French, Russian, Portuguese, and Dutch coins—representing countries all jousting to be colonial powers—could also be found. In many parts of the country, Mexican coins circulated as money, albeit “debased and worn,” as one observer put it.3 Washington himself recorded a list of the money he took with him on a single trip to Philadelphia: “6 joes, 67 half joes, 2 one-eighteenth joes, 3 doubloons, 1 pistole, 2 moidores, 1 half moidore, 2 double Louis d’or, 3 single Louis d’or, 80 guineas, 7 half guineas, besides silver and bank-notes”—this being currency from Portugal, Spain, France, and Britain.
Despite the prevalence of coins, paper money was abundant from the colonial period onward. Most states had a banking system that could issue its own notes, often theoretically redeemable for a given amount of gold, but in practice more useful as paper, even if at a discount from face value. During what was known as the “Free Banking Era”—from the fall of the Second Bank of the United States in 1837 until the passage of the National Banking Act in 1863—hundreds of loosely supervised banks were launched that printed paper money known as “shinplasters,” “stump tails,” “red dogs,” “smooth monkeys,” and “sick Indians.”4 In some regions individual cities and companies issued certificates for paying state dues that circulated as money; in the West some railroads even created reusable train “tickets” that functioned as currency. And the Civil War, of course, created Confederate money that circulated in the South and “greenbacks”—money printed by the Union government without being redeemable for gold or silver—in the North.
Some early American leaders accepted that nonmetallic money would be necessary and actively advocated its use. Benjamin Franklin, a visionary in so many diverse fields, argued that America should have a paper currency precisely because it had no native supplies of gold or silver. Others, particularly those stung by the inflationary experience of paper money in the late eighteenth and early nineteenth centuries, held different views. The patrician landowner Thomas Jefferson feared paper money as issued by private financiers; he warned that “bank notes will be as oak leaves” but advocated the issuance of paper mo
ney backed by the government.5 Alexander Hamilton, for all his disagreements with Jefferson, on this matter concurred. Of course, to many eighteenth- and nineteenth-century thinkers, the idea of the national government legitimizing a particular currency—regardless of the physical medium—represented an uncomfortable mixture of state and financial power. In the early days of the American republic, an argument about what constitutes money quickly became an argument about what type and size of government one favored. The most vigorous objections to a national currency and a national banking system came from Whig populist Andrew Jackson and what would become the Democratic Party.
And so while modern-day gold-standard advocates sometimes downplay the complexity of currency in the eighteenth and nineteenth centuries, the unstable crazy quilt of early American money could make any sensible person yearn for an immutable yardstick of value. Against the backdrop of monetary chaos, gold took on for early Americans a sense of psychological security. In a nation that embraced revolutionary change in political matters, gold was a vital tie to the ancient world. Gold meant self-reliance: it could not be destroyed and its value—compared, say, to that of paper money—could not easily be manipulated. Just as important, the more gold Americans possessed, the more they could decrease dependence on European (and in particular, British) financiers, an economic condition that long persisted even after the founding of the American republic and that especially vexed the likes of James Madison.6
It may seem astonishing that by the middle of the nineteenth century an economy the size of the United States had not adopted a uniform paper currency, and yet to a considerable degree this was by design. In the popular mind, paper money was equated with fraud and failure, even if in some instances bad financial management was mostly to blame. Banknotes in the early colonies often resulted in rapid and disastrous inflation; in Rhode Island, bills issued in the 1730s were worth no more than 4 percent of their face value by 1750. Throughout the early 1800s, bank failures were rife, and the experience of holding worthless paper money issued by a dissolved bank was all too common. One businessman and publisher wrote of his experience with paper money in the early 1800s: “Such was the state of the currency, that in New Jersey, I met with an instance where a one dollar note I had taken in change, which was current on one side of a turnpike gate, would not pass at an hundred yards distance on the other side!”7