Mahmoud the merchant bought camels and paid for them in gold. Then, as his business expanded, he would write on slips of paper, “I promise to pay an ounce of gold.” Then, inspired, he simplified the wording and wrote, “This IS an ounce of gold.” He sent one of the new notes to market, and back came another note which read, “This IS a camel.” Mahmoud had the joker beheaded, and from then on his own notes passed unquestioned.
By now, Mahmoud’s invention (first described by Hilaire Belloc in The Mercy of Allah) has been taken up by governments and central banks across the world. A dollar bill is simply a dollar bill, and its holders are encouraged to trust in God. A Bank of England note still carries a promise to pay, but all that this will get you is another note. Gone are the days when these pieces of paper stood for claims on the gold in Fort Knox or Threadneedle Street. All they are now is Monopoly money, with the Bank or the US Treasury as the monopolist.
From that point of view, they have many advantages. They are cheap and profitable to produce, and more can be run off at the press of a button. In this way the Bank could conjure up £375 billion and ease it out into the British economy. Other central banks — Zimbabwe’s, for instance — have taken this process to its limits and beyond. Gold, which used to be their guarantor, is now their rival: a monetary asset whose value does not depend on any minister’s or central banker’s signature.
As a store of value, it has certainly left paper money behind. Fort Knox, half a century ago, was selling gold — though only to official buyers — at $35 an ounce. (Charles de Gaulle urged the Banque de France to fill its boots.) More recently, Gordon Brown sold half his nation’s gold reserves at a price close to $275 an ounce. Those who bought it and held it saw the price quintuple. Conventional investments had marked time. Nothing seemed to be as good as gold.
Then the price stopped rising, and then, in the spring of this year, it took a spectacular tumble. In one day’s trading, gold lost one-twelfth of its market value. What was happening? The conspiracy theorists were full of explanations, and the perennial doubters emerged to misquote Keynes and call gold a barbarous relic. Another way of looking at it was to say that paper money was looking a little more credible.
It is a year now since Mario Draghi, the euro’s bank manager, improvised a promise to do everything it took to hold his currency together. In that time, although Europe’s economic troubles have worsened, he has been able to keep his promise, or his bluff has not been called. Perhaps he has taken his cue from Otmar Emminger, late of the Bundesbank, who defined an optimistic central banker as one who believed that the world was coming to pieces, but slowly.
In that time, too, investors have become more reconciled to risk. As their search for income widens and intensifies, they have returned to some fallen favourites, and are even flirting with junk bonds. Share prices in London, New York and Tokyo have gone steaming ahead. After all, that newly-printed money has had to find a home somewhere.
No one who wants more income buys gold. Like a house, gold does not generate income — though, like a house, it can be rented out for profit. No one buys gold to feed an appetite for risk. Gold comes into its own when risks are real and immediate. So the market in gold, as its veterans say, can be quiescent for long periods and then burst into life. It reacts to the Chinese curse: may you live in interesting times.
One specific risk has been with us ever since Mahmoud’s fateful invention. The printers of money will always be tempted to abuse their monopolies. They can set out as a matter of policy to make it lose some of its purchasing power — for the pound, in theory, at present, a loss of 2 per cent every year. So governments can sit and watch as their liabilities are inflated away. This can work wonders.
Here, in the 1970s, it worked so strongly that inflation was running at 25 per cent, and anyone who bought or owned gold was committing a criminal offence and could be sent to prison. Gold as a monetary asset was so obviously superior to its paper competitor that the law was required to shore up the monopolists’ position. Mahmoud, of course, set the precedent.
As always with monopolies, the losers are the customers. Gold represents their insurance policy, not so much to buy and sell as to have and to hold. It is on their side — on the side of the individual, that is, against the proprietors of the printing presses, and against the risks inherent in trading camels for paper.