Last week witnessed a defining moment in the cultural history of the West. Two small bands of dedicated idealists banded together in final, desperate attempts to grapple with and defeat waxing menaces to the freedom and well-being of their respective worlds. The results were, regrettably, quite different. In the wizarding world, Harry Potter and his comrades kicked Voldemort’s undead tuckus, killed Bellatrix Lestrange, and restored peace, order, and mangled Latin to the galaxy. In Washington, in stark contrast, Congressional representatives and the White House failed to find common ground on dealing with budgetary reductions and debt limits, prolonging the condition of petrificus totalis presently afflicting the US economy, and condemning future generations to de facto membership in the Debt Eaters.
One of the key kerfuffles on the margins of last week’s debt drama in Washington was an engagement between Ben Bernanke, the Chairman of the Fed, and Rep. Ron Paul, perennial presidential candidate. Rep. Paul asked Chairman Bernanke a simple question: “Is gold money?” And Bernanke, for a good ten seconds, said nothing, before eventually gabbling out the official administration line that of course, it was not.
The price of gold immediately shot up by about $40 an ounce.
Think about that for a second - “Gold is not money.” So much for 6000 years of human history. I was reflecting on this surreal exchange during a hosting exercise yesterday. With a number of in-laws visiting from across the pond, I could think of no more fascinating, touristy-type thing to do than to inflict upon them a tour of the Royal Canadian Mint. I like the Mint; more to the point, I like the idea of the Mint. If economics are the lifeblood of any civilization, then national mints serve the role that used to be played by the Red Cross, imposing a thin patina of order on what would otherwise be currency chaos.
Chaos isn’t always bad, of course; in bygone eras, money was a far less abstract thing. If you’ve read Barbara Tuchman’s A Distant Mirror (her chronicle of the ‘tumultuous’ 14th Century, told from the perspective of Enguerrand de Coucy, 7th Sieur of that impressive ruin that overlooks the Picardy countryside), you may recall an introductory disquisition on the nature of money some seven hundred years ago. Currencies, standards, rates of exchange and even names of coins were often so mutable and so imprecise that there was little point, in her view, in trying to arrive at some modern equivalency of what this rent or that ransom amounted to in today’s gelt. Europe dealt in shillings, pence, pounds, crowns, guilders, florins, bezants, shekels, sovereigns, talents, livres, louis, dollars, ducats, piastres and even the occasional chunk of Viking hacksilver. Goods - particularly highly valuable goods like precious stones, spices, church plate, holy relics and the like - served as coinage as well. Letters of credit and exchange were only beginning to be used - and it was only with their arrival that the concept of a redeemable financial instrument came into vogue.
Standing in the Mint and staring at a 300 kg rolled bar of 24-carat Canadian-made awesomeness, you can see the attraction. Gold is pretty. It’s heavy. It’s mutable, malleable, and ultimately fungible - today’s gold candlestick could be tomorrow’s gold coins and vice-versa. Gold was soft enough to strike easily, and also soft enough to allow the practice of clipping - both the unofficial sort carried on by crooked merchants and money-changers, and the official sort engaged in by kings and princes looking to expand their purchasing power, at the risk of debasing their currency. It’s one of the reasons that coins came first to be edged, and later to be rimmed (the other reason being to increase lifespan by protecting the images on the face and obverse). Later, alloying gold with baser metals became the rule.
Clipping, thinning and alloying all debased the currency. The whole idea of a debased currency is an intriguing one, isn’t it? In an age when the value of money lay in the quantity of metal making up the coinage - as it does in the investment coins struck by mints these days, which are worth nothing more than their mass times the daily commodity price for the metal of which they are made - you could only ‘debase’ a currency if its purchasing power were based on its face value rather than its weight, no? A clipped or especially thin shilling would be a problem if you considered that value lay in the metal, because the mass of, say, fifty clipped shillings would be less than the mass of fifty newly-minted ones. It wouldn’t be a problem if shillings, however, were only a representation of a promise by the crown to redeem them for a given amount of some commodity (e.g., gold). Except for one thing: the practice of clipping by the crown was instituted as a means of increasing the crown’s purchasing power. It resulted in more coins going into circulation, which resulted in - of course - inflation. A clipped shilling meant that no matter how you looked at money - whether as a mass of precious metal or a representation of redeemable value - you were going to have to line up more coins to buy the same loaf of bread.
One thing leads to another, and looking at those coils of gold - each one of which, at today’s prices, would be worth about $18,000,000 - got me thinking about another form of currency that, although not quite as fungible, was roughly as easy to transport, and a good deal more pragmatic than gold: the limestone Rai coins of the Yap islanders.
Figure 1 - two Bits, to a Yap islander
No, I’m not kidding. For those whose grandparents didn’t have a stack of well-thumbed 70s-era National Geographics near the clawfooted cast-iron bathtub, the Yap islanders, lacking a source of precious metals or other materials to serve in the stead of valuta, canoed hundreds of kilometres across the open ocean to limestone quarries on Palau. There they cut and decorated enormous stone wheels, some as large as 10-12 feet in diameter and weighing several tons, pierced them for carrying poles, and rafted them back to Yap to serve as currency.
The neat thing about the Rai stones (an American anthropologist, William Henry Furness III, writing in 1910 called them ‘Fei’ in his book, The Island of Stone Money) was that they didn’t have to be mobile to be useful. In fact, their immobility, which made them impossible for even several men to move by themselves, served as the equivalent of a bank vault. Rai stones may even have been the first form of fiat currency. Furness, for example, tells about the ownership of stones changing hands, for example as a dowry or in payment of a debt, without ever having to move. The exchanged stone would simply remain on the former owner’s property - but all would know who the stone now belonged to. Ownership was never in doubt. One of the more extreme examples was the loss of a particularly valuable stone during shipment in a storm. Because the loss had been no fault of the owner, and because the boat’s crew attested to its “exceeding value”, the fact of it being sunk in a few hundred feet of water was deemed to have no impact on its purchasing power; it remained, according to Furness, “as valid as if it were leaning visibly against the side of the owner’s house...”
Furthermore, the value of the stones was considered increased if their manufacture was especially artistic, or if they had been transported by an especially famous individual or crew, or - and this is interesting - if anyone had died in producing or transporting them. This variability in value of the stones reinforces the idea that they were more analogous to investment properties than to currency as such - although from a practical perspective, other than the fiat nature of modern currencies, there isn’t really much difference between a concrete investment property like a giant rock, and a piece of gold, or a piece of money. You see, value isn’t an absolute - it’s an agreement between purchaser and seller. Value is set by the act of sale. MPAC - the Municipal Property Assessment Corporation - might evaluate your house at a certain amount, but its value is what someone will pay for it. Same thing for your services - your time is worth what people are willing to pay for it. That’s a thought destined to keep some of us awake at night.
To the Yap islanders, ownership of a Rai stone gave you access to its value, i.e. its purchasing power, regardless of where it was. The rocks had no intrinsic worth; the labour that had gone into creating and transporting them was a sunk cost, and the resulting product could not be used for anything at all. Too big for a paperweight, too round for a foundation...apart from the Germans and Japanese, who used the stones for anchors during the Second World War, they were good for nothing whatsoever. Their value lay only in the agreement between the islanders that they had value. Milton Friedman, in a 1991 paper on the stones, recounts a story about how the German occupation forces in WWII tried to get the islanders to improve the footpaths on the island into roads that would be useful for vehicular traffic. They couldn’t pay the islanders, because they didn’t use Western money, and no other form of inducement could be found...until some bright chap hit upon the idea of sending representatives around the island to paint black crosses on the most valuable Rai stones, indicating that these now belonged to the occupiers. This “fine” did the trick; the islanders improved the roads, and the Germans took the paint off the stones.
Here’s a question for you: did the painting of crosses on the stones constitute theft, a fine, extortion, or a tax? And is there really a difference?
In his paper, Friedman - a die-hard opponent of the gold standard - offers a modern analogy in which the New York Federal Reserve Bank (the one Jeremy Irons robbed in Die Hard 3), in response to concern in 1932-33 by the French government that the US was going to abandon the standard gold price of $20.67 an ounce, agreed to sell gold to France - a classical example of fiscal nervousness leading to currency conversion into precious metals. France, unwilling to risk shipping a big pile of gold across the ocean, asked the Fed to simply leave the ingots in New York and mark them appropriately. The Fed put France’s newly-purchased gold into separate drawers and labelled them, indicating that they were now French property. For all that it mattered, Friedman remarks, “they could have done so by marking them with a cross in black paint, just as the Germans did to the stones.”
What's fascinating about the story of the "French" gold is that the news of the transfer affected the markets exactly as you would expect such an event in a gold-standard system. France now owned more gold, so the franc grew stronger, while newspapers bemoaned the “drain” on US gold stocks, leading to a weaker dollar, and contributing to the banking panic of 1933...all despite the fact that the gold never left US custody.
Given such practices, what’s the difference between gold and Rai stones? What’s the difference, in fact, between Rai stones and your pension fund or your RRSPs? “How many of us”, Friedman asks, “have literal personal direct assurance of the existence of most of the items we regard as constituting our wealth?” Well, there are a few differences between rocks and modern investments. For one thing, it’s harder for a government to devalue your investments by suddenly flooding the market with 800 billion four-ton rocks, if only because quarrying massive rocks is a lot harder than churning out greenbacks - even virtual ones. And when the debt crunch finally comes, it’s a lot harder for the government to cart off a four-ton rock that’s leaning against the wall of your house than it is to purloin - even temporarily - monies stored electronically by citizens, or monies owed by the government to the citizenry. These are pretty much the core arguments of those who advocate a return to some form of a gold standard: that eliminating the standard may have solved some problems, but doing so definitely enabled governments to play a lot faster and looser with the nation’s finances. Once you’re no longer obliged to have a gold ingot in your vault or a big rock in your back yard to back up your claim to “wealth”, then you’re pretty much free to say that you have as much “money” as you want to have.
Friedman’s conclusion is that the Yap and US/France examples illustrate the importance of “unquestioned belief” in monetary matters. Fiat currencies are about confidence - confidence that the instrument of currency you accept in exchange for a debt today will be worth the same tomorrow. Confidence, in short, about the future. Which is why, when I took the in-laws to Fort Henry last week, the sign in front of the ticket booth said “US Exchange Rate - $0.95”. Confidence in the future of the US dollar, which is to say the future of the US economy, isn’t all that high these days - and the thumb-fingered bumbling shenanigans in Washington aren’t doing much to dispel the worries that are pushing the dollar down and keeping unemployment stagnant. Nor, for that matter, are long, baffled silences from senior administration officials when they’re asked fairly basic questions about what money is, and isn’t.
Is gold money? Technically, maybe not. But without confidence in the future, neither are dollars. To put it another way, if government debt and unemployment keep spiralling upwards, what would you rather have in your pocket - 1600 greenbacks, or an ounce of gold?
Figure 2 - the best of both worlds: Canada’s Rai coin, one of five:
100 kg of 99.999 percent pure gold (worth $6.4M at noon today)
Gold keeps going up in price, as it does every time confidence in fiat currencies begins to decline; after all, scarcity, as with Rai stones, adds to value, and there’s only so much gold in circulation, and so much being produced annually. If it gets too pricey, we might have to start looking for other things to invest in. Unless our cousins down south get their fiscal house in order, we might not be all that far from a world where the dollar, which according to Bernanke is money, becomes useless; and gold, which according to Bernanke isn’t money, becomes the exchange medium of choice simply because it’s impossible to debase because without transmutation, we can’t make any more of it.
Who knows? The way things are going, at some point 8000 pounds of limestone on the bottom of the Pacific might start to look like a sound investment opportunity.
Reference: Milton Friedman, “The Island of Stone Money”, Working Papers in Economics E-91-3, The Hoover Institution, Stanford University, February 1991.