Indestructible – Always Believing in Gold

The glittering summer of sport we are enjoying may tease a recession-tainted country with a sense of prosperity that disappears when the athlates go home. Although the UK has fallen in love with sporting gold, the economic loss of contact with the precious metal, as international finance has evolved over the decades, has contributed to the current instability in global finance.

Britain has been basking in the bright reflection of its Olympic champions’ winners medals this summer, ever since rowers Helen Glover and Heather Stanning won the first of a record-breaking haul of gold medals in London. The nation’s excitement peaked the following Saturday, as a famous night in British sport saw golds for Jessica Ennis, Greg Rutherford and Mo Farah.

The value in UK pounds of a precious metals used to make 2012 Olyimpic Medals

Ecstatic BBC presenters pining for the entire Olympic stadium to be bathed in golden light as a triumphant tribute to the home-grown heroes were following a time-honoured tradition, as since time immemorial gold has represented the highest human endeavours and achievements – due to its value as the most precious substance on earth.

Who Loves The Sun?

In his recent BBC series A History Of Art In Three Colours, Dr James Fox spoke about how, in ancient civilisations like the Egyptians, gold was especially valued beyond all other precious stones and jewels as it was most closely associated with the sun.

Some beliefs held that it was literally the substance of the sun, and in a sun-worshipping culture, gold was lifted above all other valuable substances into an entirely new realm – it was holy. Most pre-Christian civilisations were much more explicitly sun-worshipping than in modern times, even though the popularity of fake tans and cheap summer holidays may make many think the opposite..

Over the ages, the mark of a country’s wealth was most ably shown by their stocks of gold. When Christopher Columbus pledged to King Ferdinand and Queen Isabella the rewards to be gained from crossing the Atlantic Ocean, it was the promise of unimaginable gold that enticed the Spanish aristocracy to fund the seemingly suicidal adventure. As the New World was colonized, Spanish conquistadores’ tales of the city of El Dorado (or ‘the Golden One’) fuelled explorers’ lust for gold – and wealth.

As the world’s monetary system evolved over the ensuing centuries, the value of gold has been the fixed point that the wheel of a country’s fortunes revolved around.

Originally based on the more plentiful silver – a ‘pound sterling,’ when the phrase was coined (no pun intended) literally meant a pound, in weight, of sterling silver – Britain’s currency , followed by all the major powers, later adopted the Gold Standard. A currency was worth an amount in gold that would enable other currencies to judge how it was valued. International trade, creating the world we know today, was able to be carried out with much greater ease.

The Twentieth Century Rocks

However, gold today is no longer the basis of any currency. Why the change? Although a stable amount of gold will maintain the value of a country’s currency, what some people call stability, others may see as restrictions: printing more money, particularly in times of recession, has the advantage of pumping funds into an ailing economy, either to begin projects like building infrastructure, or banks lending to small businesses.

The downside is that this greater amount decreases the money’s value – prices rise, causing inflation. Countries left the gold standard in the run-up to the First World War seeking to gain arms, by printing extra money to pay for these – and their populations suffered rising prices. The gold standard’s rigidity can act as a warning to not risk events like massive spending on wars – but if those inhibitions are ignored, then that rigidity can cause massive problems in dealing with the resultant mess.

So the gold standard never successfully re-established itself in the inter-war period, and following the Second World War an agreement centred on the US dollar, which would have a fixed value of 35ounces of gold per dollar, was adopted. By the early 70s however, a costly war, coupled with economic decline, were creating severe difficulties for the US. President Nixon severed this link with gold in 1971, as the US could not make the payments on its Vietnam-induced debts without having the flexibility to increase the flow of money – basically, printing more.

The Cupboard Is Bare

Inflation presents the problem of what would happen if everyone who was owed all the extra money that was printed, went to cash it in, all at the same time?

Northern Rock were presented with this problem in 2007, at the beginning of the credit crunch The money on their books was actually payments due from mortgages people were not paying, or not in a position to pay – and when this cupboard was found to be bare, people feared for their money with Northern Rock, and tried to recover it – hence the run on the bank. And the bailouts.

Liquid cash or assets are essential for the world economy – in her book Terror Inc., Loretta Napoleoni asserts that if the $1.5trn estimated to be the world’s black market economy were to be shut down tomorrow, the lack of illicit cash flowing through the banking system (using the example of Caribbean narco-trafficking funds laundered through Florida’s banks in the 80s) would actually bring the entire world economy to a screeching halt.

Keeping It Real

Since 1971 most of the world has adopted fiat currency. Although the reintroduction of the Gold standard will not solve the world economy’s current ills, many of the problems from bankers to business are at root caused by the loss of a connection with a tangible substance.

Gold is no longer the marker of actual currency value, as it is of Olympic supremacy. American Peak Oil expert Mike Ruppert writes in Confronting Collapse that “this connection to something tangible provided for very stable currencies, but limited growth could take place by connecting it to the physical limitations of the earth. Over the course of the last 150 years, every major nation in the world has steadily decoupled themselves from that fact.”

Already Mervyn King, governor of the Bank of England, has been drawing on the distinction between Britain’s Olympic achievements, and the ailing economy. The contrast between the hard-fought achievements of every athlete, sacrificing early morning and untold hours of sweat and effort to earn their golds, silvers and bronzes, and an economic system that has replaced solid produce like manufacturing for the ephemeral products of international finance (the City accounts for nearly 30% of Britain’s GDP), should not be overlooked too.