CHAPTER 1
THE MONEY OF KINGS
"He who has the gold makes the rules"
Donald Trump when asked why his home decor includes so much gold
What Is Money?
One of my first clear memories of learning in school was when I was 12 years old and in the 7th Grade. My teacher, Sister Kathleen, on the first semester of school, gave a lesson about the value of money. It's one I have forever remembered.
Sister Kathleen separated the class into five different groups and announced, "Our group project is that we are going to make ham and cheese sandwiches. The team that makes the best sandwich wins." She then pulled out various ingredients. A loaf of bread, a block of cheese, a pound of sliced ham, a jar of mayonnaise and several tomatoes were provided, with each group receiving a different ingredient. She then informed us of the rules. "Each team's sandwich must have every ingredient in order to qualify. May the best sandwich win," she proclaimed.
At first none of us knew what to do. My team was given the block of cheese. How were we going to make a ham and cheese sandwich from a block of cheese? It wasn't long before we realized each group had a necessary ingredient for the sandwich we were required to make. Within seconds it was mayhem as two dozen 12 year olds began running back and forth yelling and bartering for what each team needed.
This was my first school lesson on economics and the progression of the early barter system. Sister Kathleen used the lesson as a way to highlight that early farmer civilizations had to trade with one another for various commodities. She explained that some farmers raised cows whose milk was necessary to make cheese. Other farmers raised pigs. Other farmers had crops and the necessary grains to make bread and vegetable farmers grew produce. In order for each farmer to get other necessary supplies, they would need to trade with one another. As a class we quickly understood the challenges associated with the barter system. We were then asked what would make the barter system we had just experienced easier. The answer was clear to our 12 year old minds: money.
The next day Sister Kathleen repeated the exercise with the class. Only this time she brought in a large stack of Monopoly money and handed each group the same amount. Once again she repeated the rules that we all must make sandwiches with every ingredient, only this time added, "the team with the most money in the end wins."
Now we discovered a different problem. After several trades it became apparent that some ingredients were more valuable than others. Ham and cheese were most valuable, followed by the bread, with mayonnaise and tomatoes bringing up the rear and ascribed the least value. We comically went back and forth trading our money between ourselves, all trying to gather the most important and necessary ingredients for the winning sandwich. My group had the cheese, and it was easy to get more money for our cheese since it was the number one ingredient every team wanted. As a result, my team in the end not only had the most money, we also had the best sandwich since we were able to buy all the necessary ingredients from every other team.
Team Tomato cried that the game was unfair because nobody was willing to pay as much for tomatoes as they were for cheese and ham. Day Two's lesson illuminated the value of each commodity, and how the more valuable commodities provided certain teams more power as they were able to command a higher price for their goods.
On the third day we repeated the exercise. This time with another twist. At this point in the game my team had the vast majority of the money, with Team Ham in second place. Team Tomato had no money whatsoever. On day three, Sister Kathleen pulled out a new and even bigger stack of Monopoly money, and to every other teams chagrin, gave it all to Team Tomato. Sister Kathleen informed us that Team Tomato was now also the Central Bank, and could add as much money as they wanted to the Ham and Cheese Economy. She then pulled out wads of Monopoly money and gave it all to Team Tomato to use however they wanted.
Team Ham and my team eventually cried, "No way, not fair," as Team Tomato added money to the system. The day before we were the most powerful two teams. We had most of the money and our money had great value. Now, as money was handed out freely by the Central Bank of Tomato, our money became less and less valuable. It was a great lesson on inflation and the devaluation of money.
On day four Sister Kathleen changed the game again, this time by adding 100 copper pennies to the system. Back then a cent was actually worth something and we were all excited that "real" money had been added to the game. Now, as money was handed out freely by the Central Bank of Tomato, our entire Ham and Cheese economy became unstable. Prices fluctuated and nobody was certain of the actual value of the money in the system.
From here a fascinating thing happened: within minutes a count of all the paper money in the game was conducted. The Central Bank of Team Tomato was still able to add as much paper money as they wanted to the system. Only now, when measured against the static value of the 100 pennies, adding more paper money only made it more worthless. Providing a fixed constant allowed for stability and certainty in the new economy.
On the fifth day Sister Kathleen turned the game upside down one last time. She depleted the amount of pennies in the system by 50%. Just as we had learned how adding paper money to the system on Day Three and Four created instability and inflation, now on Day Five we learned about deflation. With less currency in the system our money was now more powerful and prices went down as a result.
This lesson, while quite simple in execution, was one of the most compelling lessons I have ever learned about economies and why the supply of money is so important to their overall function.
The Value Of Money
How could I have predicted that one day I would be recounting this childhood experience as an introduction to my book and the subject of gold? I sometimes wonder had I not gone through that exercise as a young boy would I be writing a book about gold at all, or would I be as passionate about the subject today?
The main impact of my childhood school lesson was that money is more valuable when there is a limited supply. As paper money was added to our Ham and Cheese System, that money became less and less valuable. By subtracting money from the supply, prices went down and our money had more value. Only after adding a static and consistent standard of the physical pennies into the mix, was the financial system stable and able to be controlled. I believe this story is a good introduction to gold.
Gold is static and unchanging. It is this exact feature that makes gold more relevant today than at any time in history. It is what allowed gold to become money 5,000 years ago as early barter systems became untenable. It's what we will go back to in the future when the monetary system fails.
Gold Remains The Basis Of The Monetary System
The top ten Central Banks around the world today own a combined 23,000 tons of gold. The IMF owns 2,000 tons making for a round total of 25,000 tons of gold. This gold represents about 12% of all the gold ever mined. A testament to gold's durability is that virtually every ounce of gold ever mined is still above ground. Gold is among the rarest of all of the elements making up only three parts per billion of the earth's crust. There are 325 million people in the United States. Trying to find gold is like trying to find one person in the entire U.S. population.
Gold weighs 19 times more than water and is twice as heavy as lead. Over 90% of physical gold in existence has been mined since the California gold rush. The total gold mined in history is estimated to be about 188,000 tons. This means that all of the gold mined in the history of mankind would fit into two Olympic sized swimming pools.
One of the biggest arguments against gold is that it doesn't provide any return. That's correct, and is exactly one of the most compelling reasons to own it in my opinion. Gold does not pay any return because gold has no risk. A $100 bill doesn't pay any return either unless you deposit it into a bank, at which point it has risk because it is now a liability of the bank. You are the creditor and the $100 deposited into the bank now has a risk that the bank may or may not return your $100. While the gold price can go up and can go down, the elemental and static nature of gold is its greatest feature because it is constant and therefore has no risk of permanent impairment. Permanent loss of value is a risk that all financial assets have. Gold will always be gold and has no such risk. It's for these reasons that gold first became money.
Money ultimately must have three components:
1. Unit of Account: measures the cost of an economic item
2. Medium of Exchange: an intermediary instrument used to facilitate the purchase or trade of goods between parties
3. Store of Value: an asset that can be saved, exchanged, and retrieved at a later time
Today there are several different forms of money, including the Dollar, the Euro, the Yuan, and other national currencies. Digital currencies like Bitcoin and Ethereum can also be considered money. Gold it turns out is the perfect form of money.
Gold As Currency
The purpose of this book is not to be a history of gold and paper money, but more an evaluation of how gold performs, especially when considered against paper currencies and other financial assets. Understanding gold's backstory however, is relevant to understanding gold's future. The properties of gold that made it the perfect form for money are the same today as they were 5,000 years ago. They are as follows:
1. Gold is Scarce
2. Gold is Exchangeable
3. Gold is Divisible
4. Gold is Incorruptible
5. Gold is Portable
It is these physical properties of gold that were the very reason gold became the foundation of the global monetary system. Before travel and commerce between nations was commonplace, each nation individually settled on gold as the perfect form of money. As nations grew independently and then began trading, the scarce, static, consistent, and pure nature of gold made it the perfect form of money acceptable for trading. Its consistency was its greatest feature and evened out all accounting and price systems.
Gold Is Practical
Anyone familiar with the periodic table of elements from high school will remember that there are a finite number of known elements in the universe. Each known element has an atomic symbol and atomic number that measures the number of protons in their nucleus. The atomic symbol for gold is Au and it has an atomic number of 78. Gold gets its name from the Latin word aurum meaning gold. Gold (Au) is a physical element, plain and simple. Its properties are static and will never change. Gold has been a physical element for billions of years and will continue to be billions of years in the future.
In his excellent book The New Case For Gold, Jim Rickards highlights the research of Andrea Sella, a professor of chemistry at the University of London. Sella discusses the practicality of using gold as money in the physical world.
Professor Sella shows us that most of the matter in the universe would be ineffective as a use for money. He walks through the periodic table and eliminates helium, argon and other gases as having no weight, and therefore useless as money. He also goes through and rejects mercury and bromine as they are liquid at room temperature and are as impractical as gases. Sella eliminates toxic and poisonous elements like arsenic. The twelve alkaline elements ranging from magnesium to sodium are also impractical as they dissolve or explode on contact with water. He then eliminates radioactive elements like plutonium and thorium. Sella further takes other elements like copper and iron out of contention as they corrode when exposed to air over time.
Once all the aforementioned elements have been eliminated we are left with the metals situated in the middle of the table which could even be considered for money based on their elemental properties. These elements include iridium, osmium, ruthenium, platinum, palladium, rhodium, silver and gold.
According to Sella, "That leaves us with two elements to consider for use of money, silver and gold. Both are scarce but not impossibly rare. Both have relatively low melting points and are therefore easy to turn into coins, ingots, and jewelry. Silver tarnishes when it reacts with minute amounts of sulphur in the air. That's why we place particular value on gold."
Rickards then adds the obvious, "Gold also happens to be beautiful."
Gold Is Biblical
Biblical records show that gold and silver are the oldest form of money and have never failed in over 5,000 years. The book of Genesis spans 2,400 years and tells the story of the creation of man, God's instructions on how to live and where to find the essentials for living. Genesis 2:12 says, "The gold of the land is good." If you believe in the Bible and its teachings, God wanted man to have gold for a reason. The reason we can gather was so that man could use it as money. Gold is mentioned in the Bible 417 times. Silver is mentioned in the Bible 320 times. Money is mentioned in the Bible 140 times, each time referring to either silver or gold.
Gold and silver are referred throughout the Bible as representing real wealth from its first book of Genesis through its last book of Revelations. The Bible tells us that gold and silver are the only God-ordained monetary assets that will maintain their purchasing power until the day of the Lord's wrath.
When Moses ascended the mountain at Sinai to commune with God, he was given the ten commandments which are carried in the golden arc. When the Israelites broke the law by worshiping a golden calf, God sent a plague as punishment. Moses was surrounded by a strong golden light that no one could look upon him.
Gold in the Bible is likened to wisdom, faith and knowledge. In the book of Psalms it says that God's laws and commandments are more valuable than gold. Gold is considered by the Bible to be the most valuable thing one can possess behind knowledge, faith, and righteousness. Perhaps the most well known reference to gold in the Bible is from the story of the Magi and the gifts they presented to the baby Jesus. The wise men offered gifts of gold, frankincense and myrrh. Gold representing Kingship on earth.
The name Christ is derived from the Greek meaning golden one. Revelations 21:21 tells us, "The greatest street of the city was pure gold." Jesus' greatest command was, "Do unto others as you would have them do unto you," and is referred to as the Golden Rule.
The earliest biblical mention to what gold could purchase is from Daniel 2, and references the reign of King Nebuchadnezzar from 600 BC. We learn from Daniel that a one ounce gold coin during this time would buy 350 loaves of bread. The current price of a loaf of bread today is about $3.50. Notice that an ounce of gold from the year 600 BC purchases roughly the same amount of bread 2600 years later. Gold was never intended to make one rich, but rather preserve one's buying power.
Throughout the course of history, the amount of new gold mined has averaged 1.5% annually. The historical growth of the human population has also averaged 1.5% annually. Atheists may consider this a coincidence. For those of faith it's as if God created the perfect form of money for mankind to use and also accounted for mankind's future growth ensuring there would always be enough new money supply to meet the growth in population.
Gold Is Desired
The Latin word for gold is aurum which means shining dawn. In the beautiful words of Mark Cartwright, "That which the sun radiates around itself as light and warmth as a force for the soul and the earth." The mighty sun aura which rays out over the whole cosmos is concentrated in gold. It's what the early Romans called aurum, since gold is very condensed sunlight. Aurum being a concentrated aura.
In Greek society, gold represented power and wealth. In Greek mythology King Midas was rewarded with a wish that all he touched would turn into gold. This nearly leads to Midas' own death and starvation as even his food turns to gold. In his quest for wealth and power he had forgotten the importance of the simple necessities in life.
The Ancient Egyptians mined huge quantities of gold. Africa has immense gold reserves and is the site of the fabled mines of King Solomon and his lost city of gold. The early Egyptians used gold to decorate their temples. The tombs of their pharaohs who were believed to be the reincarnation of their sun god were laden with gold.
The Aztecs regarded gold as a symbol of their sun god and crafted intricate gifts of gold to give as offerings. Their entire culture would ultimately fall because of gold and the Spanish Conquistadors' greed. Cortes, after finding tons of gold, took the Aztec King Montezuma hostage, promising to only release him for a room of gold. The natives were surprised as gold was so plentiful and complied with the request, providing the Spaniards with several tons of gold. That gold was transported to Spain, melted down, and still today decorates many of the catholic churches in Spain. Cortes then betrayed the Aztecs and had Montezuma murdered. The Aztec civilization never recovered from this betrayal.
