he yarns of the nineteenth-century gold rushes in
California, Australia, the Klondike, and South Africa have been
told over and over, in books, movies, and on television. Every
library devotes yards of its shelves to the subject. All these
accounts of adventure and personal drama are gripping, but they
reduce a great story to too small a scale. The scope of the
nineteenth-century discoveries dwarfed everything that had happened
up to that point in the history of gold. Gold production in the
United States surpassed both iron ore and petroleum in value until
after World War I. Seen from that perspective, the gold of Croesus,
Pizarro, and the caravans of the Sahara shrinks to tiny pinpoints.
Furthermore, although the huge increase in gold supplies made
possible the establishment of the international gold standard, the
economic impact of the discoveries was radically different from the
Price Revolution of the Sixteenth Century and quite the opposite of
what most experts confidently expected to happen.
True, the Spanish discoveries of gold in the New World lifted world output of precious metals-gold plus silver-in the course of the 1600s to over seven tons a year, about double what it had been before those discoveries. By 1700, the total world stock of precious metals was five times as large as it had been in 1492. Then, thanks to Portuguese discoveries in Brazil, production doubled again in the eighteenth century.'
By 1859, with California, Australia, and Siberia all going strong, total world output of gold alone was 275 tons a year, which was more than ten times the average annual output during the eighteenth century. At that rate, the amount of gold produced in ten years matched the production from all sources over the entire 356 years from Columbus to 1848.2 And that was before the Klondike, Colorado, and South Africa opened up at the turn of the century. World gold production by 1908 was over one hundred times what it had been in 1848 and 4.5 times the levels of just twenty years earlier.3 By 1908, the total amount of gold in all forms-coinage, hoards, adornment, and decoration-could have been fashioned into a cube ten meters in each direction-an enormous expansion from the two-meter cube of 1500 that represented three thousand years of developing civilization (see page 110).4
Quite aside from the contrast in supplies, the character of the entire affair bore little resemblance to the gold strikes of the 1600s. The gold of the New World was found by adventurers who led the king's armies and employed military power to lay claim to entire nations in the name of the newfound wealth and plunder. The gold in California and Australia was discovered by independent prospectors panning in the rivers and working for themselves in a full expression of pioneering spirit, followed by businessmen who replaced the individual prospector with heavy capital equipment such as dredges and drills. The gold then traveled to banks and national treasuries on railroads and steamships whose high speeds and black smoke obliterated the memories of the romance and perils of the Spanish Main or the camels of the Sahara. Little of the nineteenth-century gold production ended up in Asia, although silver continued to move eastward.
In the 1500s, the gold discoveries were accompanied by even more important new supplies of silver in both Peru and Mexico, so silver continued to be the primary form of money in Europe and America until well into the nineteenth century. The influence of all the imports of gold from America did not even begin to dislodge silver in England until 1717, in Isaac Newton's time, and another one hundred years had to pass before Britain's Parliament established the official gold standard. But the deluge of new gold supplies in the 1800s finally established gold's dominance over silver in the world's monetary system. By 1900, the gold standard had been adopted almost everywhere; in many countries, silver was demonetized (ceased to be acceptable as money) except for small-coin transactions.
Finally, although there were constant warnings about the glut of gold and the inevitability of higher prices, inflation did not take hold until the very end of the nineteenth century except for very brief periods of time. This experience was a dramatic contrast to the Price Revolution of the Sixteenth Century. Indeed, the behavior of the price level was in many ways the most startling and interesting of the consequences of the nineteenth-century discoveries of gold.
Tradition paints the nineteenth-century gold rushes as historical accidents of some kind, with unsuspecting individuals stumbling onto sudden riches and the word spreading like wildfire. That tradition contains an important element of truth, but it is incomplete. The gold rushes of the nineteenth century were something more than bursts from the blue. People had been aware of gold-bearing areas in California, Canada, Australia, Alaska, and South Africa before the excitement turned hot in those areas. But the rapidly expanding world economy and financial system made the role of gold as money and as a standard even more important than it had been up to that point. Enormous prizes were to be won by the lucky individuals who beat the odds and managed to emerge with some gold from the turmoil and struggle of daily life in the gold rushes.
Although one could hardly describe the situation in the early 1800s as a bullion famine, the copious flow of gold from Latin America had peaked out during the 1790s as Brazilian supplies began to dry up. Then in 1810-the year the Bullion Committee held its hearings-Mexico rose up in a revolution against Spain that ignited a series of wars of independence in Latin America, disrupting the production of precious metals for nearly twenty years. This turbulence in Latin America was one of the reasons that Great Britain postponed restoring convertibility of Bank notes for six years after the defeat of Napoleon in 1815.
A dire world gold shortage was postponed, however, even before gold was found in California, as a result of discoveries in the land of the first and least famous of the nineteenth-century gold rushes-Russia. Gold had first been discovered in the Urals in 1744, but output remained modest until 1823, when, sensing opportunity, Czar Alexander I mounted a major effort to develop the country's bounteous gold resources. Annual production in the Urals rose from less than two tons in 1823 to more than five tons by 1830 and kept on climbing. The explorers were even more successful when they moved eastward into Siberia; production in that area had reached eleven tons a year by 1842. By 1847, the Russians were supplying over 60 percent of world gold production. As a result of the discoveries in other countries, the Russian share of the total declined after that date, but the Russians found so much gold over the years that their output was all the way up to sixty tons when World War I broke out in 1914.5 By the time Stalin's prisoners were working the notorious mines in the Ural mountains and in Siberia, Russia had been turning out enormous amounts of gold for over one hundred years.
The development of Russian gold production bore no resemblance to the Wild West and the entrepreneurial character of the gold rushes that would stir the imagination of adventurers in North America and Australia. Most of those prospectors went home empty-handed, but at least they had had the opportunity to hit the jackpot and enough of them succeeded to keep the crowds pouring in. Not so in Russia. Digging into the freezing tundra, the tsar's miners were essentially serfs who lived and worked for pitiful wages from 5 AM to 8 PM, six days a week, in rough and marshy terrains. None of the gold they dug up would be theirs. The whole affair was either under the direct control of the crown or of a small number of rich landlords whose gold revenues were taxed by the tsars.
The contrast was striking between the downtrodden workers and their bosses, who lived in high style despite the inclement climate and forbidding landscape. A nineteenth-century visitor to Siberia dining in the home of one of these moguls described a repast as fine as anything served in the palaces of Saint Petersburg. The dinner began with oranges from the French Riviera, served on a plate of Japanese porcelain; the sumptuous meal that followed was accompanied by wines from Spain, the Rhine, and Bordeaux, and finished off with Arabian coffee and Havana cigars.6
In California, the discovery of gold in 1848 took place two years before the territory was admitted to statehood and even before a peace treaty had been signed in the Mexican War. The news about Sutter's Mill spread through the neighboring communities in short order and almost emptied out San Francisco within a few weeks. With no radios, television, or Internet, however, word reached the rest of the country more slowly. The first deposit of gold from California at the U.S. Mint did not arrive until December 8, 1848, at which point it was greeted by one periodical as "the new mistress."'
The big rush did not begin until 1849, after President Polk mentioned it in his State of the Union address to Congress, which is why the prospectors (and the San Francisco football team) came to be known as the Forty-Niners rather than the Forty-Eighters. The long delay between the discovery and Polk's announcement was the primary impetus for the first revolution in telecom-the establishment of the Western Union Company and the wiring of the entire United States for telegraphy. By 1853, over one hundred thousand people had swarmed into California, including 25,000 Frenchmen and twenty thousand Chinese, and annual gold production approached eighty metric tons; production would peak as early as 1853 at around 95 tons.'
The name Sutter's Mill has always been associated with the onset of the California gold rush. Poor Johann Sutter! In essence a good man, not a greedy man, Sutter was grieved rather than thrilled to hear about the golden nuggets in the stream on his property. He was so far out of step that he ultimately landed in deep trouble and came to a sad end.
In 1876, when he was 67 years old, Sutter received a visitor named H. H. Bancroft, a historian who persuaded him to dictate his memoirs about his null and the gold rush. Sutter had also kept a diary. Edwin Gudde, a member of the faculty at the University of California, put all this material together in 1936 and edited it for publication. The result is a charming volume, much of it in Sutter's own words, that provides a vivid picture of every aspect of life, politics, and military activity in the 1840s. The summary that follows in no way does it justice.
Sutter was born in western Switzerland in 1803 and fled his homeland in 1834, hounded by creditors and facing a term in debtor's prison. He took himself to the United States, where, after brief sojourns in New York, Saint Louis, and Santa Fe, he set out for California by way of Oregon, Vancouver, Hawaii, and Sitka in the Aleutians, before proceeding to Yerba Buena, as San Francisco was known in the 1830s. In August 1839, about eighteen months after his departure from Santa Fe, he chose his spot in the Sacramento valley, not far from where the state capitol is located today, after firing a salute from his boats on the Sacramento River that frightened away the deer, elk, timberwolves, and coyotes in the area. Sutter named his domain New Helvetia, and he had to become a Mexican citizen in order to formalize his claim there.
Sutter managed New Helvetia as a small empire, including a bell that rang each morning like reveille at an army post, and insisted on elegant manners by all workers, white and Indian alike. By 1846, there were sixty buildings in New Helvetia, including a bakery, a barracks, a tannery, and a blanket factory, plus twelve thousand head of cattle, over ten thousand sheep, two thousand horses and mules, and fields producing over forty thousand bushels of wheat." Sutter believed he had every chance of becoming the wealthiest man on the Pacific Coast. "My best days were just before the discovery of gold," he recalled."'
The need arose for a large sawmill. As the valley had no timber, Sutter decided to look for a site in the mountains and settled on Coloma on the south fork of the American River. He assigned the job of building the mill to his chief mechanic, James Marshall. On January 24, 1848, Marshall appeared at Sutter's office back at headquarters and asked to see Sutter alone, insisting that the door be locked. Marshall pulled a white cotton rag out of his trousers. He opened the cloth and held it before Sutter, who saw about 1 %? ounces of gold dust in flakes and grains. "I believe this is gold," said Marshall, "but the people at the null laughed at me and called me crazy.""
Sutter took a dim view of the consequences: "During the night the thought burst upon my mind that a curse might rest upon this discovery.... From the very beginning I knew what the outcome would be, and it was a very melancholy ride on which I started the next morn- ing."12 Sutter went up to the mill and told all the working men that they must keep the discovery a secret for six weeks until the flour mill he was building down below could be finished. "But this was not to be. Women and whiskey let the secret out."" Nevertheless, Sutter suc ceeded in keeping the discovery within a limited area around Fort Helvetia for over three months.
On May 4, everything changed when a neighbor who had visited the site ran through the streets of San Francisco with a bottle of gold dust, shouting, "Gold! Gold! Gold from the American River!"14 Within a few weeks, the surrounding area went crazy. Even the recently opened school in San Francisco had to be closed because both teachers and pupils had gone off to the mines.
And so begins Sutter's lament: "All my plans and projects came to naught. One after another, all my people disappeared in the direction of the gold fields.... Only the sick and the crippled remained behind. ... The damage which I suffered in 1848 is inestimable." Squatters settled everywhere: "My property was entirely exposed and at the mercy of the rabble.... I was alone and there was no law."15 The gristmill was never finished; even the stones were stolen, along with cattle and horses, the bells from the fort, hides, and barrels.
Sutter spent years of frustrating efforts in the law courts attempting to reclaim his land from the squatters. After five years in Washington, trying without success to adjudicate his claims, he retired to the little Pennsylvania town of Lititz. In 1880, he was back in Washington, trying for the sixteenth time to have his claim confirmed by Congress, but Congress adjourned without taking action. Two days later, at the age of 77, Sutter was dead. The memory of his sawmill, however, remains very much alive.
When the news of the discovery of Sutter's Mill reached Australia at the end of 1848, a crowd of Australians took off at once across the Pacific to join in the fun. Among them was an English-born man who had scraped together a living for some years in the Wellington district of New South Wales, about 170 miles west of Sydney. His name was Edward Hammond Hargraves, described by the historian Richard Hughes as "a corpulent bull-calf of a man."" After two years of panning and scrambling in California, with nothing to show for his efforts, Hargraves spent his last dollars to head back to Australia. He was still hopeful, however: he took his panning equipment back home with him, because he was struck by the geological similarities between the gold area in California and the Wellington area in Australia.
On February 12, 1851, Hargraves and his guide were poking on horseback along a tributary of the Macquarie River when, as Hargraves described it, he felt "surrounded by gold." Gold came up in four of the first five pans they dipped into the river. Hargraves exclaimed to the guide, "This is a memorable day in the history of New South Wales. I shall be a baronet, you will be knighted, and my old horse will be stuffed, put in a glass case, and sent to the British Museum!"" None of those things happened, but it was indeed a memorable day. As the news spread, Hughes relates, "It was as though a plug had been pulled and the male population of New South Wales had emptied like a cistern, in a rush toward the diggings." One of the Sydney newspapers reported, "A complete mental madness appears to have been seized by almost every member of the community." Within six months, fifty thousand people were digging for gold."It is interesting to note that ice from Thoreau's Walden Pond in Massachusetts, loaded in sawdust, was shipped fifteen thousand miles to Melbourne, unloaded onto carts, and dragged by horses several hundred miles to the goldfields so that the miners who had won out could enjoy cold drinks!"
By November, bags of gold were pouring in a great flood to waiting ships. The first shipment to London at the end of 1851 was 253 ounces. Six months later, weekly shipments were averaging half a ton. Gold was soon turning the crudest workmen into pretentious gentlemen. "It is not what you were, but what you are that is the criterion," as one contemporary observer wrote.20 Miners were heard to say, "We be the aristocracy now and the aristocracy be we."21
As newcomers poured into Australia, they transformed a minorleague penal colony of 45,000 men into what would turn out to be a flourishing and well-diversified nation. Hughes summarizes these turbulent times well: "Gold disturbed the order of Anglo-Australian societyfrom pastoral aristocrat to convict-with shudders of democracy."22 Indeed, the most remarkable consequence of the Australian gold rush was the end of "transportation"-the forcible exile of English criminals to the horrors of Van Diemen's Land on the island of Tasmania. No terror clung any longer to the name of Australia when a man could find the riches of his dreams there. With a quarter of Britain's men clamoring for tickets to Australia, the Governor-General had to admit that "Few English criminals ... would not regard a free passage to the gold-fields ... as a great boon."23 In medieval times, gold had saved lives by serving as ransoms; in nineteenth-century Australia, gold led to the end of the barbarous conditions on Tasmania in December 1852, less than two years after Hargraves felt "surrounded by gold."
Although the rush to the Klondike was dramatic and colorful because of its location and its hostile terrain, the Klondike was relatively unimportant in the long history of gold. In this instance, a couple of fishermen prospecting for salmon in a tributary of the Yukon called the Thron-diuck River-later transformed to Klondike-spotted gold in the waters one August afternoon in 1897. The advance guard of the rush came from Circle City, which was down the Yukon, a bustling center of gold prospectors with the usual complement of dance halls and saloons. It took until the following spring before the first shipments of Klondike gold sailed south to California. Fifteen hundred people in Seattle, including the mayor, sailed north within ten days of the first news.
Before it was all over, one hundred thousand people had set out for Dawson City, less than half of whom were able and willing to hang in during the rugged trip and actually made it to the gold-bearing areas. Four thousand found gold and about four hundred struck it rich. The most abundant areas were few in number and had been pretty much used up by 1900. For all the hoopla, all the gold mined in Alaska since 1880 has amounted to less than 10 percent of the gold mined in all the other parts of the United States over the same period of time.24
The South African story has a different flavor. Yes, South Africa has its counterpart of James Marshall or Edward Hargraves in the person of George Harrison, who happened upon an outcropping of gold in 1886 while digging up stone to build a house for a widowed neighbor not far from the city ofJohannesburg. But South African gold does not appear in nuggets and little of it shows up in surface outcroppings. Instead, the gold lies embedded in an imposing body of ore in what are called reefs that average only about one foot thick and lie as deep as one mile underground. Depth is by no means the least of the miner's problem: the ore is so low-grade that a ton of it contains no more than an ounce of pure gold, which does not willingly separate itself from the raw rock.
Despite the rush that at its peak brought as many as two thousand immigrants a week to South Africa, gold mining there required so much capital that it was big business almost from the very start, with the diamond men from Kimberly leading the way.2' Even so, like the Klondike, the boom in South Africa seemed to be coming to an end within three years of Hamson's discovery at Widow Oosthuizen's farm: the high hopes lay buried in the hideous heaps of slag that piled up like grotesque mountains from which just a trickle of gold-and an equally pitiful volume of profits-had been dislodged. Despite repeated efforts with different kinds of chemical processes to extract more gold from the ore, the tons of goldbearing rock just continued to accumulate, refusing to part with their precious contents in sufficient quantity to make the business profitable.
As the ore brought to the surface of the earth appeared thinner and thinner, all the earlier excitement yielded to pessimism. The stocks of the mining companies crashed, some falling 95 percent from their previous values. One observer predicted, "Grass will grow in the streets of Johannesburg within a year."26 That was another famous flat-out prediction that turned out to be wrong almost as soon as the words were uttered. As often happens with people who yield to panic, selling goldmining shares at that moment would turn out to be a colossal error.
In late 1889, Allan James arrived on the scene, representing a Scottish corporation called the African Gold Extracting Company. James announced that his company had developed a process called cyanidation that would solve all of South Africa's problems. Although scientists in Britain, the United States, and New Zealand had experimented with cyanide as far back as the 1840s, without clear success, the process that James offered was one that worked. The cyanide was stirred and decanted after a few hours. These steps tended to separate the gold from the ores, and then zinc was applied to precipitate the gold.27
A pilot plant was erected in May 1890 that performed all the miracles that James had promised. The process made possible the profitable production of gold from newly mined ore, but that was not all: the huge piles of slag could now be attacked and profitably turned into lovely yellow metal. The African Gold Extracting Company soon negotiated a royalty with the mining firms that was the equivalent of $1.36 per ounce of pure gold, to be earned on every ton of ore that was treated with the cyanidation process; with the world price of gold at that time around $21 an ounce, this was a handsome royalty indeed.
The cyanidation process had been developed by John Stewart MacArthur, a chemist from Glasgow, who had teamed up with an unlikely pair of physicians with intense curiosity in such matters, Robert and William Forrest. MacArthur described their efforts "in a glory-hole under the consulting rooms of the Forrests.... We did most of our work between 8 PM and 2 AM when the Forrests had finished their day's work.... It was usual to have pies and pots of tea sent in from the nearest restaurant.... When we were more than usually sleepy, Dr. Robert brought out a bottle of a weird mixture labeled `kid-reviver' and gave us a dose all around to keep awake. 1128
The cyanidation process was an immediate and smashing success. The sophistication of the MacArthur-Forrest achievements turned South African gold production into one of the high-tech industries of the late nineteenth century.29 Cecil Rhodes's consulting engineer was on the right track in 1890 when he predicted that, thanks to cyanidation, the value of the annual gold output in South Africa would exceed k20 million before the turn of the century, at a time when the total world output of gold was not much more than that.30 Gold production rose from less than a ton in 1886, when the first discovery was made at Widow Oosthuizen's farm, to fourteen tons in 1889 and then to nearly 120 tons in 1898 before the outbreak of the Boer War. The 120 tons had a market value in 1889 of about L16 million.31
After four years of paying those fat royalties to MacArthur and his associates, the gold-mining companies came to the conclusion that the African Gold Recovery Company (as it subsequently came to be known) was getting too much of a good thing. The Chamber of Mines entered into negotiations to reduce the royalty rate, but MacArthur and his associates stood fast. Their greed would do them in. After four months, the Chamber gave up on negotiating and brought suit in the High Court to contest the validity of the MacArthur patents. Their argument claimed that the patentees were not the true inventors, that the process was not new when it was patented, that the final specification was faulty, and that others had used the process in South Africa before MacArthur's group had done so.32
The result was an extraordinarily protracted and expensive lawsuit. Evidence was taken from mining experts in the United States, Canada, Australia, Hungary, Korea, Japan, South America, India, and Russia. The president of the Royal Society in England and a covey of physicists and chemists in scores of universities either testified or provided affidavits. There were two years of preparation before the hearings began, and the judges did not render their verdict until November 1896, nine months after the hearings had started. The extended arguments were highly technical-fascinating perhaps to chemists but drudgery for lay readers. The decision of the judges (two in favor and one against) ran to seventy pages.
The bottom line was loud and clear: "It was found on the facts by the majority of the Court that the processes above mentioned were not novel and had been anticipated, and consequently the Court declared the said patents void.... There is nothing novel in the weakening or diluting of a well-known solvent or re-agent for the purpose of winning gold from quartz."33
Despite this judgment, MacArthur's cyanidation process has been associated with South African gold mining ever since its introduction, with only minor modifications from the original patents. In 1988, almost one hundred years after Allan James arrived on the scene with news of the cyanidatioii process, C. E. Fivaz, a metallurgical consultant to the Chamber of Mines, made the following comment on the subject in the course of his presidential address to the South African Institute of Mining and Metallurgy:
Had it not been for the invention of the MacArthur-Forrest cyanidation process, there is every likelihood that South Africa's economic development would have died before it even had a real chance to begin its true growth. I rank this invention ... along with the great ones in the mining field such as the development of explosives and the reciprocating rock drill.... [It] was the most significant technological development in the extractive-metallurgical industry during the past century.3"
So MacArthur should have ended up a wealthy and famous man. Such was not to be the case. MacArthur followed Johann Sutter into oblivion and poverty. He died a poor man in 1920. Sutter was ruined because he had too little greed at the sight of gold; MacArthur was ruined because he had too much.
In the autumn of 1857, an alarming series of articles appeared in the Parisian Revue des Mondes on the inevitable inflationary consequences of the burgeoning supplies of gold from the gold rushes in Russia, California, and Australia. The author, Michel Chevalier, was a man of some note, strong opinions, and bold ideas. He was the only professor of economics in France in his lifetime, economic advisor to Napoleon III, and author of Letters from North America, a lengthy description of his travels in the United States. Chevalier had such passionate feelings about the rights of women-that they had to be freed from the laws of fidelity in marriage if they were to achieve equality with menthat he spent a year in jail in 1832 for "outrage to morals." At various times, he advocated a trans-Andean railroad, a trans-Siberian railroad, and a tunnel under the English Channel.3s
Chevalier also issued the warnings from his article in pamphlet form, twice the length of the newspaper series, after which his work was translated and published in London in 1859 under the imposing title of On the Probable Fall in the Value of Gold: The Commercial and Social Consequences Which May Ensue, and the Measures Which It Invites. The "probable fall in the value of gold" includes the possibility that the glut of new gold supplies would force down the price of gold relative to silver, but the outcome that most concerns Chevalier is a loss in gold's real value-namely, inflation, or an increase in the price of everything except gold.
Chevalier writes with great flair, which makes his book fun to read, but his work is above all a statistical tour de force. He is in command of a dazzling accumulation of facts about gold supplies, gold production, the banking system, the uses of gold in finance as well as in "the habits of luxury," and even crude estimates of what modern economists refer to as nominal gross domestic product, or a measure of the monetary value of a nation's total output of goods and services.
In the late 1850s, at the time Chevalier was writing his book, wholesale prices were indeed about 35 percent above the levels prevailing before the discoveries in California and Australia. The end of the decade of the 1840s, however, marked the final stage of a long decline in prices that had set in after the conclusion of the wars against Napoleon. Prices in 1857 were not much higher than the average of the preceding twenty years and were 40 percent below the peak of 1813; price performance outside the United States was even more subdued." Chevalier is well aware of these facts and goes to some length to point out the transitory influence of the recent business expansion on the price level. He emphasizes at the outset that "I shall generally reason as if these new gold mines had not yet produced any appreciable effect."37
After a sophisticated analysis of the nature of money, the magnitude of the new supplies of gold relative to the past, and the interaction between the prices of gold and silver, Chevalier concludes that "The only way to prevent a fall in the value of gold, and a consequent rise in the price of commodities, would be the discovery of a new demand, equal in extent to the increased supply [of gold] thrown upon the markets of the Western World." And then he asks: "Is the opening of such an outlet possible or probable%"3 His answer to his question is an unqualified no. He arrives at this conclusion after adding up his estimates of the increase in the demand for gold that might develop because some countries might wish to add to the proportion of metal in their currencies, because of the rising needs for gold currency impelled by the growth of business and population, and because of the necessity to offset the disappearance of gold from monetary circulation due to wear and tear, hoarding, and the "habits of luxury."39
Chevalier is at his most interesting when he reasons that "the multiplication of money which must take place in consequence of the extension of commerce" will be far too small to absorb the great glut of gold pouring into the system.4' ' He defends this position by observing that the financial system "has undergone and is undergoing continually great improvements, almost as great as those of the steam engine"-the key technological innovation of his age.41 Fifty years earlier, he informs us, a steam engine of forty horsepower would have cost (4000, but now, in 1857, as the process of manufacture has substantially reduced the necessary amount of cast or wrought iron without any loss of strength or safety, a steam engine of similar horsepower would cost only 01000. "It is the same with the instrument of exchanges," he asserts. "Formerly, [business transactions] called into requisition a large quantity of metal, gold or silver. Now for the same extent of business, a much smaller quantity suffices. 1142
Just as improved materials have reduced the cost of the steam engine, so "a number of ingenious contrivances" are reducing the amount of metal required for commercial transactions. Most transactions, in fact, are conducted without the intervention "of a single crown-piece.... Letters of credit, bills, cheques, and other instruments of the same kind are multiplied in proportion to the extension of commerce, but the specie required for these transactions experiences hardly any increase."" Even the use of banknotes had grown at a snail's pace: in the ten years from 1846 to 1856, for Great Britain-"the great seat of commerce"the circulation of banknotes increased only from k30,925,123 to ,,C31,001,027 .44
On the financial side, Chevalier reports that at the Clearing House of London, where the banks settle their accounts with one another, "[with] a mass of transactions amounting to 1,500 millions or 2,000 millions sterling annually ... not a shilling is wanted.... All is settled by the transfer of sums from one account to another in the books of the Bank of England."45
Chevalier's arguments in this connection bear a striking resemblance to conditions in the second half of the 1990s. Like the steam engine in the first half of the nineteenth century, the key technological innovation of our own age-the computer-has been continuously and dramatically reduced in price over the years, with improvements rather than deterioration in quality. At the same time, as in Chevalier's era, the breathtaking pace of financial innovations such as credit cards and other substitutes for cash have enabled the volume of business transactions to expand at a rate that has been far faster than growth in the supply of money. Exotic financial instruments such as options, futures, and swaps have revolutionized the entire world of trading financial assets by driving activity to volumes no one could have dreamed of even ten years ago.
Chevalier also explores the question of whether the demand for gold for jewelry and other forms of adornment might expand, now that such generous supplies of the metal have become available. No hope here, either, for the world appears to have changed from the days of Francis I and Henry VIII: "The age is less pompous than it is supposed to be, or rather it does not exhibit its pomp by a display of gold ornaments. "46 In England, the manufacture of articles of jewelry "is an atom in comparison with total production."47 The same is true for France. Taking Europe and "the civilised States of North and South America" together, and figuring everything on the generous side, the highest estimate for jewelry consumption that Chevalier can concoct is 25 tons a year.48
Jewelry is not the only form of adornment that involves gold, however. "Paris gilds itself not a little, and is surprisingly addicted to gold lace."49 This observation leads him to an elaborate set of calculations to demonstrate that the great malleability of gold allows a small amount of the metal to cover a huge area. For example, a ton of gold would suffice to gild an area of about 179 acres or 144,000 salons-"at least twenty times the number which are thus embellished in one year in all those cities where the houses are of a character to require their interiors to be gilded."'" As far as gold lace is concerned, a gold piece of twenty francs contains gold enough to gild a thread that would extend from Calais to Marseilles.
In short, "mankind is not rich enough, nor will it soon be, to pay so dearly for so large a mass [of gold]. To find an outlet, it is absolutely requisite that so vast a production should be accompanied by a great reduction in value."" Chevalier concludes that the only way to dispose of these masses of gold is
The predictions conveyed by Chevalier's elegant, elaborate, and persuasive analysis turned out to be far wide of the mark. The actual sequence of events bore no resemblance to his dour prophecy or even to the long, grinding period of inflation that followed the sixteenthcentury discoveries of precious metals in Mexico and South America. Prices during the last forty years of the nineteenth century never rose by more than 5 percent above the levels of the late 1850s, and they remained well below those levels from 1875 to the outbreak of World War 1.51 The contrast with the 1500s and 1600s is all the more remarkable because the magnitude of the nineteenth-century discoveries was so much greater than the new supplies that opened up after Columbus first crossed the Atlantic in 1492.
One explanation for the wide difference in economic performance between the 1500s and the 1800s is in the frequency of warfare in the 1500s. Although living standards did improve during the sixteenth century, warfare mercilessly consumed much production and mercenary manpower. The hundred years from the fall of Napoleon to the onset of World War I were also marked by wars, including the American Civil War, the Franco-Prussian War in 1870, and the British expedition to the Crimea in the 1850s, but those struggles, though bloody, were relatively brief, and both the United States and Europe enjoyed peace just about all the rest of the time.
Chevalier grossly underestimated the rate of economic growth over the next fifty years-growth so impressive that it swamped the "vast production" of gold that had provoked him to push a panic button. We cannot sit in judgment of his gaping forecast error, because what happened was so far outside the bounds of what anyone had ever experienced before. If Chevalier's forecast was wrong by such a wide margin, imagine the astonishment of the authors of the Bullion Report of 1810 at how the pace of economic activity would appear to outrun the growth in the stock of gold.
Consider just the decade of the 1870s in the United States as an example-a decade marked by persistently declining prices and a serious depression that began during 1873 and was still felt to some degree in 1879. Thanks in large part to immigration, population rose by 30 percent. The miles of railroad track in operation more than doubled (the golden spike that linked the railroad system from the Atlantic to the Pacific had been driven in place in 1869). In New York State, railroad traffic by the late 1870s was for the first time exceeding traffic on canals and rivers. The number of farms rose by 50 percent and the dollar value per acre rose even as the prices of farm products were dropping-eloquent testimony to how agricultural productivity was cutting production costs. The output of coal, pig iron, and copper more than doubled; lead multiplied sixfold.54 Overall, industrial production grew at an annual rate of better than 5 percent a year from the end of the Civil War to 1900, which meant that output at the end of the century was 5'h times as great as it had been in 1865.
One other measure conveys the dramatic process of economic growth in the nineteenth century. In 1800, the United States consumed a total of three trillion BTU of energy-coal, wood, hydropower, and petroleum. In 1850, at the time of the gold discoveries in California and Australia, energy consumption was up to 219 trillion BTU. It tripled in the next fifteen years and then rose twelvefold over the next 35 years. At the end of the century, energy consumption was at 7322 trillion BTU, a growth rate of 7.3 percent a year from the day that James Marshall stumbled onto gold at Sutter's Mill.ss
At a time such as the present, when technological change and leaps in productivity are accepted as a matter of course, we have difficulty conceiving of what technological innovation was like in an age when discontinuities were both immense and abrupt. Here, for example, is a letter from a nobleman who had gone from Manchester to Liverpool in 1833 to visit the grave of his old friend, William Huskisson, the poor co-author of the Bullion Committee Report who had been killed by Stephenson's famous Rocket at the opening ceremonies of the Liverpool and Manchester Railway in 1830:
I arrived at Manchester last night at 11 o'c. This morning at 7 I rose, and at 8 had the carriage mounted on the Ry ... and at %z past 9 was at Liverpool-32 miles in 90 minutes!!!.... You would have laughed to have seen Thompson and James on the box of the carriage, while we were sometimes flying on the rly. a mile in 2 minutes. Thompson trying to grin with his tongue out and his fingers all on end, and James quite as usual, only losing his hat now and then.56
In reading these lines, we must recall that through all of human history up to that time people had never been able to travel faster than a horse could carry them, and even a horse could sustain its highest speed for only brief periods of time. My own maternal grandmother, who was born in 1860, always referred to the family automobile as "the machine," an expression she continued to use right up to her death at the age of 86 in 1946.
There was a modest degree of correlation between gold production and price inflation, especially after 1870, but nobody took notice. Yearto-year price changes were in any case so irregular and erratic that no underlying inflationary trend was able to rise to the surface until the full impact of the South African discoveries made themselves felt in the world economic system after 1900-and even then the perception of inflation was delayed or muted.* The most striking evidence of the public's relaxed view of the probability of inflation is in the behavior of interest rates, which moved up and down without any systematic linkage to what was happening in the price level for commodities and services."
Chevalier's inability to comprehend what would happen to the productivity of the economic system was enough to make mincemeat of his gloomy predictions. This aspect of the matter, however, was not the only development that doomed his forecast to failure.
He devotes two pages to the practice of hoarding, which he describes as "to hide money in secret places." He denigrates this habit as "belonging to an uncivilised state of society, in which riches take refuge under ground to escape spoliation.' 58 As a faithful and enthusiastic participant of an age of great physical improvement in the way of life and the democratization of the political system, Chevalier minimizes the likelihood that hoarding as he defines it would amount to very much. He even goes so far as to suggest that "In the Europe of our day, the quantity of the precious metals which issue from their hidingplaces is, in all likelihood, greater than that which seeks refuge there."sv
Although we have no good data to test Chevalier's hypotheses about hoarding, we do know that he failed to recognize a demand for hoarding in a civilized state of society that would turn out to be untold magnitudes greater than any amount of gold that individuals might hide to escape spoliation. The growing acceptance of the gold standard, following Britain's first steps in that direction in the early 1800s, created an enormous demand for gold for hoarding-not by individuals but by the central banks of the nations, such as the Bank of England and the Bank of France, or the U.S. Treasury. A hoard of gold was the major line of defense against an unexpected surge in imports or outflow of investment capital to other financial centers. With the huge expansion in economic activity and international trade and investment, those gold hoards were essential to give nations freedom of action and to attract new capital to their shores. "Sound money" and "sound banks" were defined by the accessibility of gold to be paid out on demand to anyone who came to the windows and asked for it. Countries gaining gold were held in high repute; countries on the losing side were viewed as in deep trouble.
As a consequence, little of the "vast production" of gold that troubled Chevalier moved around from hand-to-hand. The largest part of it was transferred into idle hoards in monumental buildings that looked like Greek temples, where the heaps of gold enjoyed the more polite name of "reserves." Let us turn now to see how all that worked and what kinds of trouble erupted in the wake of the international gold standard.