Visualizing History 

UK Gold Exports to US 1900-1913

The 1906 San Francisco Earthquake & Gold Flows

From the Archives

The Science of Money and American Finances (1880)


Sunday Reads

Whether or not the proponents of either asset want to admit it, Gold and Bitcoin share many commonalities. In particular, they are similar in the fact that they incite very polarizing views on their value and utility. You will be hard pressed to find many investors that have no view on Gold or Bitcoin. It is much more likely that you will receive arguments for why either asset is “useless” and “has no value”, or “provides the best hedge for X/Y/Z” and acts as a superior “store of value”. The point is, people hold very strong opinions on Gold and Bitcoin.

The Federal Reserve, Gold & Bitcoin

Money Printer Go Brrr | Know Your Meme

As long as there have been financial markets, there have been concerns that the government will bring ruin to the financial system and nation’s currency. For example, the image below is basically a 19th century of the “money printer go brrr” meme:

“Money Printer Go Brrrr” Meme (19th Century Edition)

For those worried that the Fed’s decisions will lead to hyperinflation, gold and Bitcoin both claim to act as the perfect hedge for such problematic policies.

Regarding gold, the WSJ wrote:

The Federal Reserve’s March decision to slash interest rates to just above zero and buy hundreds of billions of dollars of bonds has pulled down yields in fixed-income markets, prompting investors to buy gold instead. Some money managers expect inflation to pick up once the economic crunch is over, which would act as a further drag on real yields if nominal rates don’t rise.

Investors are also buying gold because they think it will hold its value if stocks take another tumble. Enthusiasts take this argument a step further, contending that gold is the ultimate insurance policy against a scenario in which the U.S. government defaults or kindles inflation to alleviate the burden of debt.

For Bitcoin, an article from Coin Desk stated:

“As traditional finance zigs down the QE route, bitcoin is zagging in the opposite direction… In two months, the supply of new bitcoin will be reduced by 50 percent – an occurrence scheduled for roughly every four years known as the ‘halving.’ 

As the U.S. government prints another trillion-plus dollars, this will have long-term ramifications on inflation and dilution of money. On the other hand, we will still have 21 million [bitcoins] available, ever,’ said Alex Blum, COO of Hong Kong-based fintech firm Two Prime.”

The argument goes that while inflationary government and central bank policies will weaken the dollar, gold and Bitcoin can protect investor’s wealth because of their finite supply.

Bitcoin is Gold for Millennials

One increasingly popular narrative is that Bitcoin is ‘Gold’ for Millennials, and this week was the perfect microcosm of that view.

First, for those that don’t know who Dave Portnoy is, he’s the CEO of Barstool Sports. More importantly, however, he’s the newly promoted ‘Captain of the Day Traders’. During COVID-19 Portnoy has been very publicly day trading by live-streaming twice a day at the opening / closing bells. After buying airline stocks at the same time that Buffett was making headlines for selling them, Portnoy famously declared that Buffett was washed up when airline stocks rallied from their lows and Portnoy made a healthy profit:

David Portnoy is the ultimate millennial day trader. Within the narrative of “Bitcoin is for Millennials and Gold is for Boomers”, it’s fairly clear which camps Portnoy and Buffett would fall into were they to purchase one of these two assets.

Well, after this week we no longer have to speculate (pun intended) on which asset Portnoy and Buffett would invest in after Buffett made headlines for purchasing $565 million worth of shares in Barrick Gold Corporation.

For gold bugs, this was a big deal because of how openly negative Buffett had been on gold in the past:

“(Gold) gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.

On the other end of the spectrum, Dave Portnoy posted a 10-minute video on Twitter with the Winklevoss twins about Bitcoin and cryptocurrencies that ended with Portnoy making a sizable investment in Bitcoin. There are obviously thousands of reasons why David Portnoy and Warren Buffett are not an apples-to-apples comparison, but their investment decisions this week were the perfect microcosm of the narrative that the younger generation is to Bitcoin what Gold is to the older investors.

The future is obviously uncertain, but it will be interesting to see whether the performance of Bitcoin during this year’s bear market will leave a lasting impression on younger investors and influence their view of Bitcoin as a hedging asset like the older generation views gold.

Now let’s get serious and dive into today’s links!

Crisis Chronicles: Gold, Deflation, and the Panic of 1893

Uncle Sam points a gun at “hard times”

Debates surrounding the gold standard and gold as an asset have always had a political aspect, as many of the stated reasons for owning the precious metal are related to hedging the negative repercussions of fiscal and monetary policy (inflation, weakening currency, etc.). Within the United States, an early example of this relationship between gold and politics is found in the late 19th century after the Panic of 1893 resulted in a national referendum on the gold standard via the 1896 Presidential Election.

In the late 1800s, a surge in silver production made a shift toward a monetary standard based on gold and silver rather than gold alone increasingly attractive to debtors seeking relief through higher prices. The U.S. government made a tentative step in this direction with the Sherman Silver Purchase Act, an 1890 law requiring the Treasury to significantly increase its purchases of silver. Concern about the United States abandoning the gold standard, however, drove up the demand for gold, which drained the Treasury’s holdings and created strains on the financial system’s liquidity. News in April 1893 that the government was running low on gold was followed by the Panic in May and a severe depression involving widespread commercial and bank failures.”

The Panic of 1893 was heavily influenced by issues with the gold standard, as a Federal Reserve article on banking panics during the Gilded Age describes:

The Panic of 1893 was one of the most severe financial crises in the history of the United States. The crisis started with banks in the interior of the country. Instability arose for two key reasons. First, gold reserves maintained by the US Treasury fell to about $100 million from $190 million in 1890. At the time, the United States was on the gold standard, which meant that notes issued by the Treasury could be redeemed for a fixed amount of gold. The falling gold reserves raised concerns at home and abroad that the United States might be forced to suspend the convertibility of notes, which may have prompted depositors to withdraw bank notes and convert their wealth into gold. The second source of this instability was that economic activity slowed prior to the panic. The recession raised rates of defaults on loans, which weakened banks’ balance sheets. Fearing for the safety of their deposits, men and women began to withdraw funds from banks. Fear spread and withdrawals accelerated, leading to widespread runs on banks.

In June, bank runs swept through midwestern and western cities such as Chicago and Los Angeles. More than one-hundred banks suspended operations. From mid-July to mid-August, the panic intensified, with 340 banks suspending operations. As these banks came under pressure, they withdrew funds that they kept on deposit in banks in New York City. Those banks soon felt strained. To satisfy withdrawal requests, money center banks began selling assets. During the fire sale, asset prices plummeted, which threatened the solvency of the entire banking system. In early August, New York banks sought to save themselves by slowing the outflow of currency to the rest of the country. The result was that in the interior local banks were unable to meet currency demand, and many failed. Commerce and industry contracted. In many places, individuals, firms, and financial institutions began to use temporary expediencies, such as scrip or clearing-house certificates, to make payments when the banking system failed to function effectively.

In the fall, the banking panic ended. Gold inflows from Europe lowered interest rates. Banks resumed operations. Cash and credit resumed lubricating the wheels of commerce and industry. Nevertheless, the economy remained in recession until the following summer. According to estimates by Andrew Jalil and Charles Hoffman, industrial production fell by 15.3 percent between 1892 and 1894, and unemployment rose to between 17 and 19 percent. After a brief pause, the economy slumped into recession again in late 1895 and did not fully recover until mid-1897.

The 1896 Election & The Free Silver Movement
The Richmond Fed provides this excellent summary of the Free Silver movement:
The United States was technically on a bimetallic monetary standard until 1900, but the Coinage Act of 1873 made no provision for minting silver coins. As a result, only gold coins circulated widely. This condition spawned a “free-silver” political movement to bring silver coins back into circulation. One goal of the movement was to greatly expand the money supply, thus helping farmers obtain higher prices for their produce while servicing their debts with inflated dollars. In fairness to the farmers, the free-silver movement emerged during a period of trend deflation, so they likely were weary from repaying debts with deflated dollars. In a temporary victory, the movement spawned the Sherman Silver Purchase Act of 1890, which required the U.S. Treasury to buy large quantities of silver. Some economists have linked the depression that  followed the panic of 1893 to the strain that those silver purchases put on the Treasury’s gold holdings and the uncertainty they created regarding America’s commitment to the gold standard.  To allay fears of inflation, President Grover Cleveland convened a special session of Congress to quickly repeal the Sherman Silver Purchase Act, but the monetary debate continued to intensify — climaxing during the 1896 campaign.”
When it came time for the 1896 Presidential Election, the election was essentially a national referendum on the choice between a system based on Gold vs. Gold and Silver. This largely became known as “the currency question”.
Congress responded to the depression by repealing the Sherman Act in August 1893 by a surprisingly lopsided vote. ‘The only disconsolate men in Washington last night were those who have allied themselves with the silver movement. They were prepared for defeat in the House, but not for such an overwhelming defeat.’
President Cleveland was a Democrat, and the Democratic Party was largely in favor of bimetallism. Cleveland’s alliance to gold strained the party, which went on to nominate the bimetallist William Jennings Bryan for the 1896 election. Initially an underdog, Bryan won the nomination, helped by his famous Cross of Gold speech condemning the gold standard as a tool for the elite:
‘. . . the question we are to decide is, upon which side will the Democratic party fight—upon the side of ‘the idle holders of idle capital,’ or upon the side of ‘the struggling masses?’ . . . There are those who believe that if you will only legislate to make the well-to-do prosperous their prosperity will leak through on those below. The Democratic idea, however, has been that if you legislate to make the masses prosperous their prosperity will find its way up through every class which rests upon them. . . . We will answer their demand for a gold standard by saying to them: You shall not press down upon the brow of labor this crown of thorns; you shall not crucify mankind upon a cross of gold.’

Bryan lost the 1896 election as the Democrats were held responsible for the depression. The gold standard soon receded as an issue and it was not a point of contention when Bryan ran four years later, primarily because gold discoveries in Canada and South Africa meant that the gold standard was boosting prices instead of restraining them.

The Company That Paid Dividends in Bars of Gold and Silver

Can you imagine if one of your stocks paid out dividends in physical gold bars? Well that is exactly what happened with one company in the 1980s:

“Ranchers Exploration read the writing on the wall and began offering to pay dividends not in US Dollars, but in gold and silver, in part to attract shareholders to their stock.  The Dutch East India Company had regularly paid in-kind dividends to its shareholders in the 1600s and the Ranchers Development and Exploration Corp. decided to follow in their footsteps.

The June 1981 dividend was payable in 2.5 grams of gold for every 500 shares held. Holders who owned 6,221 shares received a one-ounce gold bar.  Cash equal to $0.0766 was paid for fractional shares. The September 1981 dividend was payable in 2.5 grams for each 400 shares held.  Holders of 4,997 shares received a one-ounce bar in gold. Gold was selling at $600 an ounce on June 8, 1981 and $700 an ounce on September 24, 1981. In 1981, Ranchers Exploration had about three million shares outstanding, so the company would have paid out about 600 ounces in gold.

In December, the company switched from gold to silver, and shareholders received a one-ounce bar of silver for every 120 shares that they owned. This would mean that the company paid out 25,000 ounces of silver to its shareholders. The March and June 1982 dividends were also payable in silver at the rate of 1 ounce of silver for each 120 shares, the September 1982 at the rate of 1 ounce of silver for each 100 shares, and the December 1982 dividend was payable in gold at the rate of 1 ounce of gold for every 4,977 shares. The 1983 dividends were payable at the rate of 1 ounce of silver for each 100 shares owned and the 1984 dividends were payable at the rate of 1 ounce of silver for each 150 shares owned.”

Gold, Earthquakes and the Panic of 1907

San Francisco Earthquake aftermath

In June I wrote an article about the San Francisco Earthquake and the Panic of 1907. While its limited supply is what makes gold so attractive to many investors, this scarcity is a double-edged sword. The 1906 earthquake resulted in a massive outflow of gold from London, and led to a series of knock-on effects that culminated in the Panic of 1907. This article provides a good look at why the gold standard was more problematic than we’d like to remember. Here’s an excerpt from my article:

“However, the impact of these payments were felt far beyond the balance sheets of these companies. The substantial payouts by British firms caused a mass outflow of gold from London as ships were loaded with gold bars for their transatlantic journey to San Francisco. By the end, Britain had outflows equal to 14% of its national gold reserves.

“The San Francisco earthquake gave rise to a massive outflow of funds – of gold – from London. In total, quake related payments to the United States represented 40 percent of seasonally adjusted British gold exports for all of 1906… These flows were nearly two-and-half times more than British gold flows to any other country in 1906.” 2

Domestically, New York financial institutions were also hampered by depleted gold reserves from transfers to San Francisco. The New York Times stated “imposed a substantial drain upon the banks of [New York]”.

UK Gold Exports to US 1900-1913

As the Bank of England’s (BOE) ratio of reserves to deposits hit a 16 year low, there was little choice but to raise interest rates to protect its gold reserves. In September and October of 1906 the BOE raised rates 250 bps to 6.0%, which one American paper called an unexpected “bombshell in the market”.

However, American investors held no confusion over why the BOE made this decision:

“The bank rate is now 6 per cent, the highest rate since the Baring failure sixteen years ago. This step was, of course necessitated by the impoverished condition of the Bank of England [gold] reserve…

They also recognized the negative implications this had on the US market:

The advance in the bank rate was undoubtedly in sheer self-defense… Its effect upon stock speculation must be unfavorable, and prices must fall more or less in consequence… It means that there is an end coming to reckless speculation, and that nothing but liquidation of greater or less severity can restore equilibrium…

While raising rates to 6.0%, the BOE also practically forbid British firms from accepting American ‘finance bills’, which were “used to finance gold imports into the United States” and provide credit. This devastated firms in the United States, and New York in particular.

“This policy resulted in a significant fall in American securities markets, as the collateral for those bills was sold, and led to significant gold outflows from the United States. A relatively weak cotton harvest in 1907 resulted in low export revenues, further aggravating the stress on the banking system and financial markets.” 5

Remember, this all stemmed from the earthquake in April 1906. What started as a national disaster in San Francisco led to an outflow of gold in London. This forced the BOE to raise rates, which reduced American firms’ access to credit and depleted their gold reserves. This sparked widespread selling of stocks to raise cash as ‘finance bills’ came due for payment, and could not be renewed because of the BOE’s new policy.

The U.S. money market thus found itself “low on gold reserves and vulnerable to shocks”.

A History of Alternative Currencies

“Alternative currencies, which are defined as any non-legal tender medium of exchange, have been a regular feature of the economic landscape over the last half-millennia. A survey of this history finds that alternative currencies often arise out of similar socio-economic circumstances and then cease to circulate within a relatively short time after their introduction. This pattern of decline is explained largely by three forces: regulation, technological innovation, and – most commonly – insufficient demand due to factors such as transaction inefficiencies, low institutional support, and diminished social motivation. Present-day alternative currencies, such as bitcoin and the Brixton pound, show both similarities and differences with past alternative currencies. Bitcoin in particular possesses several radical new characteristics, including a relatively decentralized structure, efficient transactions across borders, global awareness, and support from powerful institutions.”

Bitcoin is the best modern example of an alternative currency, but what have similar alternative currencies looked like over time? This article dives into the long history of alternative currencies, and the different categories that they fall into. Overall, the author argues that there are five different types of currency:

Looking at this last category, Alternative, the author provides the following socio-economic drivers behind demand for alternative currencies:


How the Gold Standard Absorbed Shocks

There are many investors that long for the days of the gold standard, but what how did the gold standard handle financial crashes and crises? This paper looks to answer that very question.

“This paper examines the historical record of the financial crises that have often accompanied surges of globalization in the past. The issue of contagion, the spread of financial turbulence from the crisis center to its trading partners, is confronted with historical and statistical evidence on the causes and consequences of well-known crises. In general, contagion seems often confused with prior interdependence, and crises are less widespread and shorter in duration than anecdotal evidence would indicate. Special attention is given to the gold standard period of 1880-1913, which we find useful to divide into the initial period of deflation, 1880-1896, and the following period of mild inflation, 1897-1913. We find evidence of changes in the pattern of “contagion” from core to periphery countries between the two periods, but in both periods apparent contagions can more readily be interpreted as responses to common shocks. Lessons for the present period can only be tentative, but the similarities in learning experiences are striking.”

Is Cryptocurrency Really A New Idea?

How Do You Value, Value?

Almost two years ago to the day I wrote my first ever financial history article. I discussed Bitcoin and the concept of “intrinsic value” as it relates to currency. I’ve provided an excerpt from that article below:

“The currency on Yap Island, located in the Pacific, provides further evidence that the belief in a currency’s worth outweighs the importance of its intrinsic value. For centuries, the natives of Yap have used ‘rai stones’ as a form of payment and store of value. These ‘stones’, however, were actually gargantuan limestone discs weighing up to 8,800 lbs., and stood 12 feet tall. The natives ‘minted’ (mined) their currency on Palau Island, which was only reachable by boat. Upon their return from mining the currency on Palau, the Chief of Yap Island valued each rai stone in front of the entire population, where locals would then purchase the currency as part of the ceremony.

The public valuation and purchasing ritual on Yap is comparable to the ‘proof of transaction’ process associated with Bitcoin. In both cases, the processes prevent fraud and theft by clearly identifying the rightful owner of each stone or token. Using a similar approach, German colonizers in the 19th century enforced their laws on the natives by publicly ‘confiscating’ dissenter’s rai stones by simply marking them with a black ‘X’.

Again, the concept of value proved to be far more significant than a stone’s intrinsic worth. In fact there is a rai stone lying on the ocean floor, after falling through a canoe, which continued to circulate in the economy. Even though the stone’s owner never physically saw their rai stone, it still carried value. In the same vein, just because Bitcoin is a digital currency that cannot be truly seen or held, the currency can still be valuable because of people’s belief in the system.”