Gold as a weapon of war

Countries have historically turned to gold in periods of instability, and today’s environment is no different

Gold has been inextricably linked with conflict since the earliest civilisations. By the 19th century, it had appeared in the global economic system as a weapon, and war was baked into the assumptions that underpinned the great financial revolution of the late 17th century.

The Bank of England was established in 1694, with the parliamentary statute specifying as the only explicit purpose of the Bank ‘the carrying on the Warr against France.’ When Napoleon established the Banque de France a century later, his motivation was equally clear: the credibility of the bank depended on the setting of strict limits on credit to the government, and the institution was constructed so as to ensure a strict balancing of government and private interest.

Preparing for global conflict

Central banks, and the monetary management they offered, assumed a new significance as Great Power competition intensified. Before the first world war, countries rushed to build up gold reserves that they believed they would need to conduct war effectively. The ability to borrow was crucial, and gold provided a security. Reserves became the key focus of attention and public debate.

The mobilisation of gold for the military had long-term consequences. First, gold became less visible in and after the war. It was no longer carried in pockets; instead it was held by governments. Second, putting gold out of sight meant that confiscation during times of war became easier. That took place in countries and between them.

Third, the management of public debt altered the rules of managing the gold standard. Governments that wanted to return to the gold standard needed to struggle to pay off high debts – governments that did or could not instead resorted to inflation to reduce and often wipe out domestic debt obligations. They still sought credibility, however, in the hope of lowering their borrowing costs. In gold standard countries, debt management thus became the central theme of monetary policy in the 1920s, with increasing complaints about the high amounts paid by governments in interest to holders of government debt.

Gold in the 1930s

Gold shaped policy more and more as security deteriorated, with the implications especially notable in smaller and more vulnerable countries. By the late 1930s, Poland was desperately negotiating for credit, associated with urgently needed military spending, that it could only find in Britain and France. The US was no longer a player to be reckoned with, either in financial or in security terms, but Britain and France too were overstretched.

The prewar notion of the gold standard as a credible commitment mechanism can be applied to the interwar story. Countries that adhered to gold did for a time get better borrowing conditions. But then the international capital market dried up with the Great Depression, and borrowers were faced by creditor runs.

Economic historians have often puzzled as to why some countries remained on gold for so long in the Great Depression. The UK benefitted greatly by suspending gold convertibility in September 1931, and the US in April 1933. Suspension allowed a stabilisation of prices and an escape from the deflationary spiral; a new capacity to make autonomous monetary policy saved banks from runs and also helped to ignite consumer spending. Scandinavia rapidly followed the UK’s example.

Other countries, however, seemed surprisingly slow to see the allure of giving up gold. Belgium, France, Switzerland and Poland all stayed on. But look at where these countries are on the map: they were neighbours of Nazi Germany. They thought they needed gold as part of their defence, a corollary of the security system that linked France to allies in central-eastern Europe.

As war drew near, the rationale became ever clearer and more pressing. A former head of Bank Polski, Colonel Adam Koc, explained: ‘The purpose of gold during war is to serve the defence of the state. It does not play the role that it played during peace when it was the foundation of the Polish currency.’

A move towards globalisation

After 1945, a long period of world peace and steady moves in the direction of more globalisation was built monetarily around the dollar: first in the shape of the Bretton Woods system, then from the 1970s around a de facto dollar standard in which the dominant role of the currency remained astonishingly constant.

Gold became more and more invisible: from 1968, the official gold market, in which gold was still valued at $35 an ounce, was decoupled from the private market. In August 1971, President Richard Nixon closed that official gold window. Effective security provision meant that gold was not needed.

As the 21st century unfolded, suspicions and hostilities mounted, and central bank purchases of gold surged at moments of geopolitical tension: after 2011, and then much more dramatically after 2020. The new emerging economies saw a way to free themselves from the dollar by buying gold. China, India, Kazakhstan, Türkiye and Russia became major purchasers. But Europeans also joined that gold surge.

In 2013, the Bundesbank announced a plan to bring half of Germany’s gold reserves back to Frankfurt by 2020, with the result that around 300 tonnes of gold were shipped from New York and 374 tonnes of gold from Paris. In 2015, China dramatically announced that it had increased its gold reserves since 2009 by 60%, to 1,658 tonnes. Russia began large-scale purchases and in 2018 almost caught up with China in terms of gold holdings, with the central bank buying gold from banks that financed expanded Russian gold production.

Post-2008 financial crisis

The dramatic rise in the gold price since the 2008 financial crisis reflects at least two considerations. Gold looked more attractive in a low- or negative interest rate environment, since the cost of holding gold and foregoing interest on reserves declined. And second, the security calculations on the need for a strategic reserve were analogous to those of the 19th century, as was the logic of countries responding to the gold policy of other countries.

When the Czech Republic joined Nato in March 1999 it immediately sold all its gold reserves. The linkage was very clear, membership in a security alliance was a much cheaper way of getting the same assurance. From 2018, the signs were reversed, and gold was great again.

In 2018 Narodowy Bank Polski made a strategic decision to significantly expand its gold reserves, and in 2018-19 bought 125.7 tonnes of gold, more than doubling the gold stock to 228.7 tonnes. A few years later, after Russia’s attack on Ukraine threatened Polish security quite directly, President Adam Glapiński explained: ‘We have huge gold reserves, we buy them all the time… This makes Poland a more credible country.’

These messages gave an ominous air to an increasingly fearful moment: as in the late 1930s, as the security threat mounted, Poland seemed to need gold. In an unstable world, gold became once more the country’s best friend. In April 2021, Magyar Nemzeti Bank tripled its gold holdings from 31.5 tonnes to 95 tonnes. From 2022, the Czech National Bank started to buy gold, and promised to double its holdings to 100 tonnes by 2028.

Gold has a special place in that imaginary, cemented in place by the experience of the first era of globalisation and high imperialism, that reaches well beyond its narrow monetary role. Every country developed its own particular tale.

For Britain gold was a dream, for America a division, and for both over the course of the 20th century it became more and more invisible. The shattering of the gold standard, above all as a consequence of the military conflict, carrying with it the possibility of seizure and confiscation, produced a dramatic reversal. Gold had become a weapon that turned into a fetter: vanity of vanities.

This article is a shortened version of a lecture given by Harold James at Rutgers University to mark the retirements of Michael Bordo, Hugh Rockoff and Eugene White. It featured in the most recent edition of the OMFIF Bulletin.

Harold James is Claude and Lore Kelly Professor in European Studies at Princeton University.

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