By the evening of 12 September 1857, the passengers and crew of the SS Central America had been fighting the Atlantic for days. The steamer, travelling towards New York with passengers and a substantial shipment of California gold, had been caught in a hurricane off the American coast.
The ship was taking on water. Its steam-powered pumps failed as the boiler lost pressure, leaving passengers and crew to form a bucket line against the sea. A nearby vessel managed to take off some of the women and children, but the weather worsened again. Captain William Lewis Herndon remained aboard as the Central America sank, taking hundreds of people and its cargo to the ocean floor.
The loss was first and foremost a human catastrophe but it is also remembered as part of a financial one.
New York’s banks had been expecting the gold. The American economy was already vulnerable: railway expansion had run ahead of sound finance, land speculation had spread, commodity prices were weakening and confidence in several financial institutions was deteriorating. The sinking did not create the Panic of 1857 on its own, but it removed anticipated reserves at the very moment they were most wanted.
Whilst the substantial amount of gold was real and had a recognised monetary value, none of that helped the institutions waiting for it in New York, because it was no longer available where and when it was needed.
This is the part of liquidity that we fail to consider when we talk about liquid assets. We speak of an asset as liquid when it can be sold readily without accepting a large discount. In practice, liquidity has at least three components: a willing buyer, functioning market infrastructure and the ability to deliver the asset within the required time. Remove any one of them and the theoretical value of an asset can become painfully separate from its usable value.
We see this in our everyday lives, for example, a house may represent considerable wealth but it’s not going to be able to settle tomorrow’s gas bill. A profitable private company may have enormous value for its owners without providing them with any immediate, liquid cash. A pension may well promise the worker future security but it usually remains inaccessible in the present. Even money in a bank can lose much of its practical liquidity if transfers are suspended or withdrawals restricted, something which is becoming all too frequent.
When it comes to gold, it is sometimes discussed as though the fact that it physically exists should settle every question. Of course, it doesn’t because its form, location and access to it are all relevant. A large wholesale bar in one jurisdiction is not identical, for a particular owner, to a smaller quantity of bullion held nearby. The bar of metal that is awaiting transport is not the same as metal already inside a recognised vaulting and settlement system. In short, an asset can be physically real but operationally unavailable, perhaps not as operationally unavailable as the bottom of the Atlantic, but still operationally unavailable to you.
Before physical gold investors worry I’ve lost my marbles, I am not working here to weaken the case for physical ownership. I am demonstrating that we need to clarify what competent ownership requires.
The SS Central America also exposes the relationship between efficiency and resilience. In normal conditions, moving California’s gold to the financial centres of the east was part of a functioning national and financial system system. The gold shipment aboard the fated steamer concentrated value because concentration made it useful. Once it arrived in New York it would be immediately useful, banks could expand reserves, settle obligations and support credit once the metal arrived.
But that value and the same concentration created a single, vulnerable journey. All that gold on the one ship, one raging, relentless storm and one missing delivery suddenly affected institutions far from the disaster itself.
But how does this history lesson affect us today? After all, modern finance has reduced many of these delays. We move capital electronically often without any human interaction at all, markets operate across time zones and sophisticated intermediaries manage settlement with extraordinary speed. Nevertheless, the same underlying dependencies that were so vulnerable in 1857 have not vanished. Certainly, they have become less visible, but they are still as present as they ever were. A delay getting a bar of gold into a vault, for example, can still separate an asset’s quoted price from an investor’s ability to obtain or deliver it.
We saw a version of this during the disruptions of 2020, when gold existed in London and demand existed in New York, but the normal processes for transporting and refining bars were impaired. The problem was not that the world had run out of gold. The problem was that the required gold was not necessarily in the required form and place at the required time.
For investors, this tells us that liquidity should be planned rather than assumed. The first question is not simply, “Can I sell this asset when the time comes?” It is, “How would I sell it, to whom, through which system and under what conditions?”
The same applies to the storage of your bullion. The nearest location in a physical sense may not be the most accessible when it comes to selling or adding to your holdings, nor may it offer the strongest legal protection. Immediate possession may reduce dependence upon a custodian while introducing personal security, insurance and authentication problems.
The useful objective is therefore not maximum access at any cost, nor maximum security regardless of access, rather this is about finding that very deliberate balance between ownership, liquidity and resilience.
When the SS Central America was discovered on the ocean floor more than a century later, part of its gold was recovered. Much to the media’s surprise, its value had survived remarkably well. But of course, the timing was off. For those banks awaiting its shipment in September 1857, gold delivered in the late twentieth century was indistinguishable from gold that never arrived.
That is the difference between an asset being valuable and an asset being available. Good financial planning requires you to answer both questions.
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