The relationship of art to corresponding monetary values seems to have been a vexed question perhaps not forever, but surely since early-Victorian times. The sense that art is “pure” and should remain unsullied by grubby considerations had been elevated to the status of dogma and is reflected in works as disparate as the visionary landscapes of Caspar David Friedrich and the writings of Samuel Taylor Coleridge. Romanticism, almost by definition, eschewed practical, value-based judgments that might cast shadows on its endeavor for spiritual purity. So firmly was this conviction rooted in nineteenth-century ethics and aesthetics that it has prevailed to this day, its survival immeasurably aided by Marxist and neo-Marxist politics. (“Art belongs to no man but to every man,” so goes the well-worn mantra). Today, paradoxically, one never hears such dated cant repeated in Russia, Eastern Europe, or China: post-Marxist countries whose nabobs seem to be driving the art market ever higher.

It is a generally accepted truism that the value of a work of art transcends the costs of its materials. This is equally true of money, whose value derives from the social consensus that makes money acceptable for use in exchange. Any commodity can be called into use. Primitive money ranged from rat traps (in the Congo) to woodpecker scalps—not forgetting the famous stone money of the Pacific island of Yap, each “coin” so large it couldn’t be moved. Even in ancient Greece, the exchange value of the first coins did not exactly match their metallic content. When the Knights of Malta, under siege from the Turks in 1565, minted copper coins in place of gold, the coins bore the motto “Non Aes, sed Fides” (not the metal, but trust).

The evanescent nature of money is wonderfully expressed by Alfred Mitchell-Innes, an Edwardian diplomat and amateur numismatist, who wrote that “the eye has never seen, nor the hand touched a dollar.”

The evanescent nature of money is wonderfully expressed by Alfred Mitchell-Innes, an Edwardian diplomat and amateur numismatist, who wrote that “the eye has never seen, nor the hand touched a dollar.” That the value of money does not reside in any material has become more evident in our age of fiat currencies, which have been conjured out of thin air by central banks, acquiring their values by government decree. Since the art market is a place where two value systems—art and money—come together, it is worth considering how disturbances in the monetary system, changes which affect both the supply of money and its price (interest rate), have affected art markets in the past.

An early example of this phenomenon is provided by the Mississippi Bubble, which took place three hundred years ago in France, in the immediate years after the death of Louis XIV. The bubble’s progenitor was a Scotsman named John Law, a gambler, “projector,” and early economist whose dream was to untether money from its golden shackles. Law’s writings on economics have earned him the title of the first monetarist, a forerunner of the likes of Milton Friedman. He can be seen as the originator of the virtual money school, writing in 1705 that “money is not the value for which goods are exchanged but the value by which they are exchanged.” Money, in other words, is just a yardstick of value.

Having settled in Paris towards the end of the reign of Louis XIV, Law gained the favor of France’s new ruler, Philippe II, the Duke of Orléans, whose regency commenced in 1715. Over the following years, Law established a national bank, whose notes in time came to replace France’s gold and silver currency, and took control of the Company of the West, known popularly as the Mississippi Company, which laid claim to French Louisiana. The Mississippi Company merged with France’s other overseas trading companies and acquired several other lines of business, including the tobacco monopoly. In 1719, Law offered to absorb the entire national debt into his company, offering rentiers shares in exchange for their claims.

The Mississippi Company’s stock was pumped up by Law’s use of a variety of tricks. The greatest impact came from Law’s bank issuing billions of livres of notes, supplied against the collateral of shares. The share price climbed twentyfold over the course of 1719, turning speculators into millionaires—one of several new words to enter the lexicon during this bubble period. Law, the company’s largest private shareholder, became, by his own reckoning, the richest man in history.

Towards the end of 1719, rich Mississippians started to realize (another neologism, meaning to “make real”) their paper profits. An orgy of luxury spending ensued. Law acquired several estates and grand houses, including the Palais Mazarin, for which he hired at a cost of 100,000 livres the fashionable Venetian artist Giovanni Pellegrini to paint its gallery ceiling. Law’s biographer James Buchan calls this the “greatest artistic commission of the French Regency.” The original has not survived, but a model sketch shows the naked figures of the Seine and the Mississippi embracing beneath the figure of Friendship.

A few years earlier, Law had arranged a loan to the French king for the purchase of the Pitt Diamond, a massive greengage-sized stone of 140.5 carats, which cost two million livres (renamed the Regent Diamond, it is now in the Louvre). Some of the Regent’s own windfall went towards his celebrated collection of paintings, which included twelve Raphaels, twenty-seven Titians, and Poussin’s Seven Sacraments, for which he paid a hefty price. The Duke of Bourbon cashed out his Mississippi fortune and spent the proceeds on the stables at his house at Chantilly, the Grandes Écuries that at one time sheltered more than two hundred horses and twenty-three coaches.

The Mississippi Bubble burst in the spring of 1720 after Law attempted to remove the excess issue of bank notes from circulation. By the end of the year, Law had fled France, leaving both family and fortune behind. The Duke of Orléans survived this calamity by only three years, dying at the age of forty-nine, worn out by affairs of state and by habitual late-night debauches with his band of roués. His paintings, however, resurfaced in London at the end of the eighteenth century, coincident with another great art market boom.

Put up for sale after the Revolution by the Regent’s great-grandson, the self-styled Philippe Egalité, the Orléans collection was acquired in 1798 for the handsome sum of £43,500 by a syndicate headed by the Duke of Bridgewater. Over the following years, wild prices were achieved for many of these works. In TheEconomics of Taste, Gerald Reitlinger records the more noteworthy transactions of this era. Several paintings by Rubens fetched £4,000 or more in London in the early 1800s. A decade earlier, says Reitlinger, “it is doubtful whether any purported Rubens would have made more than 200 guineas at a London auction.” In 1811, the Prince of Wales acquired Rembrandt’s Shipbuilder and his Wife for the then-stupendous sum of £5,250. No Rembrandt attained such a price again in a London saleroom until the end of Queen Victoria’s reign.

The monetary accompaniment to this exuberant art market was somewhat similar to Regency France. A banking panic in February 1797 had forced the Bank of England to suspend the convertibility of its notes into gold. Under a fiat money regime, interest rates were kept low, hundreds of new banks were established, and dozens of “stock-jobbing speculations” were floated, accompanied by the inevitable construction boom. A banking panic in 1810 brought the euphoria to an end. After the art market turned down, three members of the Bridgewater syndicate were declared bankrupt. Poussin’s Seven Sacraments now forms part of the Bridgewater Loan to the National Gallery of Scotland.

A pair of Claude landscapes acquired by the collector and gothic novelist William Beckford in 1799 for £6,825 were resold for £12,600 in 1808—the second-highest price paid for a work of art to that date. In 1940, the Altieri Claudes, as they are called, fetched just 2,500 guineas. Tastes change, of course, and Claude’s reputation had waned over the years. Still, there’s no doubt that the extraordinary monetary conditions of the early 1800s provided the fuel to send the London art market into orbit.

The same conjunction of easy money, stock market speculation, luxury spending, and art market froth has occurred on many subsequent occasions: for instance, during the Gilded Age of the 1860s, when the gold dollar was replaced by greenbacks, and later in the Roaring Twenties after the ill-fated “gold-exchange standard” had been instituted to provide a greater “elasticity” to the currency. In the twenties, American tycoons had a passion for British eighteenth-century aristocratic portraits, a market skillfully manipulated by the influential English art dealer Lord Duveen. During the Great Depression, the art market suffered even more than stocks. In 1938 Thomas Lawrence’s portrait of Lord Castlereagh was auctioned for just a tenth of what it had fetched a decade earlier. “When the slump came,” writes Reitlinger, “the rap was taken by lesser works of which the prices had been inflated by Duveen’s operations.”

Close at hand, and even closer to home, is a New York auction catalogue of the “Grassi Collection” dating from 1927. It is chock-full of high-style Renaissance furniture and works of art, mostly remainder stock from Luigi Grassi’s (grandfather of the co-author) lavish gallery in Florence, a “must” stopover between the wars for both German and American collectors. The catalogue’s introduction is by Wilhelm Bode, the then-Director of the Kaiser Friedrich Museum in Berlin, considered, at the time, the high priest of Italian fifteenth- and sixteenth-century sculpture. A splendid Venetian carved walnut cassone (marriage chest) datable to about 1570, fetched nearly $10,000. It’s highly doubtful whether the same amount (in today’s inflated dollars) could be realized for this item. Most of the other lots in the auction, if offered today, would almost certainly be “bought-in” for lack of interest. And what fate might await the wonderful assortment of richly embroidered antique fabrics that were part of the same sale? Donated or stowed away forever in mothballs.

It is interesting to consider that about the time of the Grassi sale one of the most expensive automobiles in the world was the Duesenberg Model J. It cost about $16,000 (well over the cassone)—to be sure, a very substantial sum at the time. Today, “Duesies” change hands for tens of millions. So much for the wisdom of “investing” in art.

We can understand why monetary disturbances have so often resulted in art market booms. In theory, the value of any investment is arrived at by discounting future cash flows, using the prevailing rate of interest. A lower discount rate inflates asset prices. The levitational effect of low interest rates is most pronounced on assets that produce little income. Since artworks actually generate negative income—owing to storage, insurance, and other costs—their market price is particularly sensitive to changes in the discount rate.

This last decade of ultra-low interest rates has witnessed bubble-like prices for Silicon Valley unicorns (start-ups), cryptocurrencies, and, of course, contemporary artworks. None of these investments yields a cent of income. A cynic might describe them as the twenty-first century’s answer to tulip bulbs. On Wall Street, the market valuations of high-profile technology stocks—the so-called faangs (Facebook, Amazon, etc.)—have soared in recent years while those of cheaper “value” stocks languished. A similar bifurcation has occurred in the art market, where the best-known modern and contemporary names have left most Old Masters trailing in the dust.

Easy money, both before and after the Lehman bankruptcy, has affected the art market in other ways.

Easy money, both before and after the Lehman bankruptcy, has affected the art market in other ways. Bull markets in stocks and metropolitan real estate have earned fortunes for those lucky enough to find themselves in the right place at the right time. When bonuses are paid on Wall Street and successful investments cashed in, some of those profits are spent on works of art, vintage cars, and Hermès handbags. These are what economists call “positional goods”—articles of (in theory) limited supply which, because they signal social status, experience an increase in demand as their prices rise. As the one percent of the one percent have garnered more of the world’s wealth in their hands, the market for positional goods has grown considerably.

Periods of easy money also tend to inflate commodity prices, generating revenues for what we now call emerging markets. High oil prices have produced the funds for the Gulf States to amass collections of modern, and not-so-modern, art. Leonardo’s oily, slug-like, and much-restored Salvator Mundi, sold by Christie’s at—in a sign of the times—an evening sale of “Post-war and Contemporary Art” in November 2017, was acquired for $450 million by Abu Dhabi’s Department of Culture and Tourism. Russians, Ukrainians, Koreans, and, above all, Chinese buyers have become a dominant force in the global art market, just as Japanese buyers were a quarter of a century earlier.

During the Dutch tulip mania of the 1630s, most of the tulip bulb transactions took place in the futures market, known appropriately as the windhandel (wind trade). We have come a long way since then. In the modern era of globalization and ultralow interest rates, the art market has, to use a modish term, been “financialized.” Museums, both public and private, play the role of central banks, providing contemporary artists with their “museum-quality” stamp of approval. Auction houses operate like investment banks, guaranteeing consignor prices (“selling puts”), lending to buyers (“leveraging”), investing their own resources (“proprietary trading”), and, most of all, aggressively marketing. The contents of a contemporary art auction catalogue bear comparison with the hype commonly found in the ipo prospectus for some speculative stock to be floated on the New York Stock Exchange.

The great art dealers resemble hedge funds, making markets in their artists (“providing liquidity”), restricting the supply of artworks (“cornering”), and employing numerous other tactics to maintain and boost prices. As for the collectors of contemporary art, well, they speculate. Hedge funds themselves, with their particularly lucrative compensation arrangements, have grown in prominence since the turn of the century, and several hedge fund managers have made their presences felt in the contemporary art market. Steven A. Cohen, formerly of s.a.c. Capital, has amassed a collection of modern and contemporary art valued near $1 billion, which includes Damien Hirst’s $12 million pickled shark and Pablo Picasso’s Le Rêve, bought from the casino operator Steve Wynn for $155 million. Another “hedgie,” the activist investor Dan Loeb, has spent large sums on both Rothko and shares of Sotheby’s. Loeb now sits on the Sotheby’s board.

Money in the age of quantitative easing and Bitcoin is even more virtual than in John Law’s day. Alfred Mitchell-Innes’s quip about the dollar’s true nature applies as well to “ultra-conceptual” art, which “the eye has never seen, nor the hand touched.” By strange coincidence, one of today’s top dealers in contemporary art is the New York gallerist Lucy Mitchell-Innes. Aspirant artists are inevitably caught up in this financial maelstrom. The fact that Jeff Koons started his career selling mutual funds on Wall Street seems too appropriate. Leading artists actually have greater kinship with Silicon Valley entrepreneurs, such as Elon Musk of Tesla fame. Both try out new ideas to see if they will stick. Marketing genius goes a long way—as Damien Hirst’s glittering career demonstrates.

The art market carnival, which runs from one international art fair to another, is accompanied by revelry of the type familiar from 1630s Holland or Regency France. An aura of “eat, drink, and be merry” hangs over this unreal world. Record hammer prices are greeted with standing ovations from attendees of Sotheby’s and Christie’s evening New York sales.

In early October, the grafitti artist Banksy arranged for his painting Girl with Balloon to be shredded as the hammer went down in front of a stunned audience in Sotheby’s London saleroom. The venerable auctioneer’s response was “we just got Banksy-ed.” Such levity is explained by the fact that there were no legal repercussions. The publicity stunt was believed to have enhanced the work’s value (even though the destruction didn’t go according to plan, as the canvas got jammed in the shredder).

Besides, is art really such a good investment? If anything, historical precedent seems to indicate just the opposite. The great Swiss collector Robert von Hirsch died in 1977, leaving in his surprisingly modest Basel home a treasure trove of works of art fastidiously chosen over a lifetime of travel and study. They ranged from early-medieval bronzes, to Italian early-Renaissance paintings, to Cézanne watercolors. Peter Wilson, at the time Sotheby’s brilliant and colorful chairman, billed the eight-catalogue extravaganza as “the sale of the century.” Records were set in every category and many museums today are richer for having von Hirsch items among their holdings. Since most pieces were purchased decades before the collector’s death, the sale also prompted some interesting calculations: how good an investment had von Hirsch actually made? The answer: he would have done a great deal better acquiring downtown Basel real estate.

In fact, a 1986 study by the economist William Baumol based on Reitlinger’s data found only a small average annual appreciation for artworks mentioned by Reitlinger, with the caveat that this only held true if the works had not risen substantially in price in the years prior to purchase. The best investment advice seems to be that if you want to preserve your capital when buying works of art, avoid the fashionable stuff. Of course, the same holds true when investing in stocks.

One of the contemporary paintings for sale at Christie’s post-war and contemporary evening sale back in November 2013—a sale that raised the record-breaking sum of $691 million—was Christopher Wool’s Apocalypse Now. This work fetched $26.5 million—a price appreciation of 350,000 percent over twenty-five years. Since first coming to market, this painting had been “flipped” many times and had recently served as collateral for a loan from JPMorgan. Composed of “alkyd and flashe on aluminum and steel,” Apocalypse Now consists of a fragment of a line delivered by Marlon Brando in the Francis Ford Coppola movie of the same name: “Sell the House/ Sell the Cars/ Sell the Kids.” As the era of unconventional monetary policy draws to a close, a more timely piece of advice springs to mind: sell the picture.

Amid all this art market fizz, it’s easy to forget that, au fond, capital preservation, let alone capital appreciation, is really not the point—certainly not the only point—of collecting art. Consider the decades that Robert von Hirsch spent savoring the company of the magnificent Madonna and Child Enthroned by Giovanni di Paolo (now in the Norton Simon Museum), not to mention the Cézanne watercolors. Those magical objects must have rewarded him every day with sensual as well as spiritual pleasures that one can only imagine: they were there for him to touch, explore with a magnifying glass, or place in a different light. Discussing them with fellow collectors and connoisseurs must have added immeasurably to the joy of ownership.

And consider this: François Jacques de Larderel was an enterprising French engineer who, in the 1820s, developed a successful and immensely profitable geothermal installation near Livorno, in Tuscany. About a century later, a sole descendant was living in a Florentine palace surrounded by an impressive group of Italian Renaissance paintings. Though the elderly gentleman had become completely blind, he delighted his guests by guiding them, item by item, through the collection, “seeing” and describing each image in minutest detail. Would their increasing, or decreasing, monetary value have concerned him? Doubtlessly not. And therein lies the ultimate rejoinder to those who would advise us on art as “property” or “capital”: the portfolio resides in the heart and in the mind, not in the bank.

This article originally appeared in The New Criterion, Volume 37 Number 4, on page 15
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