The quote in the title, “Gold Is Money, Everything Else Is Credit” is attributed to JP Morgan himself while testifying in front of Congress back in 1912 shortly before his death. I will explore this quote because it was exactly 100% correct back then and even more pertinent today, I will explain. Before I get to this I would like to mention a couple of things. First, JP Morgan did not say this; he actually said, “Money is gold, nothing else.” Secondly, back in 1912 Congress was rarely lied to if ever. Whereas today hearing the truth is as rare as hens teeth. Please recall our past Federal Reserve chairman Ben Bernocchio as he lied to Congress when he replied, “No” when asked if gold was money.
JP Morgan was in my opinion trying to convey the idea (his knowledge) that gold was the money itself and everything else was a “derivative” (derived) from this money. He understood that any currency, any debt, any equity or receipt had counterparty risk. He understood that “promises” were made to be broken. They could be outright broken through fraud or default or broken slowly through the debasement of a currency. He also understood that the longer the chain of promises became, the more likely that one link in the chain would ultimately break rendering all of the links worthless.
Fast forward 100 years and we now live in a world where nearly everything is touched by or actually is credit. The various currencies themselves, all debt of course, stocks, real estate, commodities…everything. Think about it, margin debt across the globe is at an all-time high. Real estate has been borrowed against by a bigger percentage than any time in history. Even commodities have become a “credit casino,” just ask the Chinese who have recently found out that the underlying commodities (including gold) collateral for loans may never have even existed. Then of course we have $1.4 quadrillion with a very large “Q” of derivatives hanging over the financial world. This is all credit and it all has counterparty risk.
I want to be very basic here for those not up to speed yet and it’s always good to review and think about the basics for those who are. “Counterparty” risk is the risk that whoever you are doing business with does not or cannot perform his side of the bargain. The other party may go bankrupt themselves or someone that they do business with goes under and makes it impossible for your direct counterparty to perform. There is of course also the risk of fraud, your counter party gets your money and runs which might cause you to not be able to perform on a contract with someone else. It is important to understand that counterparties may fail to perform for any number of reasons and it could be any number of counterparties that the “failure” comes from. The important thing to understand is that counterparty risk can occur out of nowhere, it can occur at any time and it can occur from places that you’ve never dreamed of.
Why am I talking about counterparty risk? Simple, because it exists everywhere and in almost everything we do or touch. You go to work and you “trust” that you’ll be paid on pay day. You put your check in the bank and you “trust” that when you return, you can retrieve the funds with a little bit of interest. You go to the store and “trust” that they will accept your credit or debit card and that they will have the items stocked that you are looking for. The store must have the same “trust” with their banks and suppliers. The suppliers must trust their middlemen and banks and so do the raw producers. This “trust” must also exist between banks, brokers, insurance companies and even central banks, treasuries and sovereign nations themselves.
The above has always and will always be the case, the world must run on “trust” but there is now a problem. The problem is that “credit” has engulfed the world. And the danger that a counterparty cascade begins because the risk of a default has never been greater than it is now. This is because leverage and debt ratios have never been higher. It is no longer “if,” it is only a mathematical question of “when.” Again I will go back to a question that I asked you a few weeks back, “Do you believe that the U.S. government is broke?” A vast majority would now answer “yes” to this question whereas 6 years ago it was considered heresy to even speak about it. If you answered yes then you are also saying that you believe the house of cards financial system that is based 100% on credit will also come down. The derivatives chain will break and that everything financial will have a worth or “value” far lower than it does now…because of counterparty failures creating a credit contraction. Just think back to late 2008 when even central banks became distrustful of other central banks…this next episode will be far worse.
OK, so back to the title and quote by JP Morgan. “Gold is money, everything else is credit.” What he was trying to explain is that physical gold in your possession has no counterparty risk. Gold does not “derive” its value from anything or anywhere. Gold is value because it is money itself in the most pure and basic form. Gold will be THE last man standing so to speak when everything falls down around it. Not only will it still be standing, it will be standing tall because of fear and panic. When the credit edifice comes down, people from all walks of life (including governments themselves) will seek safety. For the past 80 years, “safety” was considered U.S. Treasury debt but… it’s different now. It is different because the Treasury will not be seen as a safe haven but rather a place to flee from. Gold’s “value” will benefit and rise as much of the credit created over the last 100 years seeks a place to hide.
I know that this piece is most very basic in nature but as I mentioned earlier I believe it’s important to every once in a while “refresh” while newcomers absorb the logic. Truly folks this is what it’s all about and why you own (or should) own gold. The financial system is mathematically going to come down and the best position to have when this occurs is to have “money.” Not fake money watch, not receipts or promise money…REAL money because the financial system will need to be restarted. It will be “restarted” by those who have the money to do it, hopefully you are part of this because those who are will have legacy to forward to future generations.
I really enjoy your articles, and look forward to each days new blog.
In the above, however:
$1.4 trillion with a very large “T”
Shouldn’t this be Quadrillion with a “Q”?
yes Mike, my error. It has been corrected.
Bill A very good affirmation of why I stack! Thanks.
U R welcome Stacker. It’s just the basics.
JP Morgan never said “Gold Is Money, Everything Else Is Credit” in his testimony before Congress (actually it was before the Bank and Currency Committee). Here is the transcript.
actually, Morgan said “gold is money, and nothing else”.
Mr Holter. You mistakenly got it reversed. JP Morgan did not say “gold is money, and nothing else”. He said “Money is gold, and nothing else. You do have it correct in the first paragraph. Many people who believe gold is money wrongly quote JP Morgan as saying “gold is money, and nothing else. However all this means is that gold is only money and that is all gold is, it is not anything but money. As it stands, this misquote though does not exclude other things from being money also. He did not say “Gold is money, and nothing else is”. But JP Morgan did not say that. He said “Money is gold, and nothing else”. Here he seems to be saying specifically that the only money is gold. Having the words money and gold switched makes a difference.
quote by me, “Gold is money, nothing else is money. Everything else is credit”.