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Ben Bernanke and J.P. Morgan on Gold

By Frederick J. Sheehan

On July 13, 2011, Federal Reserve Chairman Ben S. Bernanke was questioned by members of theU.S. House Financial Services Subcommittee on Domestic Monetary Policy.

Chairman (of the Committee) Ron Paul asked: "Do you think gold is money?"

Chairman (of the Federal Reserve Board) Ben Bernanke responded: "No…. Well, it’s an asset."

Chairman Bernanke went on to equate holding gold to owning Treasury bills. In his mind’s eye, Bernanke could see the Federal Reserve’s balance sheet on which gold and Treasury securities line up in the asset column. He could not have offered Congressman Paul a more sincere answer. But, this is the same man who told 60 Minutes: "I’ve never been on Wall Street." And, the same man who told a 2006 conference that money no longer played a role in monetary policy, to which the (then) vice president of the European Central Bank walked to the podium and called the statement "pointedly foolish."

Congressman Paul asked Chairman Bernanke, well then, why don’t central banks hold diamonds. Bernanke responded: "Tradition."

Tradition appeared before the Pujo Committee in 1912: J.P. Morgan. (To be clear, this is J.P. Morgan – the man – who operated J.P. Morgan – the bank – until his death in 1913, and who midwifed General Electric, Westinghouse, U.S. Steel, the Natural History Museum, the Metropolitan Museum of Art, the Pierpont Morgan Library and had relieved Europe of its Raphaels, Van Dycks, and Gutenberg bibles.) Appointed by the House Committee on Banking and Currency, Congressman Arsene Pujo’s inquiry was in temper with the times. The Panic of 1907 had sparked wider interest in bestowing authority over the banking system to a government appointed body. This movement would culminate in the Federal Reserve Act in 1913.

The committee’s lead attorney, Samuel Untermeyer, questioned the star witness, J.P. Morgan.

Explaining to Untermeyer the difference between credit and money, the man who prevented a United States Treasury default in 1895 and saved the banking system from collapse in 1907 replied: "Money is gold, and nothing else."

Three words. Six words, counting the qualifying phrase that nailed shut the coffin to the qualifications and equivocations that relieve bureaucratic economists from accountability and expanded their incapacity over the past 40 years to make either a helpful or interesting statement.

Morgan had nothing else to say since he had precisely and comprehensibly answered the question.

A 2002 study by the International Monetary Fund concluded: "[T]he aggregate price level in the United Kingdom and the United States was virtually the same in 1700 as in 1900." During the century after J.P. Morgan died, the Federal Reserve, somehow authorized to replace gold with Federal Reserve Notes, has destroyed 98% of the dollar’s value. This was progress.

The Panic of 1907 was resolved by J.P. Morgan, the apex of which was the Knickerbocker Trust failure in consonance with bank runs, calls from country banks on their correspondent New York banks, call rates on the stock exchange rising above 100%, and European selling of American stocks, the proceeds exchanged for gold in New York vaults, which was then loaded on ships sailing for Europe.

By now an old man, suffering from the flu, sneezing, coughing, cigar surgically attached to his lips, Morgan assembled a high command around his library desk at Madison Avenue and 36th Street. For approximately six days and nights the group decided which banks (and trust companies) "were hopelessly overextended and should be allowed to fail, and which were essentially healthy and could be saved." (Jean Strouse, Morgan: American Financier.) The U.S. Treasury had advanced $31 million to stem the panic, but that was the extent of government involvement. If Morgan miscalculated, Jacob Schiff predicted, it would "make all previous panics look like child’s play."

Morgan told solvent bankers how much they must contribute to shore the weak banks. Occasionally, a financier balked. One banker told Morgan his reserves had fallen below the legal limit. Morgan fumed: "You ought to be ashamed of yourself to be anywhere near your legal reserve. What is your reserve for at a time like this except to use it?"

Morgan’s actions were Olympian, autocratic, undemocratic, and he repelled progressive economists, who knew what was best for Americans. Irving Fisher, a celebrity economist at Yale, wrote in 1907: "The world consists of two classes-the educated and the ignorant-and it is essential for progress that the former should be allowed to dominate the latter." This impulse was considered democratic. Chairman Bernanke, former head coach to Princeton University’s economics inductees, is successor to this lineage, as certain of its truth as was Fisher.

The colloquy between Ron Paul and Ben Bernanke elicited the best macro, market-timing advice since March, 1933, when Leon Trotsky made the blue-ribbon call of the 20th century. The revolutionary, murderer, author, and future ice-pick recipient told international investors to (effectively) short the British Empire, the pound sterling’s time had passed, and to go long the dollar and the American empire. If FDR was listening, even he must have shook his head in disbelief.

On July 13, 2011 Chairman Bernanke explained: "The reason people hold gold is protection against tail risk, really, really, bad outcomes. To the extent that the last few years have made people more worried about the potential of a major crisis, then they hold gold as a protection," said the greatest tail risk to the West since Genghis Khan.

Frederick Sheehan

About 

Frederick Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession. He is the co-author of Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve. Mr. Sheehan was Director of Asset Allocation Services at John Hancock Financial Services in Boston. For more than a decade, Mr. Sheehan wrote the monthly "Market Outlook" and quarterly "Market Review" for clients. He is a frequent contributor to Marc Faber's "Gloom, Boom & Doom Report." He also has written articles for "Whiskey & Gunpowder" and the Prudent Bear website, among others. He currently serves as an advisor to an investment firm and a non-profit foundation. A Chartered Financial Analyst, Mr. Sheehan is a graduate of Columbia Business School.