“Gold is money; everything else is credit.”
This quote is attributed to J.P. Morgan, the robber baron industrialist who virtually owned the United States during the late 19th century. Although Morgan’s exploitation of workers and monopolistic ambitions were the essence of the “Gilded Age,” this statement couldn’t be any more spot-on.
But what does it mean? For starters, he is drawing out the contrast between a tangible asset—something real, that holds intrinsic value—and debt (or credit). When you get a loan, or even hold cash, you’re really just playing with bank credit. Only gold is real money.
Gold as Money
Morgan’s quote has special relevance in today’s markets, where central banks are hell-bent on exceeding all past measures of economic stimulus and expansion of the money supply. Never mind that this money supply is made up entirely of fiat dollars, which will inevitably become worthless; the point is that it already debases the value of the currency in the short-term.
Ideally, banks would like to do away with cash altogether. We’ve seen sign after sign that this is the case: the expansion of digital money; the introduction of electronic bank transfer (EBT) cards; the complete shunning of gold as an asset. We consistently hear high-ranking bankers refer to gold as “a barbarous relic,” as early-20th-century economist John Maynard Keynes (for whom Keynesian economics is named) called the gold standard at the time.
Former Federal Reserve Chair Ben Bernanke even suggested, when pressed for an answer by gold-loving representative Ron Paul, that central banks hold gold merely because “it is a tradition.” Whoever knew that these people who have no concern for the rule of law or for fairness would care so much about tradition?
The Ongoing “War on Cash”
Enter the “War on Cash.” Increasingly, central banks are trying to do away with anything that gives consumers a measure of freedom. Fiat money aside, at least cash cannot be traced or readily confiscated. However, in a bank “bail-in” wherein depositors’ funds are simply absorbed by the bank to keep it solvent, your account balance can instantly vanish into the coffers of the institution. This is exactly what happened during a banking crisis in Cyprus (a small Mediterranean island) in 2013.
Various central bankers have thrown their support (unsurprisingly) behind the elimination of large-size banknotes. Former U.S. Treasury Secretary Lawrence Summers made the case for ending the $100 bill, while European Central Bank President Mario Draghi called for an end to the €500 note the same week. Coincidence?
It begins with the large notes—which this oh-so-altruistic bankers asset is a way to stop the funding of terrorism and organized crime—and eventually ends with one thing: credit for everyone! This once again brings up the distinction between credit and money, that essential building block of wealth. John Browne of Euro Pacific Capital (the investment firm run by Peter Schiff) succinctly stated it this way:
“Most of the great economic growth and apparent prosperity of the past 45 years, since the U.S. broke its dollar’s last link to gold, has been financed by credit—unimaginable trillions of dollars of credit. At the heart of this massive credit system are the banks.”
Once the authorities are successful in eliminating cash, there is really no way to remain beyond a bank’s purview. No business, commerce, or economic activity whatsoever could be conducted outside of the banking system.
In such a situation, would citizens turn to barter? Most likely. Obviously this would favor people who can produce their own goods and wares, like farmers and artisans. Yet, anyone who has stocked up on bullion will be equally, if not even better, prepared for such a situation. Remember: gold is money—everyone recognizes that—and it always will be.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.