Money and Making Sense

You say you don’t really understand money? You’re in good company–look at  how J.P.  Morgan, the titan of Wall Street, king of the bankers, richest man in the world, talked about money.

Morgan is here testifying before the Pujo committee, investigating the Panic of 1907.[1. You can find the full text of Morgan’s testimony before the Committee at Google books: this link shows some contemporary commentary on Morgan’s claims.] The Committee’s counsel, Samuel Untermyer, asks Morgan if controlling credit, as a banker, does not also give you control of money. Morgan replies:

Mr. Morgan. A control of credit? No.

Mr. Untermyer. You do not think so?

Mr. Morgan. What I call money is the basis of banking.

Mr. Untermyer. But the basis of banking is credit, is it not?

Mr. Morgan. Not always. That is an evidence of banking, but it is not the money itself. Money is gold, and nothing else.

Mr. Untermyer. Do you not know that the basis or banking all over the world is credit rather than gold?

Mr. Morgan. It is the basis of credit, but it is not the basis of money.

What’s Morgan mean here–what does “it” refer to in this exchange? He seems to argue that money bears no relation to credit–money is not “a basis of credit,” it’s “gold and nothing else.” But generally, one wants credit because credit equals money, no?  You don’t borrow credit., you borrow money. Untermyer keeps at him–what is the difference between money and credit? If money is “gold alone,” what’s the thing you’re lending?

Mr. Untermyer. And it is conceivable that every commodity could be controlled, is it not?

Mr. Morgan. Except money.

Mr. Untermyer. I say, every commodity except money?

Mr. Morgan. Yes.

Mr. Untermyer. And money is a commodity?

Mr. Morgan. I do not like to think of it as a commodity.

Morgan said money is “gold, and nothing else.” But gold is a commodity and money is not a commodity. This makes no sense at all–you would think the richest man in the world would understand what he had accumulated. If he “does not like to think of money as a commodity” what does he like to think of it as?

Isn’t it true, Untermyer asks, nowhere in the world “is the supply of gold anything like sufficient to meet the outstanding obligations in the form of notes representing credit?”

Morgan agrees there isn’t enough gold in the world to equal the amount of credit (money!) the owners of that gold have extended to borrowers. Untermyer concludes: “Therefore, when money is issued by a Government it is issued largely on the basis of credit, is it not? It has [not] got dollar for dollar of gold to support it, has it?” Morgan agreed: “well no, not always.”

This leads Untermyer to conclude that “a man or a group of men who have the control of credit have control of money, have they not?”

Mr. Morgan. Yes.

Mr. Untermyer. Is not that so?

Mr. Morgan. No, sir; not always.

Mr. Untermyer. That is generally so, is it not?

Mr. Morgan. No.

It seems as if Morgan simply doesn’t know what he’s talking about. He either can’t or won’t give straight answers and he baldly contradicts himself within three sentences. It’s like he’s never thought about it before.

He goes on to say, explicitly and with no apparent irony, that money and credit bear no relation to each other whatever: Untermeyer says “it is not conceivable that one man would have the credit and the other the money, is it, because the credit is based upon money?”

Mr. Morgan. But money can not be controlled.

Mr. Untermyer. Is not the credit based upon the money?

Mr. Morgan. No, sir.

Mr. Untermyer. It has no relation?

Mr. Morgan. No, sir.

Mr. Untermyer. None whatever?

Mr. Morgan. No, sir; none whatever.

Well this is an astonishing claim! Money and credit have no relation to each other whatever! And here you thought you were borrowing money! Untermyer, a self made millionaire, find this odd, and quite reasonably he asks “why do the banks demand, the first thing they ask, a statement of what the man has got, before they extend him credit?”

Mr. Untermyer. For instance, if he has got Government bonds or railroad bonds, and goes in to get credit, he gets it, and on the security of those bonds, does he not?

Mr. Morgan. Yes.

Mr. Untermyer. He does not get it on his face or his character, does he?

Mr. Morgan. Yes; he gets it on his character.

Mr. Untermyer. I see; then he might as well take the bonds home, had he not?

Mr. Morgan. Because a man I do not trust could not get money from me on all the bonds in Christendom.

That last line is the “money quote:” it appears in biz school textbooks, hortatory guides to financial conduct and political web sites to this day. It’s all about “character,” not about collateral. Money is gold only, character begets money: gold is character, money is gold, gold is a commodity, money is not a commodity. Things have stopped making sense: all that’s left is fuzzy connections between character and gold.

It’s sort of remarkable to see the richest man in the world with such a confused grasp of the subject of his expertise. But most of us walk around strongly animated by ideas we don’t understand. People fight and die for “freedom” with no clear idea what they mean by the term: whole political systems are built around vague slogans that collapse into vapidity at the slightest serious glance.

Morgan simultaneously insists that money must be gold but money bears no relation to gold: that money is just a commodity and yet uniquely cannot be commodified or controlled: that accumulated wealth is meaningless in credit relations and one of Horatio Alger’s honest fictional bootblacks would be just as likely—in fact more likely—to walk away with Mr. Morgan’s check for a million dollars, because he has “character.” Morgan wants to ignore money as an object of politics, and the often sordid ambiguity of real life, and make money, gold and character analogous: rich men are men of good character; their money is a physical manifestation of their selves.

This kind of self-flattering mumbo-jumbo always infuriated advocates of paper money. Morgan was not entirely wrong, of course: no one would lend a man with bad character money, unless the man had a lot of collateral. And as the New York Times commented: The man who goes about the city seeking credit solely on the strength of a good character will find this a hard, cold, and doubting world.” Of course that’s true. Morgan is peddling fantasy.

Morgan’s fantasy treats money not as some negotiable, arbitrary, fluctuating set of social values, but as essential character. He has money because he has character: he lends money to men of character regardless of how much money they have. Because character can’t be bought, and bears no relation to money, no one can control money; it exists, weirdly, outside the market. And yet character produces money. “John Pierpont Morgan,” declared a headline in the New York Times, was “a bank in human form.”

New York Times, Nov 10, 1907 pg. SM9

If you find Morgan’s testimony confusing, it’s not your fault: Morgan isn’t making any sense. He’s trying to mystify the subject, trying to connect money, the ultimate shape shifter, capable of being anything and nothing, into the metallic equivalent of himself and those like him.

This kind of nonsense, this kind of comforting big-strong-daddy yearning, shows up all the time in the rhetoric of the gold standard. It’s exactly like Ayn Rand’s heroic cartoon protagonists, who have specie-like character that magically generates wealth and who embody timeless truths. It’s oddly about escaping the things that made Morgan rich–speculation, credit, lending more than you have in expectation of getting more later, betting on possible outcomes—by imagining that all you are doing is seeing and admiring your own mirror image.


  • What continues to astonish me as I work on banking in the nineteenth century is how much bankers didn’t know about finance or even basic money matters. Many of these men should never have been given a national bank charter or allowed to manage a bank. They were as you so aptly put, shape shifters and wheeler dealers. It doesn’t surprise me that J. P. Morgan presented such goofy, inchoate testimony. All Morgan and his brethern had was a little razzle dazzle and a lot of luck.

  • Yes–and when you read the defenses of the gold standard–or the silver standard–you realize it’s shocking how many politicians, economists and businessmen are talking rank gibberish. They are always trying to find some way to make money be a stable thing with some simple and fixed meaning

  • I agree that Morgan was deliberately confusing and mystifying the discussion. I am sure he was pissed for being questioned by anyone, especially in public.

    With regard to his famous quote – Morgan is right in a sense – if there is someone with a lot of collateral who cannot be trusted, you buy his collateral from him at a discount, as opposed to extending credit.

    Of course, bankers do the same this if they are not interested in trusting someone at all, such as during a deflation.

  • […] Next up: JP Mor­gan didn’t under­stand money either! […]

  • Glenn Peters wrote:

    Morgan was entirely correct. I speak as a banker of 35 years standing, who has watched with fascination how banking has lost touch with Morgan’s concepts and the consequences thereof. Lenders with no character, originators with no character, borrowers with no character, CDO packagers with no character, ratings agencies with no character, and look where that has landedthe USA and every country that ignored character. Think about it, people, Morgan was absolutely correct.

  • Robert Happek wrote:

    In modern banking, only credit circulates inside the economy. The real money never leaves the banking system. That is the reason why more than 90% of all money is checking account money. Even Federal Reserve Notes are credit instruments, not money.

    If gold would not be money, why do central banks keep thousands of tons of gold in their vaults?

    In a fractional reserve banking system, money and credit are not the same.

    In a 100% reserve system, money and credit are the same.

  • Mark Meigs wrote:

    All very interesting, but I think you are hard on Morgan. He has too many plausible excuses for the confusion. He was maybe old (70). And maybe he had contempt for Congress and public discussions of money which he seems quite content to keep mysterious.
    His insistence that you cannot control money, is the oddest thing he says because obviously he has spent his life trying to control as much money as possible. And as far as I know, he was not the richest man in the world at the time–wouldn’t that have been Rockefeller?–but he was the man who “controlled” the most money in the world (through credit).
    He seems quite happy with several notions of money: something finite, but also a set of financial activities. The multiple nature of money (like the triple nature of God?) is either so obvious to him that it needn’t be explained, or so difficult for the public that it shouldn’t be explained. I suddenly have a new appreciation of his being chief vestryman at Grace Church, Broadway (High Episcopalian).
    I look forward to your next installment where I hope you examine the doings at the Jeckyll Island meeting where the Federal Reserve is said to have been born. A glance at internet reveals a lecture called “The Creature from Jekyll Island,” attacking the Federal Reserve, no doubt. But it was an odd gathering: Powerful people taking trains and yachts to a remote Georgia location not using their own names to avoid publicity.

  • […] This kind of dis­course end­lessly repeats itself, as if there was some imag­i­nary time when pe… . […]

  • […] That Rom­ney is wrong about this, and that a room full of very rich men likely to be bankers would appar­ently not see any­thing wrong, or con­tra­dic­tory, in what he says in what he says is both trou­bling and not sur­pris­ing. I’ve blogged before about the rev­e­la­tion, unmis­tak­able in the tran­scripts of his con­gres­sional tes­ti­mony, that JP Mor­gan had no clear idea or under­stand­ing of what money was. […]

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