JPMorgan: Beneficiary of Depression?

As part of the research in developing the script for the feature length documentary film Crime of the Century, I’ve been immersed over the last week in a detailed study of the history of JPMorgan (JPM), probably the most powerful bank in the world. Certainly it appears to be the only beneficiary of every painful twist in the slow-motion plunge into world depression.

After the first fifty pages of Ron Chernow’s The House of Morgan, published in 1989, there is little doubt that the financial institution that has profited from wars and financial panics consistently since the 1800’s has now mastered a globalized form of profiteering from financial mayhem.

Consider the primary platform of the above mentioned film: The world’s bankers, in cahoots with government, recognize that overcapitalizing the economy amplifies demand for credit (from which they profit), creates an atmosphere of confidence resulting in easy credit terms and higher leverage ratios (from which they profit but which also puts the leveraged businesses into a position of vulnerability), exponentially increases the speculative demand, and therefore the derivative flow of business from commodities (from which they profit) and promotes the irresponsible extension of excessive amounts of credit down into the lowest income groups of consumers, which fuels mortgage and credit card debt (providing a profit stream from origination as well as from the associated derivative products unleashed by so much credit in the system).

Then, when the system is bursting with economic growth, and commodities threaten the accessibility of energy and raw materials by consumers, the credit flow is abruptly terminated, resulting in the vulnerable businesses being foreclosed upon (by JPMorgan and associates), by the implosion of hedge funds and subsequent pennies-on-the-dollar auction of assets (sopped up by JPMorgan and associates), by the sudden insolvency of banks forced to sell themselves to larger banks (JPMorgan), all under the guise of “rescue”.

Far from a natural economic phenomenon, these intentionally induced business cycles form the backbone of the Morgan business model as is evidenced by the entire history of the institution.

Throughout the 19th century, the biggest business was the construction and operation of railroads, which were typically underwritten by bond offerings by Junius Morgan in London, and by his son Pierpont Morgan in New York.

The railroads were continuously going bust and being consolidated because the bankers learned early in the game that by financing an overcapacity of rail transportation, they could profit from the bond offerings when the railroad was launched, and then ride to the rescue when they got into trouble with fresh capital. The refinancing typically resulted in greater control over the assets of the railroad including seats on the boards of directors.

The Morgans were constantly trying to keep their investors whole through this contrived boom and bust transportation-dominated economy, and the press of the day, unlike today’s, didn’t flinch from the truth. They were regularly and roundly criticized for floating too many securities and creating the overexpansion that led to price wars, and their control of the United States railroad empire through banking was a staple of financial reporting during that era. Eventually, Pierpont Morgan was forced to compromise with the railroads, promising to cease from financing new capacity if the railroads refrained from profitless rate cutting.

See if this scenario doesn’t bear an uncanny resemblance to today’s:

In the early 1890s, global banking became enamored of Argentinean securities, and much of the free investment capital of London was diverted to these instruments through Barings Bank, at that time one of the top banks of England.

When the wheat crop failed and the Argentine government was overthrown in a coup, the Argentinean bonds collapsed in value, and Barings was facing collapse. To save Barings from that fate, the Bank of England organized a rescue funded by British government money and JPMorgan. The old Barings partnership was liquidated, and the reorganized firm never regained its former power, which had previously topped that of Morgan. In a single transaction, JPMorgan won control over the choicest of Barings’ assets, and eliminated a competitor in the process.

But the real testimony to the power over government of the Morgan banking dynasty came in 1895, when Pierpont Morgan almost single-handedly saved the Gold Standard while managing to gain control over the flow of gold into and out of the United States.

From 1879 onward, the U.S. government had pledged to redeem dollars for gold, at the time widely held to be the best insurance for the value of the new U.S. dollar. Washington then kept at least $100 million in gold coin and bullion.

As the volatility and unprofitability of railroad finance caused an increasing number of British financiers to redeem U.S. dollars for gold, which were then repatriated to Britain, U.S. Treasury-held gold began to fall below the $100 million mark, thus placing even more sell pressure on U.S. dollars and increasing the flight of gold from the U.S.

In 1890, the government enacted the Sherman Purchase Act which decreed the U.S. Treasury would had to buy 4.5 million ounces of silver each month and issue certificates redeemable in gold or silver. This put America on a bi-metal standard – that is, money was backed by both gold and silver – expanding the money supply.

While temporarily slowing the outflow of gold, the move was ultimately seen as a method of devaluing the U.S. dollar, and dollar sales and gold flight increased even further. In this deflationary environment, United States farmers were forced to service operating credit with increasingly expensive dollars while prices for their output remained low. The fault for this was laid squarely at the feet of bankers, epitomized at the time by JPMorgan. So venomous was the outpouring of hatred for the perceived subordination of U.S. farmers to British Gold, that some western states outlawed bankers and Texas banned them altogether until 1904.

The result was that then Democratic president Grover Cleveland, a staunch advocate of hard money, was prevented by a hostile Republican congress from issuing public debt to top up the gold supply, seen as subservient to European financial interests. By January 1894, U.S. gold reserves had declined to $68 million and gold coin was especially scarce at the nine sub-treasuries around the country.

As the crisis deepened and default of the U.S. dollar became increasingly likely, Pierpont Morgan, at the 11th hour, organized a syndicated bond issue led by Morgan and the Rothschilds, that saw 30 year bonds issued backed by 3.5 million ounces of gold, and the disaster was averted. The syndicate’s take on the issue was estimated at 7%, which was considered excessive by the press of the day, since the crisis was largely viewed as caused by the bankers’ excesses in the first place.

These are lessons from the first 50 pages of a 700 page plus volume on the history of JPMorgan.

The pattern of capitalizing from both boom and bust would appear to be the modus operandi of a refined business model originated by the House of Morgan, and facilitated by governments around the world and throughout history.

Comments

[jaycey:]

It's deja vu all over again

I've been reading about turn of the (20th) century politics and finance recently and the similarities are striking. The finance aristocrats seem to have an ancient playbook that they recycle every generation--as soon as the public has forgotten about the previous episodes. Bubbles, contractions (macro pump & dump?), imperialism, war profiteering and government giveaways; all facilitated by political bribery, slanted news coverage and paid shills to gull the public. It happened then, it's happening now.

What strikes you reading that stuff is how much the discussion of the intrigues and lies have been marginalized in the present day. Turn of the century commentators were much more frank--though it's debatable whether it did them much good.

I recently read an old book about the "crime of 1873." The author, a member of the US Monetary commission of 1879, says the whole "free silver" "Cross of Gold" thing was orchestrated by European investors wanting to double their money on Civil War bonds. It seems the bonds were sold for greenbacks then selling at half the value of gold and silver coins. They had over a billion dollars of these bonds and stood to make a killing if they could get their principal back in gold dollars rather than greenbacks. A quiet campaign of subterfuge and corruption slipped the law through the legislature unnoticed by the general public. The result was a bonanza for the foreign bondholders and a painful deflation for everybody else.

If you want to make sense of the world, follow the money!

www.archive.org/stream...

2008 Dec 02 05:43 AM