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Paper Money
and Tyranny
Dr.
Ron Paul is a Republican member of Congress from Texas and perhaps the only
voice in Washington still advocating "limited" government in the Jeffersonian
tradition. Washington
DC -
All great republics throughout history cherished sound money. This meant that
the monetary unit was a commodity of honest weight and purity. When money was
sound, civilizations were found to be more prosperous and freedom thrived. The
less free a society becomes, the greater the likelihood its money is being
debased and the economic well-being of its citizens diminished. Alan
Greenspan, years before he became Federal Reserve Board Chairman in charge of
flagrantly debasing the U.S. dollar, wrote about this connection between sound
money, prosperity, and freedom. In his article "Gold and Economic
Freedom" (The Objectivist, July 1966), Greenspan starts by saying:
"An almost hysterical antagonism toward the gold standard is an issue that
unites statists of all persuasions. They seem to sense...that gold and economic
freedom are inseparable." Further he states that: "Under the gold
standard, a free banking system stands as the protector of an economy's
stability and balanced growth." Astoundingly,
Mr. Greenspan's analysis of the 1929 market crash, and how the Fed precipitated
the crisis, directly parallels current conditions we are experiencing under his
management of the Fed. Greenspan explains: "The excess credit which the
Fed pumped into the economy spilled over into the stock market undefined
triggering a fantastic speculative boom." And, "...By 1929 the
speculative imbalances had become overwhelming and unmanageable by the
Fed." Greenspan concluded his article by stating: "In the absence of
the gold standard, there is no way to protect savings from confiscation through
inflation." He explains that the "shabby secret" of the
proponents of big government and paper money is that deficit spending is simply
nothing more than a "scheme for the hidden confiscation of wealth."
Yet here we are today with a purely fiat monetary system, managed almost
exclusively by Alan Greenspan, who once so correctly denounced the Fed's role
in the Depression while recognizing the need for sound money. The Founders
of this country, and a large majority of the American people up until the
1930s, disdained paper money, respected commodity money, and disapproved of a
central bank's monopoly control of money creation and interest rates.
Ironically, it was the abuse of the gold standard, the Fed's credit-creating
habits of the 1920s, and its subsequent mischief in the 1930s, that not only
gave us the Great Depression, but also prolonged it. Yet sound money was blamed
for all the suffering. That's why people hardly objected when Roosevelt and his
statist friends confiscated gold and radically debased the currency, ushering
in the age of worldwide fiat currencies with which the international economy
struggles today. If honest
money and freedom are inseparable, as Mr. Greenspan argued, and paper money
leads to tyranny, one must wonder why it's so popular with economists, the
business community, bankers, and our government officials. The simplest
explanation is that it's a human trait to always seek the comforts of wealth
with the least amount of effort. This desire is quite positive when it inspires
hard work and innovation in a capitalist society. Productivity is improved and
the standard of living goes up for everyone. This process has permitted the
poorest in today's capitalist countries to enjoy luxuries never available to
the royalty of old. But this human
trait of seeking wealth and comfort with the least amount of effort is often
abused. It leads some to believe that by certain monetary manipulations, wealth
can be made more available to everyone. Those who believe in fiat money often
believe wealth can be increased without a commensurate amount of hard work and
innovation. They also come to believe that savings and market control of
interest rates are not only unnecessary, but actually hinder a productive
growing economy. Concern for liberty is replaced by the illusion that material
benefits can be more easily obtained with fiat money than through hard work and
ingenuity. The perceived benefits soon become of greater concern for society
than the preservation of liberty. This does not mean proponents of fiat money
embark on a crusade to promote tyranny, though that is what it leads to, but
rather they hope they have found the philosopher's stone and a modern
alternative to the challenge of turning lead into gold. Our Founders
thoroughly understood this issue, and warned us against the temptation to seek
wealth and fortune without the work and savings that real prosperity requires.
James Madison warned of "The pestilent effects of paper money," as
the Founders had vivid memories of the destructiveness of the Continental
dollar. George Mason of Virginia said that he had a "Mortal hatred to
paper money." Constitutional Convention delegate Oliver Ellsworth from
Connecticut thought the convention "A favorable moment to shut and bar the
door against paper money." This view of the evils of paper money was
shared by almost all the delegates to the convention, and was the reason the
Constitution limited congressional authority to deal with the issue and
mandated that only gold and silver could be legal tender. Paper money was
prohibited and no central bank was authorized. Over and above the economic
reasons for honest money, however, Madison argued the moral case for such.
Paper money, he explained, destroyed "The necessary confidence between man
and man, on necessary confidence in public councils, on the industry and morals
of people and on the character of republican government." The Founders
were well aware of the biblical admonitions against dishonest weights and
measures, debased silver, and watered-down wine. The issue of sound money
throughout history has been as much a moral issue as an economic or political
issue. Even with this
history and great concern expressed by the Founders, the barriers to paper
money have been torn asunder. The Constitution has not been changed, but is no
longer applied to the issue of money. It was once explained to me, during the
debate over going to war in Iraq, that a declaration of war was not needed
because to ask for such a declaration was "frivolous" and that the
portion of the Constitution dealing with congressional war power was
"anachronistic." So too, it seems that the power over money given to
Congress alone and limited to coinage and honest weights, is now also
"anachronistic." If indeed our
generation can make the case for paper money, issued by an unauthorized central
bank, it behooves us to at least have enough respect for the Constitution to
amend it in a proper fashion. Ignoring the Constitution in order to perform a
pernicious act is detrimental in two ways. First, debasing the currency as a
deliberate policy is economically destructive beyond measure. Second, doing it
without consideration for the rule of law undermines the entire fabric of our
Constitutional republic. Though the
need for sound money is currently not a pressing issue for Congress, it's
something that cannot be ignored because serious economic problems resulting
from our paper money system are being forced upon us. As a matter of fact, we
deal with the consequences on a daily basis, yet fail to see the connection
between our economic problems and the mischief orchestrated by the Federal
Reserve. All the great
religions teach honesty in money, and the economic shortcomings of paper money
were well known when the Constitution was written, so we must try to understand
why an entire generation of Americans have come to accept paper money without
hesitation, without question. Most Americans are oblivious to the entire issue
of the nature and importance of money. Many in authority, however, have either
been misled by false notions or see that the power to create money is indeed a
power they enjoy, as they promote their agenda of welfarism at home and empire
abroad. Money is a
moral, economic, and political issue. Since the monetary unit measures every
economic transaction, from wages to prices, taxes, and interest rates, it is
vitally important that its value is honestly established in the marketplace
without bankers, government, politicians, or the Federal Reserve manipulating
its value to serve special interests. Money As a
Moral Issue The moral
issue regarding money should be the easiest to understand, but almost no one in
Washington thinks of money in these terms. Although there is a growing and
deserved distrust in government per se, trust in money and the Federal
Reserve's ability to manage it remains strong. No one would welcome a
counterfeiter to town, yet this same authority is blindly given to our central
bank without any serious oversight by the Congress. When the
government can replicate the monetary unit at will without regard to cost,
whether it's paper currency or a computer entry, it's morally identical to the
counterfeiter who illegally prints currency. Both ways, it's fraud. A fiat
monetary system allows power and influence to fall into the hands of those who
control the creation of new money, and to those who get to use the money or
credit early in its circulation. The insidious and eventual cost falls on
unidentified victims who are usually oblivious to the cause of their plight.
This system of legalized plunder (though not constitutional) allows one group
to benefit at the expense of another. An actual transfer of wealth goes from
the poor and the middle class to those in privileged financial positions. In many
societies the middle class has actually been wiped out by monetary inflation,
which always accompanies fiat money. The high cost of living and loss of jobs
hits one segment of society, while in the early stages of inflation, the
business class actually benefits from the easy credit. An astute stock investor
or home builder can make millions in the boom phase of the business cycle,
while the poor and those dependent on fixed incomes can't keep up with the
rising cost of living. Fiat money is
also immoral because it allows government to finance special interest
legislation that otherwise would have to be paid for by direct taxation or by
productive enterprise. This transfer of wealth occurs without directly taking
the money out of someone's pocket. Every dollar created dilutes the value of
existing dollars in circulation. Those individuals who worked hard, paid their
taxes, and saved some money for a rainy day are hit the hardest, with their
dollars being depreciated in value while earning interest that is kept
artificially low by the Federal Reserve easy-credit policy. The easy credit
helps investors and consumers who have no qualms about going into debt and even
declaring bankruptcy. If one sees
the welfare state and foreign militarism as improper and immoral, one
understands how the license to print money permits these policies to go forward
far more easily than if they had to be paid for immediately by direct taxation.
Printing money,
which is literally inflation, is nothing more than a sinister and evil form of
hidden taxation. It's unfair and deceptive, and accordingly strongly opposed by
the authors of the Constitution. That is why there is no authority for
Congress, the Federal Reserve, or the executive branch to operate the current
system of money we have today. Money As a
Political Issue Although the
money issue today is of little political interest to the parties and
politicians, it should not be ignored. Policy makers must contend with the
consequences of the business cycle, which result from the fiat monetary system
under which we operate. They may not understand the connection now, but
eventually they must. In the past,
money and gold have been dominant issues in several major political campaigns.
We find that when the people have had a voice in the matter, they inevitably
chose gold over paper. To the common man, it just makes sense. As a matter of
fact, a large number of Americans, perhaps a majority, still believe our dollar
is backed by huge hoards of gold in Fort Knox. The monetary
issue, along with the desire to have free trade among the states, prompted
those at the Constitutional Convention to seek solutions to problems that
plagued the post-revolutionary war economy. This post-war recession was greatly
aggravated by the collapse of the unsound fiat Continental dollar. The people,
through their representatives, spoke loudly and clearly for gold and silver
over paper. Andrew
Jackson, a strong proponent of gold and opponent of central banking (the Second
Bank of the United States,) was a hero to the working class and was twice
elected president. This issue was fully debated in his presidential campaigns.
The people voted for gold over paper. In the 1870s,
the people once again spoke out clearly against the greenback inflation of
Lincoln. Notoriously, governments go to paper money while rejecting gold to
promote unpopular and unaffordable wars. The return to gold in 1879 went
smoothly and was welcomed by the people, putting behind them the disastrous
Civil War inflationary period. Grover
Cleveland, elected twice to the presidency, was also a strong advocate of the
gold standard. Again, in the
presidential race of 1896, William McKinley argued the case for gold. In spite
of the great orations by William Jennings Bryant, who supported monetary
inflation and made a mocking "Cross of Gold" speech, the people
rallied behind McKinley's bland but correct arguments for sound money. The 20th
Century was much less sympathetic to gold. Since 1913 central banking has been
accepted in the United States without much debate, despite the many economic
and political horrors caused or worsened by the Federal Reserve since its
establishment. The ups and downs of the economy have all come as a consequence
of Fed policies, from the Great Depression to the horrendous stagflation of the
'70s, as well as the current ongoing economic crisis. A central bank
and fiat money enable government to maintain an easy war policy that under
strict monetary rules would not be achievable. In other words, countries with
sound monetary policies would rarely go to war because they could not afford
to, especially if they were not attacked. The people could not be taxed enough
to support wars without destroying the economy. But by printing money, the cost
can be delayed and hidden, sometimes for years if not decades. To be truly
opposed to preemptive and unnecessary wars one must advocate sound money to
prevent the promoters of war from financing their imperialism. Look at how
the military budget is exploding, deficits are exploding, and tax revenues are
going down. No problem; the Fed is there and will print whatever is needed to
meet our military commitments, whether it's wise to do so or not. The money
issue should indeed be a gigantic political issue. Fiat money hurts the
economy, finances wars, and allows for excessive welfarism. When these
connections are realized and understood, it will once again become a major
political issue, since paper money never lasts. Ultimately politicians will not
have a choice of whether to address or take a position on the money issue. The
people and circumstances will demand it. We do hear
some talk about monetary policy and criticism directed toward the Federal
Reserve, but it falls far short of what I'm talking about. Big-spending
welfarists constantly complain about Fed policy, usually demanding lower
interest rates even when rates are at historic lows. Big-government
conservatives promoting grand worldwide military operations, while arguing that
"deficits don't matter" as long as marginal tax rates are lowered,
also constantly criticize the Fed for high interest rates and lack of
liquidity. Coming from both the left and the right, these demands would not
occur if money could not be created out of thin air at will. Both sides are
asking for the same thing from the Fed for different reasons. They want the
printing presses to run faster and create more credit, so that the economy will
be healed like magic undefined or so they believe. This is not
the kind of interest in the Fed that we need. I'm anticipating that we should
and one day will be forced to deal with the definition of the dollar and what
money should consist of. The current superficial discussion about money merely shows
a desire to tinker with the current system in hopes of improving the
deteriorating economy. There will be a point, though, when the tinkering will
no longer be of any benefit and even the best advice will be of no value. We
have just gone through two-and-a-half years of tinkering with 13 rate cuts, and
recovery has not yet been achieved. It's just possible that we're much closer
than anyone realizes to that day when it will become absolutely necessary to
deal with the monetary issue undefined both philosophically and strategically
undefined and forget about the band-aid approach to the current system. Money As an
Economic Issue For a time,
the economic consequences of paper money may seem benign and even helpful, but
are always disruptive to economic growth and prosperity. Economic
planners of the Keynesian-socialist type have always relished control over
money creation in their efforts to regulate and plan the economy. They have no
qualms with using this power to pursue their egalitarian dreams of wealth
redistribution. That force and fraud are used to make the economic system
supposedly fairer is of little concern to them. There are also
many conservatives who do not endorse central economic planning as those on the
left do, but nevertheless concede this authority to the Federal Reserve to
manipulate the economy through monetary policy. Only a small group of
constitutionalists, libertarians, and Austrian free-market economists reject
the notion that central planning, through interest-rate and money-supply
manipulation, is a productive endeavor. Many sincere
politicians, bureaucrats, and bankers endorse the current system, not out of
malice or greed, but because it's the only system they have known. The
principles of sound money and free market banking are not taught in our
universities. The overwhelming consensus in Washington, as well as around the
world, is that commodity money without a central bank is no longer practical or
necessary. Be assured, though, that certain individuals who greatly benefit
from a paper money system know exactly why the restraints that a commodities
standard would have are unacceptable. Though the
economic consequences of paper money in the early stage affect lower-income and
middle-class citizens, history shows that when the destruction of monetary
value becomes rampant, nearly everyone suffers and the economic and political
structure becomes unstable. There's good reason for all of us to be concerned
about our monetary system and the future of the dollar. Nations that live
beyond their means must always pay for their extravagance. It's easy to
understand why future generations inherit a burden when the national debt piles
up. This requires others to pay the interest and debts when they come due. The
victims are never the recipients of the borrowed funds. But this is not exactly
what happens when a country pays off its debt. The debt, in nominal terms,
always goes up, and since it is still accepted by mainstream economists that
just borrowing endlessly is not the road to permanent prosperity, real debt
must be reduced. Depreciating the value of the dollar does that. If the dollar
loses 10% of its value, the national debt of $6.5 trillion is reduced in real
terms by $650 billion dollars. That's a pretty neat trick and quite helpful
undefined to the government. That's why the
Fed screams about a coming deflation, so it can continue the devaluation of the
dollar unabated. The politicians don't mind, the bankers welcome the business
activity, and the recipients of the funds passed out by Congress never
complain. The greater the debt, the greater the need to inflate the currency,
since debt cannot be the source of long-term wealth. Individuals and
corporations who borrow too much eventually must cut back and pay off debt and
start anew, but governments rarely do. But where's
the hitch? This process, which seems to be a creative way of paying off debt,
eventually undermines the capitalist structure of the economy, thus making it
difficult to produce wealth, and that's when the whole process comes to an end.
This system causes many economic problems, but most of them stem from the Fed's
interference with the market rate of interest that it achieves through credit
creation and printing money. Nearly 100
years ago, Austrian economist Ludwig von Mises explained and predicted the
failure of socialism. Without a pricing mechanism, the delicate balance between
consumers and producers would be destroyed. Freely fluctuating prices provide
vital information to the entrepreneur who is making key decisions on
production. Without this information, major mistakes are made. A central
planning bureaucrat cannot be a substitute for the law of supply and demand. Though
generally accepted by most modern economists and politicians, there is little
hesitancy in accepting the omnipotent wisdom of the Federal Reserve to know the
"price" of money undefined the interest rate undefined and its proper
supply. For decades, and especially during the 1990s undefined when Chairman
Greenspan was held in such high esteem, and no one dared question his judgment
or the wisdom of the system undefined this process was allowed to run unimpeded
by political or market restraints. Just as we must eventually pay for our
perpetual deficits, continuous manipulation of interest and credit will also
extract a payment. Artificially
low interest rates deceive investors into believing that rates are low because
savings are high and represent funds not spent on consumption. When the Fed
creates bank deposits out of thin air making loans available at below-market
rates, mal-investment and overcapacity results, setting the stage for the next
recession or depression. The easy credit policy is welcomed by many:
stock-market investors, home builders, home buyers, congressional spendthrifts,
bankers, and many other consumers who enjoy borrowing at low rates and not
worrying about repayment. However, perpetual good times cannot come from a
printing press or easy credit created by a Federal Reserve computer. The piper
will demand payment, and the downturn in the business cycle will see to it. The
downturn is locked into place by the artificial boom that everyone enjoys,
despite the dreams that we have ushered in a "new economic era." Let
there be no doubt: the business cycle, the stagflation, the recessions, the
depressions, and the inflations are not a result of capitalism and sound money,
but rather are a direct result of paper money and a central bank that is
incapable of managing it. Our current
monetary system makes it tempting for all parties, individuals, corporations,
and government to go into debt. It encourages consumption over investment and
production. Incentives to save are diminished by the Fed's making new credit
available to everyone and keeping interest rates on saving so low that few find
it advisable to save for a rainy day. This is made worse by taxing interest
earned on savings. It plays havoc with those who do save and want to live off
their interest. The artificial rates may be 4, 5, or even 6% below the market
rate, and the savers undefined many who are elderly and on fixed incomes
undefined suffer unfairly at the hands of Alan Greenspan, who believes that
resorting to money creation will solve our problems and give us perpetual
prosperity. Lowering
interest rates at times, especially early in the stages of monetary debasement,
will produce the desired effects and stimulate another boom-bust cycle. But
eventually the distortions and imbalances between consumption and production,
and the excessive debt, prevent the monetary stimulus from doing very much to
boost the economy. Just look at what's been happening in Japan for the last 12
years. When conditions get bad enough the only recourse will be to have major
monetary reform to restore confidence in the system. The two conditions
that result from fiat money that are more likely to concern the people are
inflation of prices and unemployment. Unfortunately, few realize these problems
are directly related to our monetary system. Instead of demanding reforms, the
chorus from both the right and left is for the Fed to do more of the same
undefined only faster. If our problem stems from easy credit and interest-rate
manipulation by the Fed, demanding more will not do much to help. Sadly, it
will only make our problems worse. Ironically,
the more successful the money managers are at restoring growth or prolonging
the boom with their monetary machinations, the greater are the distortions and
imbalances in the economy. This means that when corrections are eventually
forced upon us, they are much more painful and more people suffer with the
correction lasting longer. Today's
Conditions
Today's
economic conditions reflect a fiat monetary system held together by many tricks
and luck over the past 30 years. The world has been awash in paper money since
removal of the last vestige of the gold standard by Richard Nixon when he
buried the Bretton Woods agreement undefined the gold exchange standard
undefined on August 15, 1971. Since then we've been on a worldwide paper dollar
standard. Quite possibly we are seeing the beginning of the end of that system.
If so, tough times are ahead for the United States and the world economy. A paper
monetary standard means there are no restraints on the printing press or on
federal deficits. In 1971, M3 was $776 billion; today it stands at $8.9
trillion, an 1100% increase. Our national debt in 1971 was $408 billion; today
it stands at $6.8 trillion, a 1600% increase. Since that time, our dollar has
lost almost 80% of its purchasing power. Common sense tells us that this
process is not sustainable and something has to give. So far, no one in
Washington seems interested. Although
dollar creation is ultimately the key to its value, many other factors play a
part in its perceived value, such as: the strength of our economy, our
political stability, our military power, the benefit of the dollar being the
key reserve currency of the world, and the relative weakness of other nation's
economies and their currencies. For these reasons, the dollar has enjoyed a special
place in the world economy. Increases in productivity have also helped to
bestow undeserved trust in our economy with consumer prices, to some degree,
being held in check and fooling the people, at the urging of the Fed, that
"inflation" is not a problem. Trust is an important factor in how the
dollar is perceived. Sound money encourages trust, but trust can come from
these other sources as well. But when this trust is lost, which always occurs
with paper money, the delayed adjustments can hit with a vengeance. Following the
breakdown of the Bretton Woods agreement, the world essentially accepted the
dollar as a replacement for gold, to be held in reserve upon which even more
monetary expansion could occur. It was a great arrangement that up until now seemed
to make everyone happy. We own the
printing press and create as many dollars as we please. These dollars are used
to buy federal debt. This allows our debt to be monetized and the spendthrift
Congress, of course, finds this a delightful convenience and never complains.
As the dollars circulate through our fractional reserve banking system, they
expand many times over. With our excess dollars at home, our trading partners
are only too happy to accept these dollars in order to sell us their products. Because
our dollar is relatively strong compared to other currencies, we can buy
foreign products at a discounted price. In other words, we get to create the
world's reserve currency at no cost, spend it overseas, and receive
manufactured goods in return. Our excess dollars go abroad and other countries
undefined especially Japan and China undefined are only too happy to loan them
right back to us by buying our government and GSE debt. Up until now both sides
have been happy with this arrangement. But all good
things must come to an end and this arrangement is ending. The process put us
into a position of being a huge debtor nation, with our current account deficit
of more than $600 billion per year now exceeding 5% of our GDP. We now owe
foreigners more than any other nation ever owed in all of history, over $3
trillion. A debt of this
sort always ends by the currency of the debtor nation decreasing in value. And
that's what has started to happen with the dollar, although it still has a long
way to go. Our free lunch cannot last. Printing money, buying foreign products,
and selling foreign holders of dollars our debt ends when the foreign holders
of this debt become concerned with the dollar's future value. Once this
process starts, interest rates will rise. And in recent weeks, despite the
frenetic effort of the Fed to keep interest rates low, they are actually rising
instead. The official explanation is that this is due to an economic rebound
with an increase in demand for loans. Yet a decrease in demand for our debt and
reluctance to hold our dollars is a more likely cause. Only time will tell
whether the economy rebounds to any significant degree, but one must be aware
that rising interest rates and serious price inflation can also reflect a weak
dollar and a weak economy. The stagflation of the 1970s baffled many
conventional economists, but not the Austrian economists. Many other countries
have in the past suffered from the extremes of inflation in an inflationary
depression, and we are not immune from that happening here. Our monetary and
fiscal policies are actually conducive to such a scenario. In the short
run, the current system gives us a free ride, our paper buys cheap goods from
overseas, and foreigners risk all by financing our extravagance. But in the
long run, we will surely pay for living beyond our means. Debt will be paid for
one way or another. An inflated currency always comes back to haunt those who
enjoyed the "benefits" of inflation. Although this process is
extremely dangerous, many economists and politicians do not see it as a
currency problem and are only too willing to find a villain to attack.
Surprisingly the villain is often the foreigner who foolishly takes our paper
for useful goods and accommodates us by loaning the proceeds back to us. It's
true that the system encourages exportation of jobs as we buy more and more
foreign goods. But nobody understands the Fed role in this, so the cries go out
to punish the competition with tariffs. Protectionism is a predictable
consequence of paper-money inflation, just as is the impoverishment of an
entire middle class. It should surprise no one that even in the boom phase of
the 1990s, there were still many people who became poorer. Yet all we hear are
calls for more government mischief to correct the problems with tariffs,
increased welfare for the poor, increased unemployment benefits, deficit
spending, and special interest tax reduction, none of which can solve the
problems ingrained in a system that operates with paper money and a central bank.
If inflation
were equitable and treated all classes the same, it would be less socially
divisive. But while some see their incomes going up above the rate of inflation
(movie stars, CEOs, stock brokers, speculators, professional athletes,) others
see their incomes stagnate like lower-middle-income workers, retired people,
and farmers. Likewise, the rise in the cost of living hurts the poor and middle
class more than the wealthy. Because inflation treats certain groups unfairly,
anger and envy are directed toward those who have benefited. The long-term
philosophic problem with this is that the central bank and the fiat monetary
system are not blamed; instead free market capitalism is. This is what happened
in the 1930s. The Keynesians, who grew to dominate economic thinking at the
time, erroneously blamed the gold standard, balanced budgets, and capitalism
instead of tax increases, tariffs, and Fed policy. This country cannot afford
another attack on economic liberty similar to what followed the 1929 crash that
ushered in the economic interventionism and inflationism which we have been
saddled with ever since. These policies have brought us to the brink of another
colossal economic downturn and we need to be prepared. Big business
and banking deserve our harsh criticism, but not because they are big or
because they make a lot of money. Our criticism should come because of the
special benefits they receive from a monetary system designed to assist the
business class at the expense of the working class. Labor leader Samuel Gompers
understood this and feared paper money and a central bank while arguing the
case for gold. Since the monetary system is used to finance deficits that come
from war expenditures, the military industrial complex is a strong supporter of
the current monetary system. Liberals
foolishly believe that they can control the process and curtail the benefits
going to corporations and banks by increasing the spending for welfare for the
poor. But this never happens. Powerful financial special interests control the
government spending process and throw only crumbs to the poor. The fallacy with
this approach is that the advocates fail to see the harm done to the poor, with
cost of living increases and job losses that are a natural consequence of
monetary debasement. Therefore, even more liberal control over the spending
process can never compensate for the great harm done to the economy and the
poor by the Federal Reserve's effort to manage an unmanageable fiat monetary
system. Economic
intervention, financed by inflation, is high-stakes government. It provides the
incentive for the big money to "invest" in gaining government
control. The big money comes from those who have it undefined corporations and
banking interests. That's why literally billions of dollars are spent on
elections and lobbying. The only way to restore equity is to change the primary
function of government from economic planning and militarism to protecting
liberty. Without money, the poor and middle class are disenfranchised since
access for the most part requires money. Obviously, this is not a partisan
issue since both major parties are controlled by wealthy special interests.
Only the rhetoric is different. Our current
economic problems are directly related to the monetary excesses of three
decades and the more recent efforts by the Federal Reserve to thwart the
correction that the market is forcing upon us. Since 1998, there has been a
sustained attack on corporate profits. Before that, profits and earnings were
inflated and fictitious, with WorldCom and Enron being prime examples. In spite
of the 13 rate cuts since 2001, economic growth has not been restored. Paper money
encourages speculation, excessive debt, and misdirected investments. The
market, however, always moves in the direction of eliminating bad investments,
liquidating debt, and reducing speculative excesses. What we have seen,
especially since the stock market peak of early 2000, is a knock-down, drag-out
battle between the Fed's effort to avoid a recession, limit the recession, and
stimulate growth with its only tool, money creation, while the market demands
the elimination of bad investments and excess debt. The Fed was also motivated
to save the stock market from collapsing, which in some ways they have been
able to do. The market, in contrast, will insist on liquidation of
unsustainable debt, removal of investment mistakes made over several decades,
and a dramatic revaluation of the stock market. In this go-around, the Fed has
pulled out all the stops and is more determined than ever, yet the market is
saying that new and healthy growth cannot occur until a major cleansing of the
system occurs. Does anyone think that tariffs and interest rates of 1% will
encourage the rebuilding of our steel and textile industries anytime soon?
Obviously, something more is needed. The world
central bankers are concerned with the lack of response to low interest rates
and they have joined in a concerted effort to rescue the world economy through
a policy of protecting the dollar's role in the world economy, denying that
inflation exists, and justifying unlimited expansion of the dollar money
supply. To maintain confidence in the dollar, gold prices must be held in
check. In the 1960s our government didn't want a vote of no confidence in the
dollar, and for a couple of decades, the price of gold was artificially held at
$35 per ounce. That, of course, did not last. In recent
years, there has been a coordinated effort by the world central bankers to keep
the gold price in check by dumping part of their large horde of gold into the
market. This has worked to a degree, but just as it could not be sustained in
the 1960s, until Nixon declared the Bretton Woods agreement dead in 1971, this
effort will fail as well. The market
price of gold is important because it reflects the ultimate confidence in the
dollar. An artificially low price for gold contributes to false confidence and
when this is lost, more chaos ensues as the market adjusts for the delay. Monetary
policy today is designed to demonetize gold and guarantee for the first time
that paper can serve as an adequate substitute in the hands of wise central
bankers. Trust, then, has to be transferred from gold to the politicians and
bureaucrats who are in charge of our monetary system. This fails to recognize
the obvious reason that market participants throughout history have always
preferred to deal with real assets, real money, rather than government paper.
This contest between paper and honest money is of much greater significance
than many realize. We should know the outcome of this struggle within the next
decade. Alan
Greenspan, although once a strong advocate for the gold standard, now believes
he knows what the outcome of this battle will be. Is it just wishful thinking
on his part? In an answer to a question I asked before the Financial Services
Committee in February 2003, Chairman Greenspan made an effort to convince me
that paper money now works as well as gold: "I have been quite surprised,
and I must say pleased, by the fact that central banks have been able to
effectively simulate many of the characteristics of the gold standard by
constraining the degree of finance in a manner which effectively brought down
the general price levels." Earlier, in December 2002, Mr. Greenspan spoke
before the Economic Club of New York and addressed the same subject: "The
record of the past 20 years appears to underscore the observation that,
although pressures for excess issuance of fiat money are chronic, a prudent
monetary policy maintained over a protracted period of time can contain the
forces of inflation." There are several problems with this optimistic
assessment. First, efficient central bankers will never replace the invisible
hand of a commodity monetary standard. Second, using government price
indexes to measure the success of a managed fiat currency should not be
reassuring. These indexes can be arbitrarily altered to imply a successful
monetary policy. Also, price increases of consumer goods are not a litmus test
for measuring the harm done by the money managers at the Fed. The development
of overcapacity, excessive debt, and speculation still occur, even when prices
happen to remain reasonably stable due to increases in productivity and
technology. Chairman Greenspan makes his argument because he hopes he's right
that sound money is no longer necessary, and also because it's an excuse to
keep the inflation of the money supply going for as long as possible, hoping a
miracle will restore sound growth to the economy. But that's only a dream. We are now
faced with an economy that is far from robust and may get a lot worse before
rebounding. If not now, the time will soon come when the conventional wisdom of
the last 90 years, since the Fed was created, will have to be challenged. If
the conditions have changed and the routine of fiscal and monetary stimulation
don't work, we better prepare ourselves for the aftermath of a failed dollar
system, which will not be limited to the United States. An interesting
headline appeared in the New York Times on July 31, 2003,
"Commodity Costs Soar, But Factories Don't Bustle." What is observed
here is a sea change in attitude by investors shifting their investment funds
and speculation into things of real value and out of financial areas, such as stocks
and bonds. This shift shows that in spite of the most aggressive Fed policy in
history in the past three years, the economy remains sluggish and interest
rates are actually rising. What can the Fed do? If this trend continues,
there's little they can do. Not only do I believe this trend will continue, I
believe it's likely to accelerate. This policy plays havoc with our economy;
reduces revenues, prompts increases in federal spending, increases in deficits
and debt occur, and interest costs rise, compounding our budgetary woes. The set of
circumstances we face today are unique and quite different from all the other
recessions the Federal Reserve has had to deal with. Generally, interest rates
are raised to slow the economy and dampen price inflation. At the bottom of the
cycle interest rates are lowered to stimulate the economy. But this time
around, the recession came in spite of huge and significant interest rate
reductions by the Fed. This aggressive policy did not prevent the recession as
was hoped; so far it has not produced the desired recovery. Now we're at the
bottom of the cycle and interest rates not only can't be lowered, they are
rising. This is a unique and dangerous combination of events. This set of
circumstances can only occur with fiat money and indicates that further
manipulation of the money supply and interest rates by the Fed will have little
if any effect. The odds
aren't very good that the Fed will adopt a policy of not inflating the money
supply because of some very painful consequences that would result. Also there
would be a need to remove the pressure on the Fed to accommodate the big
spenders in Congress. Since there are essentially only two groups that have any
influence on spending levels, big-government liberals and big-government
conservatives, that's not about to happen. Poverty is going to worsen due to
our monetary and fiscal policies, so spending on the war on poverty will
accelerate. Our obsession with policing the world, nation building, and
pre-emptive war are not likely to soon go away, since both Republican and
Democratic leaders endorse them. Instead, the cost of defending the American
empire is going to accelerate. A country that is getting poorer cannot pay
these bills with higher taxation nor can they find enough excess funds for the
people to loan to the government. The only recourse is for the Federal Reserve
to accommodate and monetize the federal debt, and that, of course, is
inflation. It's now
admitted that the deficit is out of control, with next year's deficit reaching
over one-half trillion dollars, not counting the billions borrowed from
"trust funds" like Social Security. I'm sticking to my prediction
that within a few years the national debt will increase over $1 trillion in one
fiscal year. So far, so good, no big market reactions, the dollar is holding
its own and the administration and congressional leaders are not alarmed. But
they ought to be. I agree, it
would be politically tough to bite the bullet and deal with our extravagance,
both fiscal and monetary, but the repercussions here at home from a loss of
confidence in the dollar throughout the world will not be a pretty sight to
behold. I don't see any way we are going to avoid the crisis. We do have
some options to minimize the suffering. If we decided to, we could permit some
alternatives to the current system of money and banking we have today. · Already,
we took a big step in this direction. Gold was illegal to own between 1933 and
1976. Today millions of Americans do own some gold. · Gold
contracts are legal, but a settlement of any dispute is always in Federal
Reserve notes. This makes gold contracts of limited value. · For
gold to be an alternative to Federal Reserve notes, taxes on any transactions
in gold must be removed, both sales and capital gains. · Holding
gold should be permitted in any pension fund, just as dollars are permitted in
a checking account of these funds. · Repeal
of all legal tender laws is a must. Sound money never requires the force of
legal tender laws. Only paper money requires such laws. These proposals, even if put in place tomorrow,
would not solve all the problems we face. It would though, legalize freedom of
choice in money, and many who worry about having their savings wiped out by a
depreciating dollar would at least have another option. This option would ease
some of the difficulties that are surely to come from runaway deficits in a
weakening economy with skyrocketing inflation. Curbing the scope of government and limiting its
size to that prescribed in the Constitution is the goal that we should seek.
But political reality makes this option available to us only after a national
bankruptcy has occurred. We need not face that catastrophe. What we need to do
is to strictly limit the power of government to meddle in our economy and our
personal affairs, and stay out of the internal affairs of other nations. Conclusion It's no coincidence that during the period
following the establishment of the Federal Reserve and the elimination of the
gold standard, a huge growth in the size of the federal government and its debt
occurred. Believers in big government, whether on the left or right,
vociferously reject the constraints on government growth that gold demands.
Liberty is virtually impossible to protect when the people allow their
government to print money at will. Inevitably, the left will demand more
economic interventionism, the right more militarism and empire building. Both
sides, either inadvertently or deliberately, will foster corporatism. Those
whose greatest interest is in liberty and self-reliance are lost in the
shuffle. Though left and right have different goals and serve different
special-interest groups, they are only too willing to compromise and support
each other's programs. If unchecked, the economic and political chaos that
comes from currency destruction inevitably leads to tyranny undefined a
consequence of which the Founders were well aware. For 90 years we have lived
with a central bank, with the last 32 years absent of any restraint on money
creation. The longer the process lasts, the faster the printing presses have to
run in an effort to maintain stability. They are currently running at record
rate. It was predictable and is understandable that our national debt is now
expanding at a record rate. The panicky effort of the Fed to stimulate economic
growth does produce what it considers favorable economic reports, recently
citing second quarter growth this year at 3.1%. But in the footnotes, we find that
military spending undefined almost all of which is overseas undefined was up an
astounding 46%. This, of course, represents deficit spending financed by the
Federal Reserve's printing press. In the same quarter, after-tax corporate
profits fell 3.4%. This is hardly a reassuring report on the health of our
economy and merely reflects the bankruptcy of current economic policy. Real economic growth won't return until confidence
in the entire system is restored. And that is impossible as long as it depends
on the politicians not spending too much money and the Federal Reserve limiting
its propensity to inflate our way to prosperity. Only sound money and limited
government can do that. Dr.
Ron Paul is a Republican member of Congress from Texas and perhaps
the only voice in Washington still advocating "limited"
government in the Jeffersonian tradition. |
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