Paper Money and Tyranny
HON. RON PAUL OF TEXAS
IN THE HOUSE OF REPRESENTATIVES
September 5, 2003
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- 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- 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- both philosophically and strategically-
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 know. 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- 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- the interest
rate- and its proper supply. For decades, and especially during the
1990s- when Chairman Greenspan was held in such high esteem, and
no one dared question his judgment or the wisdom of the system- 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- many who are elderly and on fixed
incomes- 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- 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- the gold exchange standard- 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-especially Japan and China- 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- 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- 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-almost all of which is overseas- 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.
US Representative
Ron Paul of Texas
September 5, 2003
