HON. Ron Paul OF TEXAS
IN THE HOUSE OF REPRESENTATIVES
September 5, 2003
(All bold emphasis added)
Paper Money and Tyranny
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
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
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
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.
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,
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
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.
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
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
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
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
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
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
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 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
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
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
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
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
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
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.
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