[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
ROAD MAP TO SOUND MONEY: A
LEGISLATIVE HEARING ON H.R. 1098
AND RESTORING THE DOLLAR
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
DOMESTIC MONETARY POLICY
AND TECHNOLOGY
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
__________
SEPTEMBER 13, 2011
__________
Printed for the use of the Committee on Financial Services
Serial No. 112-59
_____
U.S. GOVERNMENT PRINTING OFFICE
72-600 PDF WASHINGTON : 2012
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC
area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, Washington, DC
20402-0001
HOUSE COMMITTEE ON FINANCIAL SERVICES
SPENCER BACHUS, Alabama, Chairman
JEB HENSARLING, Texas, Vice BARNEY FRANK, Massachusetts,
Chairman Ranking Member
PETER T. KING, New York MAXINE WATERS, California
EDWARD R. ROYCE, California CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois BRAD SHERMAN, California
GARY G. MILLER, California GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina CAROLYN McCARTHY, New York
JOHN CAMPBELL, California JOE BACA, California
MICHELE BACHMANN, Minnesota STEPHEN F. LYNCH, Massachusetts
THADDEUS G. McCOTTER, Michigan BRAD MILLER, North Carolina
KEVIN McCARTHY, California DAVID SCOTT, Georgia
STEVAN PEARCE, New Mexico AL GREEN, Texas
BILL POSEY, Florida EMANUEL CLEAVER, Missouri
MICHAEL G. FITZPATRICK, GWEN MOORE, Wisconsin
Pennsylvania KEITH ELLISON, Minnesota
LYNN A. WESTMORELAND, Georgia ED PERLMUTTER, Colorado
BLAINE LUETKEMEYER, Missouri JOE DONNELLY, Indiana
BILL HUIZENGA, Michigan ANDRE CARSON, Indiana
SEAN P. DUFFY, Wisconsin JAMES A. HIMES, Connecticut
NAN A. S. HAYWORTH, New York GARY C. PETERS, Michigan
JAMES B. RENACCI, Ohio JOHN C. CARNEY, Jr., Delaware
ROBERT HURT, Virginia
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO R. CANSECO, Texas
STEVE STIVERS, Ohio
STEPHEN LEE FINCHER, Tennessee
Larry C. Lavender, Chief of Staff
Subcommittee on Domestic Monetary Policy and Technology
RON PAUL, Texas, Chairman
WALTER B. JONES, North Carolina, WM. LACY CLAY, Missouri, Ranking
Vice Chairman Member
FRANK D. LUCAS, Oklahoma CAROLYN B. MALONEY, New York
PATRICK T. McHENRY, North Carolina GREGORY W. MEEKS, New York
BLAINE LUETKEMEYER, Missouri AL GREEN, Texas
BILL HUIZENGA, Michigan EMANUEL CLEAVER, Missouri
NAN A. S. HAYWORTH, New York GARY C. PETERS, Michigan
DAVID SCHWEIKERT, Arizona
C O N T E N T S
----------
Page
Hearing held on:
September 13, 2011........................................... 1
Appendix:
September 13, 2011........................................... 19
WITNESSES
Tuesday, September 13, 2011
Parks, Lawrence M., Ph.D., Executive Director, Foundation for the
Advancement of Monetary Education.............................. 3
White, Lawrence H., Ph.D., Professor of Economics, Department of
Economics, George Mason University............................. 6
APPENDIX
Prepared statements:
Paul, Hon. Ron............................................... 20
Parks, Lawrence M............................................ 24
White, Lawrence H............................................ 87
Additional Material Submitted for the Record
Paul, Hon. Ron:
Written responses to questions submitted to Dr. Lawrence M.
Parks...................................................... 91
Letter from then-Chairman Alan Greenspan of the Federal
Reserve dated November 20, 2003............................ 101
ROAD MAP TO SOUND MONEY: A
LEGISLATIVE HEARING ON H.R. 1098
AND RESTORING THE DOLLAR
----------
Tuesday, September 13, 2011
U.S. House of Representatives,
Subcommittee on Domestic Monetary
Policy and Technology,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 2:35 p.m., in
room 2128, Rayburn House Office Building, Hon. Ron Paul
[chairman of the subcommittee] presiding.
Members present: Representatives Paul, Jones, Luetkemeyer,
and Huizenga.
Chairman Paul. This hearing will come to order. Without
objection, all members' opening statements will be made a part
of the record.
Are there any other opening statements? Okay. I will make a
brief opening statement and then we will go to our witnesses.
The monetary issue has been an issue that I have been
fascinated with and interested in for a long time. I became
much more aware of the significance of this issue back in
August of 1971, with the breakdown of the Bretton Woods
agreement. At that time, I was quite convinced and remain
convinced that we have ushered in a special age that probably
did not exist in the same fashion ever before. And we now have
been living for 4 decades with a total fiat world currency, and
it has created a lot of problems for us.
I am convinced also that we are on the verge of a change
from the current status. Just as significant as it was in 1971,
something had to give, and there was a change. And I think this
is what the conflict in the markets and the chaos in the
markets is telling us.
But too often, the people in the Congress are looking
elsewhere to solve the problems. We, as a Congress, have lived
way beyond our means because the people in this country wanted
us to live beyond our means, and the monetary issue of course
is very significant because it actually facilitates the
spending.
So without the type of system of money that we have today,
there would have been a limitation on the massive expansion of
the size of government, spending, taxes, debt, and the crisis
that we are facing right now. But very few are even thinking
about monetary policy as a significant contributor to the
economic problems we have today. More attention has been given
to the Federal Reserve in recent years than it has in the past
but we have a long way to go. But there are more and more
people on both sides of this issue who are recognizing that
monetary reform eventually will come. The big question is, is
will they try to patch this up or transfer this into another
system that is not much better than the one we have?
In many ways, that is what we did in 1971. We had a dollar
reserve gold standard that broke down, and then we ushered in
something actually worse and it probably lasted a lot longer
than a lot of people expected. But today, because of the
crisis, I think many are just wondering what is going to
happen.
I have had a position for a long time about what I think we
should do with the Federal Reserve; I don't believe it
contributes all that much. But I have also taken the position
that if I had the authority to do it, I probably wouldn't take
the key, lock the door, and just allow the system to work its
way out. I think that would be very chaotic, and that is not my
position. So as early on as the Gold Commission in the early
1980s, even up until now, I still believe that the best way to
go from one system to another is to try to allow the market to
help us.
The British made a serious mistake when they tried to go
back on the gold standard in the 1920s at an old ratio of the
dollar to the pound and it obviously failed. Of course, it was
blamed on the gold, not on the policy of transition.
So the market has to help us on this, the market has to
help us if we ever want to relate our currency to gold again. I
have been fascinated with some of the work of Hayek and others
that talks about allowing currencies to compete with one
another, let the markets sort it out. And it is a lot less
threatening. Other countries are talking about that. The
Mexican Government has talked about it. The Swiss Government
has talked about just allowing other currencies to circulate
within their own country. And when you think about it, that is
what happens internationally all the time. Currencies fluctuate
all the time, and that is one of the ways that they were able
to keep the system together, is allow the competing currencies
to fluctuate on a minute-to-minute basis.
So there is no reason in the world that we couldn't adapt
to allowing competing currency within our own country. And then
if people just love Federal Reserve Notes and want to spend
Federal Reserve Notes and save in Federal Reserve Notes, let
them do it. But others who might think that another system is
better, I think we ought to talk about legalizing it.
To me, I would like to summarize and say, why don't we
legalize the Constitution? The Constitution has been rather
clear. It might not have given us the perfect monetary system
and we didn't follow it very well. But at least it did indicate
that the Founders didn't like paper money. They did not like
emitting bills with credit. They did not like fiat money. And
if we were to look just to the Constitution, it would mean that
we should reconsider commodity money, something that
governments can't control, can't monopolize, and let the market
work.
So, those are basically my thoughts on this issue. I am
anxious to hear the remarks from Dr. Parks and Dr. White on
these issues, because I have studied this for many, many years
and there are still a lot of questions to answer.
We do have a bill, H.R. 1098, which is far from a perfect
bill. But it is a place to get started in talking about what we
might do and how we can do it because things could change
rapidly. Although many of us have been thinking about this for
many, many years, things could move rapidly. Currency
destructions, the end of currencies sometimes move much quicker
than anybody dreams that it could. So a major crisis could
come. It could come next month or next year or in a few years.
But to me, there is no guarantee that we have 5 or 10 years to
keep studying this. I think that we need to get people engaged
in this and talking about it and understanding the monetary
issue.
So I am very grateful to our two guests for coming today
and for being willing to submit their remarks and answer some
questions for us.
I will now go to our first witness. Dr. Lawrence Parks is
the executive director and founder of the Foundation for the
Advancement of Monetary Education. Dr. Parks has studied money
for 30 years and was a student of the free market economist
Murray Rothbard. His writings have appeared in The Economist,
Pensions and Investment, and The Washington Times, among
others. He has authored and produced over 200 educational
videos on the U.S. monetary system. Dr. Parks is a member of
the United Association of Labor Education and UAW 1981, AFL-
CIO. He received his Ph.D. in operations research from the
Polytechnic Institute of New York University.
Dr. Parks, please go ahead and give your summary and then
we will go to our next witness.
STATEMENT OF LAWRENCE M. PARKS, PH.D., EXECUTIVE DIRECTOR,
FOUNDATION FOR THE ADVANCEMENT OF MONETARY EDUCATION
Mr. Parks. Thank you very much, Dr. Paul. It is a great
honor to be here, and I appreciate the opportunity to testify
in support of H.R. 1098, the Free Competition in Currency Act
of 2011. I am honored to have been invited.
I know it must sound like hyperbole, but I believe that
H.R. 1098 is perhaps the most important piece of legislation
ever to come before the Congress, because H.R. 1098 is
necessary to make a transition from a certain catastrophic
collapse of our unauthorized by the Constitution, dishonest,
and unstable legal tender, irredeemable paper-ticket-electronic
monetary system.
While I suspect that this committee will be most interested
in how this bill will affect jobs, debt, economic growth in
capital markets, pensions, and a host of other important and
timely topics, I am going to focus my opening statement with an
example of the dishonesty, which is the Achilles' heel of the
present system, by highlighting one of the many
misrepresentations about our money.
There are three take-away points from my testimony. The
first is that the system is not in conformity with the
Constitution. The second, and very importantly, it is
dishonest. And third, it is unstable and in the process of
blowing up perhaps while I am testifying here today.
One can be certain of a complete collapse of this monetary
system because there is no longer any market-based self-
correcting mechanism for increasing debt, increasing the money
supply, and increasing leverage. And any system, any physical
system, any social system, any system without a self-correcting
mechanism blows up. With no exceptions, the history of legal
tender irredeemable paper-ticket money is that its purchasing
power always approaches its cost of production, which is zero.
I want to explain why the system is dishonest. There are a
myriad of misrepresentations and nondisclosure of material
information about what we call a dollar. No amount of
regulation or oversight committees will cure dishonesty. The
only remedy is honesty.
To illustrate what in my view is the most egregious example
of this dishonesty, I give an example of silver, although the
same principle applies with gold. Now it was and remains
inconvenient for people to carry around silver dollars because
they are heavy and bulky. So what people did--let's have the
first exhibit up there--is that they deposited their silver
dollars typically in a bank and received in exchange a
promissory note, a.k.a. a banknote or a note that bore the
inscription that so many dollars had been deposited and the
note was payable to the bearer on demand.
Here is an example of a United States note. And notice that
this is not a dollar. At the top of the bill are the words,
``United States Note.'' I don't know if you can see it from
where you are sitting but under the image it says, ``will pay
to the bearer on demand one dollar.'' Well, what is a dollar?
Next slide [image of a silver dollar]. That is a dollar, as
put into law by Alexander Hamilton in the Coinage Act of 1792.
But then the promise to pay a dollar--let's have the next
slide--was defaulted. Here is the punchline. The broken
promissory note, the dishonored promissory note is now
represented as being a dollar. This is a gross
misrepresentation and is dishonest. This piece of paper is not
even a valid note. The signatures of the Treasurer of the
United States and the Secretary of the Treasury are gratuitous
and deceptive.
In other words, what we use for money are just dishonered
promissory notes that are misrepresented to be dollars. It
means that all of the securities in our capital markets at home
and abroad are denominated in dishonored promissory notes. This
has immense implications for trade, jobs, pensions, military
preparedness, and almost everything else that is important.
People have the notion that the Congress can make the
dollar anything the Congress wants it to be and back it with
specie or not or whatever. This is demonstrably false. The
highest law in our country is the Constitution and all of our
laws have to be in conformity with it. The word ``dollar'' is
mentioned twice in the Constitution but it is not defined in
the Constitution. It is mentioned in connection with the Slave
Tax, which is no more, but it is also mentioned very
importantly in the Seventh Amendment, which guarantees everyone
a right to a trial by jury for any dispute $20 or more.
If it were true that the Congress could redefine the
dollar, that would mean that the Congress could redefine the
Seventh Amendment, which is ridiculous. And so the question
comes up, what is the objective meaning of the dollar? And in
fact, for the Seventh Amendment to have objective meaning, the
dollar has to have an objective meaning. And what they are
talking about in the Constitution itself--next slide--is the
Spanish Milled Dollar, sometimes called the piece of eight. The
Spaniards had built mints all over the colonies and the Spanish
Milled Dollar was ubiquitous. When independence was declared,
the colonies adopted the Articles of Confederation, which gave
the Congress the power to issue money called ``continentals.''
Here is an example of a continental $30 bill.
Next slide. I don't know if you can read it from where you
are sitting, but notice it ``entitles the bearer to receive 30
Spanish Milled Dollars, or the Value thereof in Gold or
Silver.'' The value of a coin is its specie content.
After independence was achieved and the Constitution was
adopted, the United States did not want to rely on Spanish
mints for its coins. The United States wanted its own mints to
mint its own coins, including dollars. To that end, Alexander
Hamilton, then Secretary of the Treasury, wrote the Coinage Act
of 1792, wherein he tells us exactly what a dollar is. And what
a dollar is, is 371.25 grains of silver. Where did Hamilton get
that crazy number? That was the silver content of the Spanish
Milled Dollar. They couldn't just introduce some arbitrary coin
because everybody had contracts in terms of dollars. So the
Constitution requires that the dollar be a weight of silver.
Now some might claim that if Hamilton defined the dollar this
way, perhaps it can be defined another way. And that is not
true either. Hamilton's definition of a dollar was not
arbitrary. All he did was write into law what was already a
fact.
Here is another way of looking at this issue. Go to the
next slide, please. Suppose we have a sign that says ``cat''
and we hang it on a dog. Does the dog become a cat? And suppose
the Congress passes a law that says all the dogs with cat signs
are now cats--go to the next slide--now are all of these dogs
cats? And the answer is no. Conceptually, this is no different
than taking a piece of paper, printing the word ``dollar'' on
it, adding seals and signatures, and calling it a dollar. And
this is precisely what has happened to our money.
Clearly, there is no easy remedy. How could such an immense
fraud be perpetrated? There are several reasons but one of the
most important ones, which H.R. 1098 will go a long way to
correcting, is that we are coerced into using fraudulent money
by the legal tender statutes. By getting rid of legal tender,
H.R. 1098 is necessary and may be sufficient to help pave the
way to an honest monetary system.
I am going to stop now and give you a chance to address any
questions or issues that may come to mind. Thank you so much.
[The prepared statement of Dr. Parks can be found on page
24 of the appendix.]
Chairman Paul. I thank you. I would like to go next to Dr.
White.
Dr. Lawrence White is professor of economics at George
Mason University, where he specializes in the theory and
history of banking and money. Dr. White has written extensively
on monetary systems with over 40 articles published in academic
journals, including the American Economic Review and the
Journal of Monetary Economics. He has also authored three books
on monetary matters, including ``Competition and Currency:
Essays on Free Banking and Money.'' He received his Ph.D. in
economics from UCLA and his undergraduate degree in economics
from Harvard.
Dr. White, you may proceed.
STATEMENT OF LAWRENCE H. WHITE, PH.D., PROFESSOR OF ECONOMICS,
DEPARTMENT OF ECONOMICS, GEORGE MASON UNIVERSITY
Mr. White. Thank you, Mr. Chairman. Thanks for the
opportunity to discuss my views on H.R. 1098, the Free
Competition and Currency Act of 2011. I am going to have to be
very sweeping given the limited time, but I will be happy to
answer any questions you might have about historical or other
details.
The idea of competition in currency, or you might call it
competition among currencies, is fairly straightforward. We
know as a rule that open competition gives us better products,
higher quality at lower cost. For example, we have faster and
more reliable package delivery thanks to the competition of
FedEx and United Parcel Service with the U.S. Postal Service.
The main point I want to emphasize today is that competition in
currency isn't any exception to this general rule. More
competition promotes better currency.
Let me give you some examples. Throughout history, currency
has been better provided by freely competing private
enterprises than by government monopoly or by legally protected
private monopoly. The United States had competing gold and
silver mints at one time during our gold and silver rushes and
they produced very trustworthy coins. These private mints ended
only when they were suppressed by Civil War legislation, part
of which H.R. 1098 aims to repeal. Redeemable private tokens
and redeemable bank-issued paper currency notes have also been
popular forms of money in the 60-plus parts of the world where
they have been allowed.
H.R. 1098 would lift legal barriers to currency
competition. It wouldn't immediately remove the U.S. Treasury
or the Federal Reserve System from issuing currency. But--and
then this is the second point I want to emphasize--competition
would give the Fed better incentives to provide the kind of
money that people want. Sound money, stable, valued money,
trustworthy money. It would give the Fed better incentives to
avoid creating inflation, in other words, because its customers
could begin to go elsewhere. The U.S. dollar already faces
competition, and I would say useful competition, in the
international arena. People have a choice in international
trade. Between the dollar and the euro, the Swiss franc and
they can invest in gold and silver. So there are many monetary
standards in the world.
H.R. 1098 would open a door to similar kinds of competition
within the domestic arena between Federal Reserve Notes and
other currencies. It won't make the Federal Reserve Note go
away, as Dr. Paul said, if people want to use Federal Reserve
Notes. New forms of currency won't gain a foothold in the
market any faster than the public has reason to prefer them to
Federal Reserve Notes. So the Fed can retain its business as
long as it provides a high-quality product. But if the Fed
slips up in quality control, meaning if double digit inflation
should unfortunately return to the United States, then the
American public would find it very useful to have trustworthy
alternatives to Federal Reserve Notes that are depreciating in
their pockets.
So this Act offers three concrete reforms. And let me talk
about them briefly. Section 2 of the Act removes legal tender
status from Treasury coins and Federal Reserve Notes. Legal
tender has a more narrow scope than is often realized. It
relates to the discharge of debts. So the phrase on Federal
Reserve Notes, ``legal tender for all debts'' means that under
current law a creditor is barred from refusing payment in
Federal Reserve Notes. But it is perfectly feasible to have
debt contracts without legal tender, and, in fact, there is
already an important class of contracts that are today exempt
from legal tender provisions.
Under Title 31, Section 5118(d)(2), the obligations created
by gold clause bonds are not discharged by delivery of legal
tender today. That section says that the bond issuer has a
contractual obligation to pay in gold. That is what the
contract says, and that will be enforced. So removing legal
tender status from U.S. Treasury coins and Federal Reserve
Notes more generally would simply broaden the freedom to
denominate debt contracts in whatever people want, not just
dollars, not just gold. But they might want silver. They might
want to say the debt is only discharged by checks or wire
transfers of dollars, or it could be silver coins or it could
be units of foreign currency, claims denominated in consumer
index bundles or wholesale commodity bundles or it could be
Bitcoins.
Section 3 of the Act rules out Federal or State taxes on
precious metal coins, whether minted by a foreign government or
by a private firm. That would allow a more level playing field
for competition of private coins with the U.S. Treasury coins
without the special tax disadvantages which now handicap
private coins. Sales taxes on acquisition, capital gains taxes
on holding them, right. Federal Reserve Notes are not subject
to those taxes.
Section 4 of the Act repeals Title 18, Section 486. That
section bans privately produced coins of gold, silver or other
metals and it repeals Section 489 which bans disks that are
merely similar to official coins. Section 486 is the relic of
the Civil War that I mentioned. It was part of an effort to
boost the acceptance of the wartime paper greenbacks by banning
competition from the private gold coins that were being
produced. Repealing that would again allow producers to make
and consumers the option to use privately minted silver and
gold coins if they like.
I think the question we should ask, in the words of Seth
Lipsky in a recent Wall Street Journal article, is whether it
makes any sense to ``suppress private money that is sound in
order to protect government-issued money that is unsound.''
I have mentioned that Section 489 would also be repealed.
That I think is a section that is redundant at best and far too
sweeping at worst. It outlaws making or possessing ``any token,
disk or device in the likeness or similitude as to design,
color, or the inscription thereon of any of the coins of the
United States.'' It is redundant at best because there is
already another section that outlaws counterfeiting and we are
not talking about repealing the laws against counterfeiting.
But this section is simply about similitude. And if you took it
literally, it would outlaw all silver medallions because after
all they are the same color as silver dollars and quarters and
dimes. So it is too sweeping because it can be used to suppress
private coinage, what we might say victimless private coinage
that doesn't involve counterfeiting and doesn't involve any
other fraudulent intent.
So to conclude, competition in currency is a very practical
idea. It is an idea that offers sizable benefits to the public
when the quality of the dominant currency becomes doubtful. Now
we all hope that Federal Reserve Notes retain their value. But
for those who are skeptical, they should have another
alternative. U.S. citizens would benefit from H.R. 1098's
removal of current legal restrictions and obstacles against
currencies that could provide useful competition with Federal
Reserve Notes and Treasury coins.
Thank you.
[The prepared statement of Dr. White can be found on page
87 of the appendix.]
Chairman Paul. Thank you. I will start off with the
questions. The first question will be for both of you.
What do you think the arguments will be by the
establishment? How will they come back and describe what we are
trying to do? And why is it--I think it is well known that
governments have always wanted to cling to a monopoly power
over the currency, and it must be related to that. But could
you give me an idea of what you think they will be saying or
trying to describe what is going to happen? And if they claim
that this would be terribly chaotic, what are some of the
answers that we might give to those questions that they raise?
Mr. White. I suspect that the argument might be made that
you are encouraging people to abandon the U.S. dollar and,
thereby, you are undermining the U.S. economy. Right? But the
answer is that the fate of the dollar or the purchasing power
of the dollar is in the Federal Reserve's hands. And all we are
doing is giving people the option to make the transition to a
more stable system if the Federal Reserve Note should begin to
deteriorate in value, in reliability.
If we look at the experience around the world with paper
money, we know that high inflation is not impossible, and we
have had double digit inflation in the United States. And where
people are free, they start--in a country with very high
inflation--in Latin America we see this many times--they prefer
to start moving their savings into a more stable currency. And
then they start posting prices in the more stable currency so
that they don't have to repost them every day. And then they
start accepting payment in the more stable currency. Having
that freedom makes the public a lot better off. So giving
people an additional option doesn't undermine the stability of
the current monetary system. That is under the control of the
people who issue the current money.
Chairman Paul. Dr. Parks?
Mr. Parks. What I suspect they are going to do is to ignore
this altogether, not raise any objections at all, just leave it
alone. However, should any objections come forth, I think the
best response is that the irredeemable paper-ticket money is
going away, and, in fact, the history of the world is that
these paper moneys always go away. Why should this one be any
different?
Second, the irredeemable paper-ticket dollar has lost
something like 98 percent of its purchasing power since the
Federal Reserve was formed. Why does anybody think that the
last 2 percent is sacrosanct?
Third, there is a whole bunch of--how shall I say--trial
balloons being put forth by the media talking about currency
depreciation and why it is acceptable. So there was a time
roughly about a year ago when Jeffrey Garten--Jeffrey Garten
had a minor role in the Nixon Administration, was an Under
Secretary of, I think Commerce, in the Clinton Administration,
went on to be Dean of the Management School at Yale University,
wrote five books, sometimes a publisher of articles in Business
Week, member of the Council on Foreign Relations--published an
article in the Financial Times, something to the effect of, we
have to get ready for a weaker dollar. And he says in the
Financial Times, the United States is going to have to
camouflage a slow motion default. ``Camouflage.'' In other
words, not really explain to the people what they are doing.
But there is no question at all that the obligations of this
government, of all the local and State governments and all the
other debts, these obligations are not going to be met.
People's pensions are going to be lost.
Then this was followed up just recently by a professor from
Harvard, Professor Rogoff, who published a piece saying that
once every 75 years or so we have to have extra inflation,
maybe 6, 7 percent, in order to get rid of this debt. And this
was legitimatized further by Floyd Norris, senior writer from
The New York Times, a very senior guy. He wrote an article,
``Sometimes inflation is not evil.''
So what they are really doing is setting us up for the
depreciation of the dollar. And we know from history that once
this gets started, once this gets out of the can, there is no
way to put it back in the can.
Other things about this competition and money. It is true
that you can make contracts in gold. However, in regular life,
if you should have a contractual dispute with somebody and it
gets settled in the courts, that judgment is going to come down
in the irredeemable paper-ticket money. And it is also
noteworthy that the people in the financial sector have gotten
the International Monetary Fund--in 1978--to add a provision to
the IMF Articles of Agreement--it is like their bylaws--to
prohibit member countries from linking currencies to gold and
only to gold. These folks have really knocked themselves out to
get gold out of the monetary structure and I think part of the
response should be that the reason they did that is so that
they could garner unearned profits.
I have good evidence to show that. I think I am past my
time. I don't know if you want to see some of that evidence.
I am asking you a question. Should I put it up?
Chairman Paul. Yes.
Mr. Parks. Thank you. Put up slide number 67, please. I am
sorry, 56. Do you have that? 63. It is important. So if you go
back to 1980, the money supply in this country, defined by the
Federal Reserve at that time, was M3, was something on the
order of $2 trillion. And the market capitalization of the
stock market was roughly $1 trillion. The financial sector
portion of that was roughly 5 percent, roughly $50 billion. You
shift ahead to 2007. Now all created flat out of nothing, with
no work, now the money supply is something on the order of $13
trillion. The stock market capitalization is approaching $20
trillion and now the value of the financial sector firms is
something like $4 trillion. It went from $50 billion to $4
trillion. Forget about the bonuses. Think stock options. These
folks have garnered just an incredible amount of money. They
don't even know what to do with it. That would not have been
possible if we had an honest monetary structure. And the way
they got away from an honest monetary structure is they got
gold out of the system. And the legal tender laws helped do
that. So really you have to get rid of legal tender.
Chairman Paul. Thank you. I want to move on. I want to
yield time to the vice chairman of the committee, the gentleman
from North Carolina, Walter Jones.
Mr. Jones. Mr. Chairman, thank you very much. Dr. Parks and
Dr. White, thank you very much for your testimony today. I am
going to take a little different approach. I am not an expert
in financial matters of this magnitude, but I have learned a
lot from my good friend Ron Paul, and being part of the Liberty
Caucus has at least exposed me to some individuals like
yourself who could help me become more interested in the issue
of monetary policy.
I am one who is very much concerned, as most Americans are,
that we are headed down the road of no return. And when I
listened to both of your testimonies--and I listened very
carefully--it brings me to a question that the average working
American, which I am a part of that group, by the way, when do
we know that we get to a monetary point of no return? When that
collapse comes, is that something in your opinion that you see
happening sooner rather than later? And what should the average
person--what will make the average person realize that we are
in a collapse as it relates to strength of the dollar?
Mr. White. I think we are getting mixed messages right now.
If we look at the exchange value of the U.S. dollar, it has
declined precipitously the last couple of years. If we look at
the price of gold, of course, that is shooting through the
roof. And those are telling us that people don't want to hold
their wealth in dollars. They want to move it into something
they think is safer. On the other hand, if you look at the
inflation indexed bonds or if you look at long-term bonds,
those are not signaling the expectation of high inflation. But
I am not sure how much we can trust those signals anymore
because the Federal Reserve now has a policy of buying 30-year
bonds to drive their prices up and drive their yields down. So
that signal may be jammed a little bit.
But when we see all those signals indicating that high
inflation is coming, then we know we have a big problem on our
hands. And of course we don't just have a monetary problem. We
also have a fiscal problem. We have a problem of an
unsustainable debt going forward. And the two issues are of
course related. As Dr. Parks mentioned, there has been talk
about how we need inflation in order to relieve our national
debt in real terms. But that is nothing more than a default,
sort of behind a very thin veil in the form of the value of the
dollars being paid back is reduced by half instead of the debt
is explicitly cut in half. But it is the same thing. So when
that becomes sort of respectable talk, then we have to be very
worried.
I am not sure if I can identify exactly a tipping point.
But when we see inflation get into double digits, then we will
know we are in big trouble.
Mr. Parks. I would say that collapse can come at any
moment. And the amount of leverage in the system is beyond
belief. Put up slide number 71, please. This is a slide showing
the amount of derivative bets the banks have made all over the
planet. It is something north of $600 trillion. This data comes
from the Bank for International Settlements, which is sort of
like an umbrella organization for all the central banks--it has
sovereignty by the way. But one of the things it does, they
calculate all these derivative bets.
Slide 71. There you go.
So after the last tie to gold was broken, which was in
1971, as you can see from this chart, basically the only
derivative bets you had were things like commodities, corn,
soybeans or whatever. But after the last tie to gold was broken
you start to have volatility in interest rates, big volatility,
and big volatility in foreign exchange rates, and people who
are in business and people who trade between countries need to
hedge that. Banks have made an incredible number of bets on
this. According to the Bank for International Settlements, the
amount at risk that can be lost is something like $30 to $40
trillion and this is worldwide. In this country, according to
the Office of the Comptroller of the Currency, the amount of
derivative bets is something on the order of $200 trillion, and
of that, one bank, JPMorgan Chase has something like $80
trillion worth of derivative bets.
These bets, by the way, you have counterparty risk and that
is what happened with AIG. That is why they really had to bail
out AIG. AIG owed money to a bunch of banks. If you let AIG go
down, then those banks' balance sheets become impaired.
But also on this business of inflation, they have changed
the methodology of how they compute the CPI multiple times
since the Clinton years.
Put up slide 27, please. There is a guy who is a scholar
for us. His name is John Williams. He is in retirement now. He
used to be an establishment economist with clients like Boeing
and IBM. And what he does is he calculates the CPI using the
consistent methodology from the 1980s--that is that top blue
line--versus what the Bureau of Labor Statistics tells us
today. And as you can see, on a consistent methodology basis,
inflation is already and has been running 10, 11 percent for
like 25 years. The understatement of the CPI, there are
innovations such as the hedonic pricing, geometric weighting,
substitution. Who knows what these people are talking about?
They really lull people into thinking it is not as bad as it
is.
I have prepared an analysis. Go to chart number 29, please.
These are my health care premiums for Oxford while I had
Oxford, and I compare the year-on-year increases with the
medical component of the CPI. Next slide, please. With the
medical component of the CPI and my insurance premiums--this is
everybody in the whole country--they are going up 15 percent a
year. But the medical component of the CPI is going up 4
percent a year. So they mislead people on that. And of course
people who are seniors, who get Social Security and those
benefits are keyed to the CPI. Disabled veterans, people who
have cost-of-living escalations and union contracts and of
course holders of Treasury inflation protection bonds, these
people are all being cheated. But the tipping point comes, you
don't know how it is because of the leverage. It is the
leverage that always brings you down. And the leverage is
beyond belief. As I said, it could happen while I am talking.
You don't know when it is going to be.
Mr. Jones. Thank you, Mr. Chairman.
Chairman Paul. I have a couple of follow-up questions that
I would like to ask. I will start with Dr. White.
We have had this system of money since 1971 where there is
no connection to gold and the dollar has been used as a reserve
currency, to a slightly less degree than it was even a year
ago, but it is still the major reserve currency and most of the
countries hold dollars. And they pyramid down and inflate their
own currencies from this. Have there been many times in history
that it has been this significant, this big, this worldwide
with the fiat currencies? I know we have had fiat currencies
for as long as we can date. People have debased their currency
in different manners. But has it ever been this big? Is this a
special phenomenon? Or is this something that you can go back
in history and say, it was sort of like this 200 years ago or
300 years ago and we worked our way out of it? How do you put
this in perspective in history?
Mr. White. As far as the international monetary system
goes, the international monetary system was never a fiat
system. It was the international silver standard and the
international gold standard. And of course there is no
potential for runaway inflation when you have a metallic
currency. It is only mined to--1, 2 percent of the stock is
produced each year. The stock of gold just doesn't grow that
fast. And in fact, that makes it possible to have an
international monetary system. It is not controlled by any one
country. And so countries can join, knowing that it is safe
from political devaluation from the interest of any one country
undermining the system.
Countries that have adopted the dollar or who fix their own
exchange rate to the dollar do so when they think the dollar is
the most popular currency in world markets. But as you have
mentioned, as the dollar becomes a little shakier, they start
to shy away. China, most importantly, has moved from basing
their currency entirely on the dollar to now a basket of
currencies. So we are starting to see other countries starting
to back away from the dollar.
In that sense, I think the move to create the European
monetary system provides some real competition to the dollar as
an international reserve currency. And we can only hope that
that will give the Fed a signal that there is somebody they
don't want to inflate faster than. Of course, it seems to be a
race to the bottom right now.
Chairman Paul. If we were successful and had something like
we are proposing and we had a competing currency, what would
happen with the concept of fractional-reserve banking? Would
more laws have to be written? Or would they follow the same
pattern that we have today? How do you think that would work?
Mr. White. That is a very good question. If private gold
and silver coins begin to be popular, people are going to want
to have bank services denominated in gold units or silver
units, whatever it is that they find attractive. I am not sure
we really have a sort of legal barrier against the Fed
controlling that parallel banking system the way they control
the current banking system. So it might be necessary to
construct some barriers and say, here are the rules for this
parallel banking system. It doesn't have deposit insurance. It
doesn't have control by the Federal Reserve System as to
reserve ratios or investment portfolios. So we would need to
think about that if we got to the point where there was a big
demand for those services.
Chairman Paul. I will follow up on that and ask both of you
what your opinion is. Of fractional-reserve banking, you know
in free market circles, there is a disagreement to a large
degree on--I know Rothbard was very adamant, his position of no
fractional-reserve banking. What is your opinion about what
would be proper? And Larry, you can answer as well, as to
whether we should have rules on what the banks declare.
Mr. White. I think the basic should be freedom of contract.
And as long as people make informed fractional-reserve
contracts with a banker, I have no problem with that.
Historically, that seems to have been what was more popular. If
you have a fractional reserve then you don't need to pay
storage fees to the vault keeper who is keeping your gold and
you may even get interest on your account balance. So it is an
attractive deal. It doesn't have to be based on hoodwinking the
customers. Customers brought their money to fractional-reserve
banks because they got a better deal.
The other thing worth noting is that you can't really have
circulating paper currency, which is more convenient than
carrying around coins for many purposes, unless you have
fractional reserve banking. Because if it is a warehouse
receipt, the warehouse needs to know who to charge the storage
fees to. But if it is an anonymous circulating note, like we
are accustomed to, how do they know who to charge the storage
fees to? So I don't know of any historical examples of
circulating warehouse receipts. But there are plenty of
examples of pay to the bearer on demand in gold or silver
circulating banknotes.
Chairman Paul. Do you have an opinion on fractional-reserve
banking?
Mr. Parks. First question, put up slide number 73. This has
to do with the size, the amount of fiat money out there. This
is an analysis that is put together by McKinsey Global. And in
1980, the amount of financial securities was roughly--I don't
know, it looks around $18 trillion. By the end of 2009, it was
close to $200 trillion. Last year, it hit something like $212
trillion. I don't know if you can see on that chart, but at the
very top it is in red, and that is gold. So all the rest is--it
is irredeemable paper-ticket money, U.S. and foreign money, or
securities denominated in irredeemable paper-ticket money.
The nice thing about this bill is that it leaves everything
in place. It leaves the dollar in place, leaves the Federal
Reserve in place, and it really facilitates a transition. And
for everyday purposes, it really doesn't make any difference to
people whether we use an irredeemable paper-ticket, token, or
whatever. They go to work, they get paid, they buy stuff, who
cares? Where it becomes important is for future payment for
people's pensions, for people's annuities, for people's
savings. There they want to know in the future that they are
going to have what they have. So in that way, this bill is very
important.
For future transactions, people will want gold and we have
precedent in this country where this kind of thing was
instituted. And that was after the Civil War. You recall the
Civil War was financed with greenbacks at one point. The
greenbacks were discounted roughly 50 percent against gold. And
the way people looked to protect themselves afterwards is they
put a gold clause in their contracts. And when they got paid
later on they got the same amount of gold they were expecting.
When the United States issued Liberty Bonds during the first
World War, they had a gold clause in the bonds.
As for fractional-reserve lending, I agree with Dr. White.
But I want to add something to that. And that is, it is
fractional-reserve lending that got us into trouble from the
get-go. And the reason is, the banks have engaged in fraud in
their basic banking relationships right from the beginning. And
so, for example, banks told people that they were depositors.
They are not depositors. They are unsecured creditors. And
second, banks told people they could get their money back on
demand. In fact and in law, when these people put money into a
bank it is not their money anymore. It is the bank's money to
do with as the bank wishes. If banks want to do fractional-
reserve lending, they need to do what I call full disclosure.
They have to tell people right out, we are going to lend this
money to somebody else or whatever, that you may not be able to
get it back. Some people may want to take that gamble. But my
guess is they won't. Ordinary people put money in the bank for
security, for safety. They don't want to have it in the
mattress. It might be stolen or lost or whatever. They are not
interested in making interest on their savings. They just want
it to be safe. Those people are not going to be involved in
fractional-reserve lending.
As to Murray Rothbard's point of view, Murray was talking
always about a gold backed dollar. That is a mistake. Again,
you have to go back to what a dollar is. A dollar is the weight
of silver. There is no such thing as a gold-backed piece of
silver. The trouble with what Murray did is, he didn't go back
further than the Coinage Act of 1792 where Hamilton defined the
dollar as 371.25 grains of silver. The notion was that if
Hamilton could define the dollar one way, we could define it
another way. That is not true.
But again, the beauty of this H.R. 1098 bill is that we
don't really have to address those issues. I think what will
happen is that for long-term transactions, people will start
using the gold clause. And over time, there will be a
transition. During that period, all the irredeemable paper-
ticket money will go away. The Federal Reserve will go away.
Again, there is no possibility, in my view, as a practical
matter, of having some kind of discontinuity in our monetary
system, getting rid of the Fed. But this in fact is really
important and we need to bring people up to curve as to why it
is.
Chairman Paul. Congressman Jones?
Mr. Jones. Mr. Chairman, thank you. I want to go a little
bit off of your expertise, but I think you will have some very
helpful comments. I have said two of the worst votes I ever
made since I have been in Congress were the vote to go into
Iraq and the repeal of Glass-Steagall. I realize this doesn't
deal exactly with monetary issues, but we do have banks. You
have made reference to banks many times in your comments about
monetary policy.
Do you feel that when Glass-Steagall was repealed by the
Congress, it helped the banking world or it created
opportunities for greed and for mistakes?
Mr. Parks. Greed is part of the human condition. Glass-
Steagall did not do anything to change that. There is a fellow,
his last name was Warburg, he was the son of Paul Warburg, what
was his name? One of Franklin Roosevelt's advisors. He wrote a
book in the 1930s called, ``The Money Muddle,'' which really
led to this business with Glass-Steagall, and what they were
complaining about in those days was using bank money to
speculate in the securities market. Bank money, it was
understood, was money that the bank created out of nothing as
opposed to regular money, gold and silver, and so the purpose
of Glass-Steagall was really to keep the banks from
overleveraging, and when Glass-Steagall was passed, now the
banks could overleverage in a big way.
I have charts that I can put up for you that show what
happens to the banks. Let me just get those out. Start with
chart number 67, please. We will go right through them.
If you go before the last tie to gold was broken, and look
at bank revenues, they are tiny. What are banks doing? They are
processing payments, they are handling the check clearing
system. But after the last tie to gold was broken, look what
happened to bank revenues, it went up to something like $800
plus billion. This is just for passing paper around.
Go to the next slide. Look at bank net income after the
last tie to gold was broken. It went up to something like, I
don't know, $130 billion at its peak. This is after paying
compensation to employees.
Go to slide 70, please. Look what happened to bank employee
compensation. So the whole notion of all this business of
allowing the banks to leverage up, this was enormously
beneficial to employees, to the banks themselves. Over the
period after the last tie to gold was broken, banks paid out
over a trillion dollars in dividends, a trillion dollars in
dividends, and just a couple of years ago, it turns out that
while bank balance sheets said they had to get, I don't know,
$2 trillion from the Federal Reserve, all this money that they
paid out in bonuses and what-not, it was not real profits, and
the only reason they were able to do that is because they were
able to leverage up, and the only reason they were able to
leverage up is because we have irredeemable paper ticket
electronic money as legal tender. If you had gold and silver
money, you would be back on that curve before the last tie to
gold was broken, and it is the banks that really have corrupted
the system, but again it is probably counterproductive to point
fingers. Really what we want to do is have a transition, and
again the whole system is going to collapse no matter what. It
is urgent that we pass this bill in order to facilitate a
transition to an honest monetary structure.
Mr. Jones. I understand. Dr. White, could you comment on
Glass-Steagall as well?
Mr. White. I would say the repeal of Glass-Steagall had
very little to do with the financial crisis. There would be
absolutely no objection to repealing Glass-Steagall; that is,
letting commercial banks align or merge with investment banks
and insurance companies, if it weren't for deposit insurance
and if it weren't for the too-big-to-fail doctrine.
If those had not been in place, then if somebody wants to
form a financial supermarket, okay, we will see if that will
fly. It is no skin off our nose. But when we begin to guarantee
the liabilities of investment banks which are highly leveraged,
which are not like commercial banks, which are not even part of
the payment system, that is really an invitation to trouble,
and when the Federal Reserve Bank of New York intervened in the
Bear Stearns failure and took up the bad assets so that
JPMorgan Chase would buy the rest, it is not the first sort of
too-big-to-fail action, but it is the one that sort of sticks
in my craw. That was really bad policy.
Mr. Jones. Right.
Mr. White. And I don't think it had that much to do with
the repeal of Glass-Steagall. But if we treat investment banks
like they are entitled to too-big-to-fail protection, then we
are really asking for trouble, and that is really what needs to
be undone.
Mr. Jones. Thank you, sir.
Mr. Parks. Can I add to that, please? If you have gold and
silver as money, gold as money, this too-big-to-fail stuff
doesn't even come up. The only reason you have this is because
of the irredeemable paper ticket money. You could never have
this kind of leverage with gold, and in fact the money-center
banks, they have leveraged their balance sheets something like
30 to 1, impossible if you had an honest monetary system. So
really one feeds into the other, and this whole business with
too-big-to-fail, the lender of last resort, Federal Deposit
Insurance--Federal Deposit Insurance is not insurance; it is
just a subsidy to the banks, and the reason it came about is
that after the banks failed in 1933--they were failing before
1933--people were not putting their money back into the banks,
and so they passed that legislation to induce people to put
their money back into the banks.
As far as the lender of last resort comes about, again,
that is the result of bank leverage, and the only reason you
have so much leverage with the banks is because they
misrepresented depositors. So if I were to borrow money from
you, say I want you to lend me $10,000, what is the first thing
that goes through your mind? I would think, what is the
collateral? How am I going to get the money back? What are you
going to do with the money? But if you loaned it to a bank and
they say, well, this is a deposit, now you don't do the
counterparty surveillance, so it is really a function of what
constitutes the money, and I think you have to go back and
realize that what we call our money today, our dollar, this is
just a dishonered promissory note. And in fact one of the
quotes I have for you, and I will stop right here, is after
Franklin Roosevelt closed the banks on March 5th, 1933, a lot
of people were caught short, and there was a question of
whether they should print script, and here is a quote from
William Woodin, Roosevelt's Secretary of the Treasury, he says
the Federal Reserve Act lets us print all we need, and it won't
frighten the people. Get this line now. It will look like--it
won't look like stage money, it will be money that looks like
real money. This is the Secretary of the Treasury telling you
that this stuff is really, in effect, stage money, but it looks
like real money. This is not real money that we have, folks.
This is just a piece of paper gussied up with seals and what-
not. It is dishonest, and we need to fix the dishonesty.
Mr. Jones. Thank you, sir.
Chairman Paul. Thank you. I have one more question for Dr.
White. If we moved in to a period of time where we had
competing currency, we have one group of people thinking a
dollar equals a Federal Reserve note and let's say we or
somebody decides that a dollar equals 371 grains of silver, and
we use an old silver dollar, that could be competing, but the
definitions are obviously completely different. How do you
think it would be resolved when it comes to paying your taxes?
Because they won't allow--I think this is part of the reason
that we allowed the resistance because some people have tried
this, paying salaries with old silver dollars, and, oh, that is
a dollar, I don't have to pay any taxes on this. But it is a
real problem because if they think that anybody--we want to get
rid of some of the inhibitions to a competing currency, but if
the people who use silver dollars had no taxes to pay, it would
be a tremendous advantage. I think we could win that argument.
But what do you think the IRS and the tax people are going to
say about this? And do you have an idea how that could be
resolved?
Mr. White. I am sure the IRS would like the taxes to be
paid in the equivalent of what they would be if all the
transactions had been done in Federal Reserve notes. It would
be an interesting exercise to look at around the world and see
if there are other countries that have faced this problem of
having taxes denominated in multiple currencies. I really don't
know that much about it myself, but it seems like not a very
important problem. On tax day, you need to have some exchange
rate between the different currencies people might be allowed
to pay in or you would require them to convert their own books
into whatever the official currency for tax purposes is, but
364 days of the year that shouldn't bother them. It is pretty
easy with software these days to convert one column of figures
into another column of figures.
Chairman Paul. It seems like in the computer age we could
probably work that out rather well. If I made one dollar of
profit and silver was $40, maybe it could be worked out, but of
course the more ideal thing would be not to have the income
tax, and we wouldn't have to worry about problems like that.
Okay, Walter is gone.
I think that we will conclude. The Chair notes that some
members may have additional questions for this panel that they
may wish to submit in writing. Without objection, the hearing
record will remain open for 30 days for members to submit
written questions to these witnesses and to place their
responses in the record.
This hearing is now adjourned.
[Whereupon, at 3:35 p.m., the hearing was adjourned.]
A P P E N D I X
September 13, 2011