[Congressional Record Volume 144, Number 118 (Wednesday, September 9, 1998)]
[House]
[Pages H7470-H7472]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                      A WORLDWIDE FINANCIAL CRISIS

  The SPEAKER pro tempore (Mr. Everett). Under the Speaker's announced 
policy of January 7, 1997, the gentleman from Texas (Mr. Paul) is 
recognized for 60 minutes as the designee of the majority leader.
  Mr. PAUL. Mr. Speaker, we are now experiencing a worldwide financial 
crisis. It may yet prove to be the worst in all of history.
  There have been a lot of wringing of hands as to the cause, but the 
source of the problem is not a mystery. It is a currency induced 
crisis.
  Although tax, spending, regulatory policies and special interest 
cronyism compounds the problems, all nations of the world operate with 
a fiat monetary system. We have been operating with one for 27 years. 
It has allowed the financial bubble to develop.
  Easy credit and artificially low interest rates starts a chain 
reaction that, by its very nature, guarantees a future

[[Page H7471]]

correction. Depending on the particulars of fiscal and monetary policy 
and political perceptions, the boom part of the cycle lasts for 
unpredictable lengths of time.
  The later bad consequences of inflating a currency are certain, no 
matter how beneficial the earlier ones seem. The dollar has played a 
major roll in the worldwide financial bubble since the dollar is the 
reserve currency of the world. It is readily accepted and used to 
further inflate most other world currencies.
  Noted free market economists Ludwig Von Mises astutely observed in 
1940:

       No political party and no government has ever tried to make 
     a conscious deflationary effort. The unpopularity of 
     deflation is evidenced by the fact that inflationists 
     constantly talk of the evils of deflation in order to give 
     their demands for inflation and credit expansion the 
     appearance of justification.

  Since we hear no talk of sound money and we can be assured no 
government will deliberately deflate, we should remain vigilant against 
the politically popular policy of inflation, the deliberate debasement 
of the currency.
  Beneficiaries of easy credit demand the policy of currency inflation 
continue. Creating money and credit out of thin air gives the illusion 
of the perfect counterfeiter, appearing legal and helpful to many. The 
power to inflate a currency guarantees a lender of last resort for 
risky borrowing, domestic and international. It accommodates deficit 
spending, permitting spending on extravagant welfare programs and 
unwarranted international militarism, something for everyone.
  The welfare poor like it. The welfare rich like it. The foreign 
welfare recipients like it. It seems everyone likes it until the 
artificial nature of the financial bubble becomes apparent as it is 
now.
  Fiat money and its low interest rates cause mal-investment, over 
capacity, rising prices in one industry or another, excessive debt and 
over speculation worldwide. We have had all of this. The current system 
has generated a nearly $30 trillion derivatives market. This is a 
modern day phenomenon, having allowed a greater speculative binge than 
anything known in financial history. But the current prices signals an 
end of an era and it does not bode well for anyone.
  The near anarchy in Russia, the food riots in Indonesia, and the 
growing recession in Japan are signs of conditions spreading across the 
globe. Unfortunately, there is no sign that correct policy will soon be 
instituted, anyplace.
  Capitalism erroneously is being blamed. No mention is made that no 
country today is truly capitalist in following a sound monetary policy.

  A lot of lip service is given to free trade but, with only casual 
observation, one realizes that which is being promoted as free trade is 
internationalism and managed trade through organizations and programs 
such as NAFTA, the World Trade Organization, the IMF, the World Bank, 
foreign aid, subsidized exports, and a U.N. directed foreign policy. 
Economic sanctions by those professing free trade are commonplace and 
growing.
  Today's protectionists rely on these programs in an effort to outwit 
their competitors along with demanding currency devaluations in a 
futile effort to enhance exports.
  Markets inevitably devalue currencies that have been inflated by the 
monetary authorities. The degree depends on the amount of previous 
monetary inflation and political perceptions but, on the short run, 
countries frequently accelerate the devaluation in a competitive 
fashion in an effort to gain a competitive edge against their trading 
partners. This is why China, despite the denials, will likely accept 
the policy of official devaluation.
  But our concerns here in the Congress should be for the dollar. We 
should not be so arrogant as to dictate policies to others since we 
have no authority to do so, whether it be Japan, Indonesia, Mexico, or 
Russia. We should resist this no matter how tempting it might seem. And 
we certainly should not use dollars to prop up other currencies or 
economies whether it be Mexico or anyone else.
  Bailouts compound the problems and encourages others to mismanage 
their economies while expecting a bailout for themselves from Uncle 
Sam. But most importantly, it undermines the value of the dollar.
  Since returning to Congress in January of 1997, I have repeatedly 
warned that our monetary policy is seriously flawed and will eventually 
lead to a dollar crisis. This, in spite of the fact that the dollar has 
been riding high in American bonds, and up until recently our stock 
markets have been a haven for the ravaged world financial markets.
  Foreign Central Banks for years have been willing holders of our 
dollars, helping to finance our profligate ways, diminishing price 
inflation here at home, by buying up more dollars than our own central 
bank. But conditions are changing. In spite of many reasons for capital 
to flow into dollars assets in the last few years, foreign central 
banks have dumped $85 billion of their U.S. bond holdings. Considering 
our large negative trade balance, it is not a surprise to see this 
happening. And as this dumping of U.S. dollars accelerates, more 
pressure will be put on the dollar.
  What can we expect from our illustrious central planners, the Federal 
Reserve? Just as difficult as it is for an addict to gradually cut back 
on drugs, economic planners refuse to accept the cutting back of credit 
creation the markets have become addicted to. Long life may be 
dependent on sound medical advice and drug abstinence, but feeling good 
on the short run drives the addict.
  Likewise, an economy feels good by perpetuating for as long as 
possible the easy credit that brought us the good times in the first 
place while the long life of the currency, the economy, and the 
political system causes little concern. Because there is little 
interest for the long term in Russia and East Asia, chaos and political 
strife has prevailed. This we cannot afford in the United States.
  Today, essentially all politicians, economists, and investors are 
strongly urging the Fed to do what they do best, inflate the currency, 
arguing that a liquidity crisis must be avoided at all costs. All that 
is required, they say, are low interest rates. But this can only be 
achieved by creating new money even faster, and M3 is already growing 
at a 9 percent annualized rate. This is inflation and the source of the 
problem. It appears the Fed is ready to accommodate.
  Central planning, Soviet style, is a known failure. But we have not 
yet given up on our type of central planning through a powerful and 
secretive central bank that dictates interest rates and amounts of 
credit available to the system. Fine tuning and economic management has 
been left to the Fed. It is at its pinnacle of power under, ironically, 
a once gold standard, free market proponent, Alan Greenspan who leads 
it.
  Let there be no doubt about it. The good times came with the generous 
credit creation and low interest rates. And Greenspan will yield to the 
politicians' pressure to continue the process. Turning off the money 
spigot and allowing the markets to work will never be seriously 
considered.
  But eventually, the markets will rule. Credit creation may lower 
rates for a time, but when confidence is undermined, an inflation 
premium will emerge and rates will rise regardless. Lack of demand for 
loans in Indonesia and elsewhere in East Asia has not lowered rates. In 
a country with a collapsing currency, rates can and will rise 
especially if inflating the money supply is the tool of choice in an 
effort to stimulate the economy.
  Inflating the money supply presents a great danger to the future of 
the dollar and the economy and our political system.

                              {time}  1815

  The worldwide financial bubble is like nothing ever witnessed before 
and it is collapsing. The Y2K problem will compound our problems, not 
to mention the instability of the U.S. presidency.
  It is time to consider the fundamentals underlying our financial and 
economic system. The welfare state is unsustainable as are our 
worldwide commitments to bail out everyone and to intervene in every 
fight, even those that have been ongoing for hundreds if not thousands 
of years.
  A limited government, designed to protect liberty and provide for a 
national defense is one that could be easily managed with minimal 
taxes, but it

[[Page H7472]]

would also require that we follow the advice of the founders who 
explicitly admonished us not to ``emit bills of credit,'' that is paper 
money, and to use only silver and gold as legal tender.
  We need to lay plans for our future because we are rapidly 
approaching a time of crisis and chaos. We surely do not want to leave 
the solution to FEMA and presidential executive orders.
  Let me quote from a famous economist who was writing in 1966 about 
the Great Depression:

       The Fed succeeded, but it nearly destroyed the economies of 
     the world in the process. The excess credit which the Fed 
     pumped into the economy spilled over into the stock market, 
     triggering a fantastic speculative boom. Belatedly, Federal 
     Reserve officials attempted to sop up the excess reserves and 
     finally succeeded in braking the boom.
       But it was too late; by 1929 the speculative imbalances had 
     become so overwhelming that the attempt precipitated a sharp 
     retrenching and a consequent demoralizing of business 
     confidence. As a result, the American economy collapsed.
       Great Britain fared even worse, and rather than absorb the 
     full consequences of her previous folly, she abandoned the 
     gold standard completely in 1931, tearing asunder what 
     remained of the fabric of confidence and inducing a worldwide 
     series of bank failures. The world economies plunged into the 
     Great Depression of the 1930s.
       With a logic reminiscent of a generation earlier, statists 
     argued the gold standard was largely to blame for the credit 
     debacle which led to the Great Depression. If the gold 
     standard had not existed, they argued, Britain's abandonment 
     of gold payments in 1931 would not have caused the failure of 
     banks all over the world. The irony was that since 1913, we 
     had not been on a gold standard, but on what may be termed a 
     mixed gold standard; yet it is gold that took the blame.

  Further quoting from this economist from 1966:

       But the opposition to the gold standard in any form, from a 
     growing number of welfare state advocates, was prompted by a 
     much subtler insight: the realization that the gold standard 
     is incompatible with chronic deficit spending, the hallmark 
     of the welfare state. Stripped of its academic jargon, the 
     welfare state is nothing more than a mechanism by which 
     governments confiscate the wealth of the productive members 
     of a society to support a wide variety of welfare schemes. A 
     substantial part of the confiscation is effected by taxation. 
     But the welfare statists were quick to recognize that if they 
     wished to retain political power, the amount of taxation had 
     to be limited and they had to resort to programs of massive 
     deficit spending, i.e., they had to borrow money, by issuing 
     government bonds, to finance welfare expenditures on a large 
     scale.
       Under a gold standard, the amount of credit that an economy 
     can support is determined by the economy's tangible assets, 
     since every credit instrument is ultimately a claim on some 
     tangible asset. But government bonds are not backed by 
     tangible wealth, only by the government's promise to pay out 
     of future tax revenues, and cannot be easily absorbed by the 
     financial markets. A large volume of new government bonds can 
     be sold to the public only at progressively higher interest 
     rates. Thus, government deficit spending under a gold 
     standard is severely limited.
       The abandonment of the gold standard made it possible for 
     the welfare statists to use the banking system as a means to 
     an unlimited expansion of credit. They have created paper 
     reserves in the form of government bonds which, through a 
     complex series of steps, the banks accept in place of 
     tangible assets and treat them as if they were an actual 
     deposit as the equivalent of what was formerly a deposit of 
     gold. The holder of a government bond or of a bank deposit 
     created by paper reserves believes that he has a valid claim 
     on a real asset. But the fact is there are no more claims 
     outstanding than real assets.
       In the absence of the gold standard, there is no way to 
     protect savings from confiscation through inflation. There is 
     no safe store of value. If there were, the government would 
     have to make its holding illegal, as was done in the case for 
     gold. If everyone decided, for example, to convert all his 
     bank assets to silver or copper or any other good, and 
     thereafter declined to accept checks for payment for goods, 
     bank deposits would lose their purchasing power and 
     government-created bank credit would be worthless as a claim 
     on goods.
       The financial policy of the welfare state requires that 
     there be no way for the owners of wealth to protect 
     themselves.
       This is the shabby secret of the welfare statists' tirades 
     against gold. Deficit spending is simply a scheme for the 
     hidden confiscation of wealth. Gold stands in the way of this 
     insidious process. It stands as a protector of property 
     rights. If one grasps this, one has no difficulty in 
     understanding the statists' antagonism toward the gold 
     standard.

  The economist who wrote this in 1966 was Alan Greenspan. He was right 
then. He is wrong now. Deliberate debasement of a currency cannot 
assure perpetual wealth, only hardship, the type of hardship we are now 
witnessing in East Asia and spreading around the world, moving now into 
Central and South America. And we here in the United States follow the 
same policy, and we are vulnerable no matter how beneficial and how it 
appears that we are doing today.
  Congress has an explicit constitutional responsibility in the area of 
money and finance, and we must assume this responsibility. Secretive 
plans by a central bank to manipulate money and credit with the 
pretense of helping us is unacceptable, and before the trust in the 
dollar is lost we should work diligently to restore soundness to our 
monetary system. Without trust, the current system cannot last, and 
there is every reason to believe that the disintegration of trust 
throughout the world can and will spread to this country.
  It is an obligation on our part, Members of Congress, to look into 
this matter, study it and at least be prepared for the problems that we 
will have to confront. We cannot continue with the system that we have. 
That is what the markets are telling us today. The worldwide financial 
crisis is not a figment of anybody's imagination, it is real, and we 
are reading about it every day and it threatens the life savings of 
every single American.
  The value of the currency is crucial to protecting the assets of all 
retirees. This issue, I believe, is one of the most serious issues that 
we as Members of Congress have the responsibility of looking into and 
confronting and doing something about it. But as long as we accept the 
notion that the central planner of this country, the Federal Reserve, 
remains totally secret, without true supervision by the Congress, we 
are derelict in our duty.
  It is up to us to do something. And as the crisis worsens, I believe 
it will become more apparent that our responsibility to look into this 
is quite evident.

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