[Congressional Record Volume 149, Number 121 (Friday, September 5, 2003)]
[House]
[Pages H8003-H8009]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
PAPER MONEY AND TYRANNY
The SPEAKER pro tempore. Under the Speaker's announced policy of
January 7, 2003, the gentleman from Texas (Mr. Paul) is recognized for
60 minutes as the designee of the majority leader.
Mr. PAUL. Mr. Speaker, earlier we heard some concern expressed for
jobs leaving this country. If one is concerned about that, maybe it
would be advantageous to listen to what I say, because I will try to
give an explanation for exactly the reason why those jobs leave.
My Special Order today is entitled ``Paper Money and Tyranny.''
Mr. Speaker, all great republics throughout history cherished sound
money. This meant the monetary unit was a commodity of honest weight
and purity. When money was sound, civilizations were found to be more
prosperous and freedom thrived. The less free a society becomes, the
greater the likelihood its money is being debased and the economic
well-being of its citizens diminished.
Alan Greenspan, years before he became Federal Reserve Board Chairman
in charge of flagrantly debasing the U.S. dollar, wrote about this
connection between sound money, prosperity and freedom.
In his article ``Gold and Economic Freedom'' in 1966, Mr. Greenspan
starts by saying, ``An almost hysterical antagonism toward the gold
standard is an issue that unites status 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 Mr. 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 the 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 is why people hardly objected when Roosevelt and
his status friends confiscated gold and radically debased the currency,
ushering in the age of worldwide fiat currencies with which the
international community struggles today.
If honest money and freedom are inseparable, as Mr. Greenspan argues,
and paper money leads to tyranny, one must wonder why it is so popular
with the economists, the business community, bankers and our government
officials. The simplest explanation is that it is 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 created
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
that 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 the
destructiveness of the continental dollar.
George Mason of Virginia said that he had a ``mortal hatred of paper
money.''
Constitutional Convention delegate Oliver Elseworth 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 of the
delegates to the convention and was the
[[Page H8004]]
reason the Constitution limited congressional authority to deal with
the issue and mandate 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 and necessary
confidence in public councils on the industry and morals of people and
on the character of republican government.''
The founders were well aware of the Biblical admonitions against
dishonest weights and measures, debased silver and watered-down wine.
The issue of sound money throughout history has been as much a moral
issue as an economic or political one.
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 it is no longer applied to the issue of
money.
It was once explained to me during the debate over going to war in
Iraq that a declaration of war was not needed because to ask for such a
declaration was frivolous and that the portion of the Constitution
dealing with congressional war power was anachronistic.
So, too, it seems that the power over money given to Congress alone
and limited to coinage and honest weights is now also anachronistic. If
indeed our generation can make the case for paper money issued by an
unauthorized central bank, it behooves us to at least have enough
respect for the Constitution to amend it in a proper fashion.
{time} 1600
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 is 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 the special
interest.
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 remain
strong. No one would welcome a counterfeiter to town, yet this same
authority is blindly given to the 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 is a paper currency or a computer entry, it
is morally identical to the counterfeiter who illegally prints
currency. Both ways it is fraud. A fiat monetary system allows power
and influence to fall into the hands of those who control the creation
of new money and to those who get to use the credit or money early in
its circulation. The insidious and eventual costs falls on unidentified
victims who are usually oblivious to the cause of their plight.
This system of legalized plunder allows one group to benefit at the
expense of another. An actual transfer of wealth goes from the poor and
middle class to those in privileged financial position.
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 cannot 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's easy credit system.
The easy credit helps investors and consumers who have no qualms
about going into debt and even declaring bankruptcy. If someone sees
the welfare state and foreign militarism as improper and immoral, one
understands how the license to print money permits these policies to go
forward far more easily than if they had to be paid for immediately by
direct taxation. Printing money, which is literally inflation, is
nothing more than a sinister and evil form of hidden taxation. It is
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.
Although the money issued today is of little practical interest to
the parties and the politicians, it should not be ignored. Policymakers
must contend with the consequence of the business cycle which result
from the fiat monetary system under which we operate. They may not
understand the connection now but eventually they must. In the past,
money and gold have been dominant issues in several major political
campaigns. We find that when the people have had a voice in the matter,
they inevitably choose 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 gold at 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.
The postwar 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, he opposed the second bank in 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
[[Page H8005]]
behind McKinley's bland but correct argument 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 by 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 1970s,
as well as the current ongoing economic crisis.
A central bank in fiat money enables 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 costs 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
is wise to do so or not.
Money issues should indeed be a gigantic political issue. Fiat money
hurts the economy, finances war, 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 over whether or not 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 am 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 promote grand worldwide military
operations while arguing that deficits do not matter as long as
marginal tax rates are lowered and 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 am
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 little
value.
We have just gone through a 2\1/2\ year period of tinkering with 13
interest rate cuts and recovery has not yet been achieved. It is just
possible that we are much closer than anyone realizes to that day when
it will become absolutely necessary to deal with the monetary issue
both philosophically and strategically and forget about the Band-Aid
approach to the current system.
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 types have
always relished control over money creation in their effort to regulate
and plan the economy. They have no qualms with using their 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 is the only system they have ever heard of.
The principles of sound money and free market banking are not taught
in our universities anymore. 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 commodity standard would have are
unacceptable.
Though the economic consequences of paper money in the early stage
affect lower-income and middle-class citizens, history shows that when
the destruction of monetary value becomes rampant, nearly everyone
suffers and the economic structure becomes unstable.
There is 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 is 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
percent of its value, the national debt of $6.5 trillion is reduced in
real terms by $650 billion.
{time} 1615
That is a pretty neat trick and quite helpful to the government. That
is why the Fed screams about a coming deflation, so it can continue the
devaluation of the dollar unabated. The politicians do not 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 the debt cannot be the
source of long-term wealth. Individuals and corporations who borrow too
much eventually must cut back and pay off their debt and start anew,
but governments never do.
Where is the hitch? This process which seems to be a creative way of
paying off debt eventually undermines the capital structure of the
economy, thus making it difficult to produce wealth, and that is 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
accurate 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 and 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.
[[Page H8006]]
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 now, 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 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 savings 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 or 5 or even 6 percent
below the market rate and the savers, many of whom are elderly and on
fixed incomes, suffer unfairly at the hands of Alan Greenspan who
believes that resorting to money creation will solve our problems and
give us perpetual prosperity.
Lowering interest rates at times, especially in the early stages of
monetary debasement, will produce the desired effect and stimulate
another boom-bust cycle, but eventually the distortions and imbalances
between consumption and production and excessive debt prevent the
monetary stimulus from doing very much to boost the economy. Just look
at what has been happening to Japan for the last 12 years. When
conditions get bad enough, the only recourse will be to have major
monetary reform to restore confidence in the system.
The two conditions that result from fiat money that are more likely
to concern the people are inflation of prices and unemployment.
Unfortunately, few realize these problems are directly related to our
monetary system. Instead of demanding reforms, the chorus from both the
right and the left is for the Fed to do more of the same, only faster.
If our problems stem 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 have
been on a worldwide paper dollar standard. Quite possibly we are seeing
the beginning of the end of that system. If so, tough times are ahead
for the United States and the world economy.
A paper monetary standard means there are no restraints on the
printing press or on Federal deficits. In 1971, M3 was $776 billion.
Today, it stands at $8.9 trillion, an 1100 percent increase. Our
national debt in 1971 was $408 billion. Today it stands at $6.8
trillion, a 1600 percent increase.
Since that time, our dollar has lost almost 80 percent 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
benefits of the dollar being the key reserve currency of the world and
the relative weakness of other nations' 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 currency with consumer prices 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 that 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 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 product.
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. This process puts us into a position of being a huge debtor
nation, with our current account deficit of more than $600 billion a
year now exceeding 5 percent of our GDP. We now owe foreigners more
than any other nation ever owed in history, over $3 trillion.
A debt of this sort always ends by the currency of the debtor nation
decreasing in value, and that is what has started to happen with the
dollar.
Although it has still 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 about the value of the dollar.
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. The official explanation is that this is
due to an economic rebound with an increase in demands for loans. Yet a
decrease in demand for our debt in 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 have
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 foods 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
[[Page H8007]]
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 is true that the system encourages exportation of jobs as we buy
more and more foreign goods, but nobody understands the Fed's 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 the 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 like movie stars, CEOs, stock brokers,
speculators, professional athletes, others see their income 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 towards those who have benefited.
The long-term philosophic problem with this is that the central bank
and fiat monetary system are never blamed. Instead, free market
capitalism is. This is what happened in the 1930s. The Keynesians, who
grew to dominate economic thinking at that time, erroneously blamed the
gold standard, balanced budget 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 with
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 are rich. 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.
{time} 1630
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, as one would expect,
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 spending for the
welfare of 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,
corporation and banking interests. That is 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 the 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 3 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 debts 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 knockdown-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 excessive 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 reevaluation of the
stock market. In this go-round, the Fed has pulled out all 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 percent 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's 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 did not want a vote of no
confidence in the dollar, and for a couple of decades the price of gold
was artificially held at $35 an ounce. That of course did not last. In
recent years there has been a coordinated effort by the world central
bankers to keep the price of gold in check by dumping part of their
large hoard 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 Brenton 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
answer to a question I asked him before the Committee on Financial
Services in February of this year, Mr. Greenspan made an effort to
convince me that paper money now works as well as gold when he
responded, ``I have been quite surprised,
[[Page H8008]]
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 excessive 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 indices to
measure the success of a managed fiat currency should not be
reassuring. These indices 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 is right
that sound money is no longer necessary and also because it is 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 is 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 do not 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:
``Commodity Costs Soar But Factories Don't Bustle.'' What is observed
here is a sea change in attitude by investors, shifting their
investments, 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 3 years,
the economy remains sluggish and interest rates are actually rising.
What can the Feds do? If this trend continues, there is very little
they can do. Not only do I believe this trend will continue; I believe
it is likely to accelerate. This policy plays havoc with our economy,
reduces revenues, prompts increases in Federal spending, increases in
deficits and debt occur, and interest costs rise compounding our
budgetary woes.
The set of circumstances we face today is 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 a huge significant interest rate reduction 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 are at the bottom of
the cycle and interest rates not only cannot 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 effect at all. The odds are not very good that the Fed will
adopt a policy of not inflating the money supply because of some very
painful consequences that would occur.
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 is 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 preemptive war
are not likely to soon go away since both Republican and Democrat
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 is now admitted that the deficit is out of control, with next
year's deficit reaching over $1 trillion, not counting the billions
borrowed from the trust funds, like Social Security. I am 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 do not see any way we are
going to avoid the crisis.
We do have some options to minimize the suffering. If we decided to,
we could permit some alternatives to the current system of money and
banking we have today. Already we took a major step in this direction.
Gold was illegal to own between 1933 and 1976. Today, millions of
Americans do own 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 transaction 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 collecting account of
these funds.
Important point. 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 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 run-
away deficits in a weakened economy with skyrocketing inflation.
Curbing the scope of government and limiting its size to that
prescribed in the Constitution is the goal that we should seek, but
political reality makes this option available to us only after a
national bankruptcy has occurred. We need not face that catastrophe.
What we need 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.
It is no coincidence that during the period following the
establishment of the Federal Reserve and the elimination of the gold
standard a huge growth in the size of the Federal Government and its
debt occurred. Believers in Big Government, whether or not on the left
or right, vociferously reject the constraints on government growth that
gold demands.
Liberty is virtually impossible to protect when the people allow
their governments to print money at will. Inevitably, the left will
demand more economic interventionism, the right more militarism and
empire building. Both sides, either inadvertently or deliberately will
foster corporatism, those whose greatest interest in liberty and self-
reliance are lost in the shuffle. Those left and right have different
goals and serve different special interest groups are only too willing
to compromise and support each other's programs.
If unchecked, the economic and political chaos that comes from
currency destruction inevitably leads to tyranny, a consequence of
which the founders were very much aware. For 90 years we have lived
with the Central Bank, with the last 32 years absent of any restraint
on money creation. The longer the process lasts, the faster the
[[Page H8009]]
printing presses have to run in an effort to maintain stability. They
are currently running at record rates.
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 is considered favorable
economic reports, recently citing a second quarter growth this year at
3.1 percent. But in the footnotes we find that military spending,
almost all of which went overseas, was up an astounding 46 percent.
{time} 1645
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 percent. This is hardly a reassuring report on the
health of our economy, and merely reflects the bankruptcy of our
current economic policy.
Real economic growth will not return until confidence in the entire
system is restored. That is impossible as long as it depends on the
politicians not spending too much money and the Federal Reserve
limiting its propensity to inflate our way to prosperity. Only sound
money and limited government can do that.
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