[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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