[Congressional Record Volume 152, Number 46 (Tuesday, April 25, 2006)]
[House]
[Pages H1729-H1733]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                        GOLD AND THE U.S. DOLLAR

  The SPEAKER pro tempore (Ms. Foxx). Under the Speaker's announced 
policy of January 4, 2005, the gentleman from Texas (Mr. Paul) is 
recognized for half the remaining time until midnight.
  Mr. PAUL. Madam Speaker, the financial press and even the network 
news shows have begun reporting the price of gold regularly.
  For 20 years, between 1980 and 2000, the price of gold was rarely 
mentioned. There was little interest, and the price was either falling 
or remaining steady. Since 2001, however, interest in gold has soared 
along with its price.
  With the price now over $600 an ounce, a lot more people are becoming 
interested in gold as an investment and an economic indicator. Much can 
be learned by understanding what the rising dollar price of gold means.
  The rise in gold prices, from $250 per ounce in 2001 to over $600 
today has drawn investors and speculators into precious metals markets. 
Though many already have made handsome profits, buying gold, per se, 
should not be touted as a good investment. After all, gold earns no 
interest, and its quality never changes. It is static and does not grow 
as sound investments should.
  It is more accurate to say that one might invest in a gold or silver 
mining company, where management, labor costs, and the nature of new 
discoveries all play a vital role in determining the quality of the 
investment and the profits made.
  Buying gold and holding it is somewhat analogous to converting one's 
saving into $100 bills and hiding them under the mattress, yet not 
exactly the same. Both gold and dollars are considered money, and 
holding money does not qualify as an investment. There is a big 
difference between the two, however, since by holding paper money, one 
loses purchasing power. The purchasing power of commodity money, that 
is gold, however, goes up if the government devalues the circulating 
paper currency.
  Holding gold is protection or insurance against government's 
proclivity to debase the currency. The purchasing power of gold goes up 
not because it is a so-called good investment. It goes up in value only 
because the paper currency goes down in value. In our current 
situation, that means the dollar.
  One of the characteristics of commodity money, one that originated 
naturally in the marketplace, is that it must serve as a store of 
value. Gold and silver meet the test; paper does not. Because of this 
profound difference, the incentive and wisdom of holding emergency 
funds in the form of gold becomes attractive when the official currency 
is being devalued. It is more attractive than trying to save wealth in 
the form of a fiat currency, even when earning some nominal interest.
  The lack of earned interest on gold is not a problem once people 
realize the purchasing power of their currency is declining faster than 
the interest rates they might earn. The purchasing power of gold can 
rise even faster than increases in the cost of living.
  The point is that most who buy gold do so to protect against the 
depreciating currency, rather than as an investment in the classical 
sense. Americans understand this less than citizens of other countries. 
Some nations have suffered from severe monetary inflation that 
literally led to the destruction of their national currency.
  Though our inflation, that is the depreciation of the U.S. dollar, 
has been insidious, average Americans are unaware of how this occurs. 
For instance,

[[Page H1730]]

few Americans know nor seem concerned that the 1913 pre-Federal Reserve 
dollar is now worth only 4 cents. Officially, our central bankers and 
our politicians express no fear that the course on which we are set is 
fraught with great danger to our economy and to our political system.
  The belief that money created out of thin air can work economic 
miracles if only properly managed is pervasive in the District of 
Columbia. In many ways, we should not be surprised about this trust in 
such an unsound system. For at least four generations our government-
run universities have systematically preached a monetary doctrine 
justifying the so-called wisdom of paper money over the foolishness of 
sound money.
  Not only that, paper money has worked surprisingly well in the past 
35 years, the years the world has accepted pure paper money as 
currency. Alan Greenspan bragged that central bankers in these decades 
have gained the knowledge necessary to make paper money respond as if 
it were gold.
  This, they argue, removes the problem of obtaining gold to back the 
currency and hence frees the politician from the rigid discipline a 
gold standard imposes. Many central bankers in the last 15 years became 
so confident they had achieved this milestone that they sold off large 
hordes of their gold reserves. At other times they tried to prove that 
paper works better than gold by artificially propping up the dollar by 
suppressing the market price of gold.
  This recent deception failed just as it did in the 1960s when our 
government tried to hold gold artificially low at $35 an ounce. But 
since they could not truly repeal the economic laws regarding money, 
just as many central bankers sold, others bought. It is fascinating 
that the European central banks sold gold while the Asian central banks 
bought it over the last several years.
  Since gold has proven to be the real money of the ages, we see once 
again a shift in wealth from the West to the East, just as we saw a 
loss of our industrial base in the same direction.
  Though Treasury officials deny any U.S. sales or loans of our 
official gold holdings, no audits are permitted, so no one can be 
certain. The special nature of the dollar as the reserve currency of 
the world has allowed this gain to last longer than it would have 
otherwise.
  But the fact that gold has gone from $250 an ounce to over $600 an 
ounce means there is concern about the future of the dollar. The higher 
the price of gold the greater the concern for the dollar. But instead 
of dwelling on the dollar price of gold, we should be talking about the 
depreciation of the dollar.
  In 1934, a dollar was worth one-twentieth of an ounce of gold. $20 to 
buy one ounce. Today a dollar is worth one-six-hundredth of an ounce, 
meaning it takes $600 to buy one once of gold.
  The number of dollars created by the Federal Reserve and through the 
fractional reserve banking system is crucial in determining how the 
market assesses the relationship of the dollar and gold.
  Though there is a strong correlation, it is not instantaneous or 
perfectly predictable. There are many variables to consider. But in the 
long term, the dollar price of gold represents past inflation of the 
money supply. Equally important, it represents the anticipation of how 
much new money will be created in the future.
  This introduces the factor of trust and confidence in our monetary 
authorities and our politicians, and these days the American people are 
casting a vote of no confidence in this regard and for good reasons.
  The incentive for central bankers to create new money out of thin air 
is two-fold. One is to practice central planning through the 
manipulation of interest rates. The second is to monetize the escalated 
Federal debt politicians create and thrive on.
  Today, no one in Washington believes for a minute that runaway 
deficits are going to be curtailed. In March alone, the Federal 
Government created a historic $85 billion deficit. The current 
supplemental bill going through Congress has grown from $92 billion to 
over $106 billion, and everyone knows it will not draw President Bush's 
first veto.
  Most knowledgeable people therefore assume that inflation of the 
money supply is not only going to continue, but accelerate. This 
anticipation, plus the fact that many new dollars have been created 
over the past 15 years that have not yet been fully discounted, 
guarantees the future depreciation of the dollar in terms of gold.

                              {time}  2245

  There is no single measurement that reveals what the Fed has done in 
the recent past or tells us exactly what it is about to do in the 
future. Forget about the lip service given to transparency by the new 
Fed Chairman Bernanke. Not only is this administration one of the most 
secretive across the board in our history, the current Fed firmly 
supports denying the most important measurement of current monetary 
policy to Congress, the financial community and the American public.
  Because of a lack of interest and poor understanding of monetary 
policy, Congress has expressed essentially no concern about the 
significant change in reporting statistics on the money supply. 
Beginning in March, though planned before Bernanke arrived at the Fed, 
the central bank discontinued compiling and reporting monetary 
aggregates known as M3. M3 is the best description of how quickly the 
Fed is creating new money and credit. Common sense tells us that a 
government central bank creating new money out of thin air depreciates 
the value of each dollar in circulation. Yet this report is no longer 
available to us, and Congress makes no demands to receive it.
  Though M3 is the most helpful statistic to track Fed activity, it by 
no means tells us everything we need to know about trends in monetary 
policy. Total bank credit, still available to us, gives us indirect 
information reflecting the Fed's inflationary policies. But ultimately 
the markets will figure out exactly what the Fed is up to, and then 
individuals, financial institutions, governments and other central 
bankers will act accordingly.
  The fact that our money supply is rising significantly cannot be 
hidden from the markets. The response in time will drive the dollar 
down while driving interest rates and commodity prices up.
  Already we see this trend developing, which surely will accelerate in 
the not-too-distant future. Part of this reaction will be from those 
who seek a haven to protect their wealth, not invest, by treating gold 
and silver as universal and historic money. This means holding fewer 
dollars that are decreasing in value while holding gold as it increases 
in value.
  A soaring gold price is a vote of no confidence in the central bank 
and the dollar. This certainly was the case in 1979 and 1980. Today 
gold prices reflect a growing restlessness with the increasing money 
supply, our budgetary and trade deficits, our unfunded liabilities, and 
the inability of this Congress and the administration to rein in 
runaway spending.
  Denying us statistical information, manipulating interest rates, and 
artificially trying to keep gold prices in check won't help in the long 
run. If the markets are fooled only on the short term, it only means 
the adjustments will be much more dramatic later on, and in the 
meantime other market imbalances develop.
  The Fed tries to keep the consumer spending spree going, not through 
hard work and savings, but by creating artificial wealth in stock 
market bubbles and housing bubbles. When these distortions run these 
courses and are discovered, the corrections will be quite painful as 
was witnessed with the collapse of the NASDAQ bubble. Likewise a fiat 
monetary system encourages speculation and unsound borrowing.
  As problems develop, scapegoats are sought and frequently found in 
foreign nations. This prompts many to demand altering exchange rates 
and protectionist measures. The sentiment for this type of solution is 
growing each day. Though everyone decries inflation, trade imbalances, 
economic downturns and Federal deficits, few attempt a closer study of 
our monetary system and how these events are interconnected.
  Even if it were recognized that a gold standard without monetary 
inflation would be advantageous, few in Washington would accept the 
political disadvantages of living with the discipline

[[Page H1731]]

of gold since it serves as a check on government size and power. This 
is a sad commentary on the politics of today.
  The best analogy to our affinity for government spending, borrowing 
and inflating is that of a drug addict who knows if he doesn't quit, he 
will die, yet he can't quit because of the heavy price required to 
overcome the dependency.
  The right choice is very difficult, but remaining addicted to drugs 
guarantees the death of the patient, while our addiction to deficit 
spending, debt and inflation guarantees the collapse of our economy.
  Special interest groups, who vigorously compete for Federal dollars, 
want to perpetuate the system rather than admit to a dangerous 
addiction. Those who champion welfare for the poor, entitlements for 
the middle class or war contracts for the military industrial complex 
all agree on the so-called benefits bestowed by the Fed's power to 
counterfeit fiat money.
  Bankers who benefit from our fractional reserve system likewise never 
criticize the Fed, especially since it is the lender of last resort 
that bails out financial institutions when crises arise. It is true, 
special interest and bankers do benefit from the Fed and may well get 
bailed out, just as we saw with the long-term capital management fund 
crisis a few years ago.
  In the past, companies like Lockheed and Chrysler benefited as well. 
But what the Fed cannot do is guarantee the market will maintain trust 
in the worthiness of the dollar. Current policy guarantees that the 
integrity of the dollar will be undermined. Exactly when this will 
occur, and the extent of the resulting damage to the financial system, 
cannot be known for sure, but it is coming. There are plenty of 
indications already on the horizon.
  Foreign policy plays a significant role in the economy and the value 
of the dollar. A foreign policy of militarism and empire building 
cannot be supported through direct taxation. The American people would 
never tolerate the taxes required to pay immediately for overseas wars 
under the discipline of a gold standard. Borrowing and creating new 
money is much more politically palatable. It hides and delays the real 
costs of the war. The people are lulled into complacency, especially 
since the wars we fight are couched in terms of patriotism, spreading 
the ideas of freedom and stamping out terrorism. Unnecessary wars and 
fiat currencies go hand in hand, while a gold standard encourages a 
sensible foreign policy.
  The cost of war is enormously detrimental. It significantly 
contributes to the economic instability of the Nation by boosting 
spending, deficits and inflation. Funds used for war are funds that 
could have remained in the productive economy to raise the standard of 
living of Americans now unemployed, underemployed or barely living on 
the margin.
  Yet even these costs may be preferable to paying for war with huge 
tax increases. This is because although fiat dollars are theoretically 
worthless, value is imbued by the trust placed in them by the world's 
financial community. Subjective trust in a currency can override 
objective knowledge about government policies, but only for a limited 
time.
  Economic strength and military power contributes to the trust in a 
currency. In today's world trust in the U.S. dollar is not earned, and, 
therefore, fragile. The history of the dollar, being as good as gold up 
until 1971, is helpful in maintaining an artificially higher value for 
the dollar than deserved.
  Foreign policy contributes to the crisis when the spending to 
maintain our worldwide military commitments become prohibitive, and 
inflationary pressures accelerate. But the real crisis hits when the 
world realizes the king has no clothes in that the dollar has no 
backing, and we face a military setback even greater than we already 
are experiencing in Iraq. Our token friends may quickly transform into 
vocal enemies once the attack on the dollar begins.
  False trust placed in the dollar once was helpful to us, but panic 
and rejection of the dollar will develop into a real financial crisis. 
Then we will have no other option but to tighten our belts, go back to 
work, stop borrowing, start saving, and rebuild our industrial base 
while adjusting to a lower standard of living for most Americans. 
Counterfeiting the Nation's money is a serious offense.
  The Founders were especially adamant about avoiding the chaos, 
inflation and destruction associated with the continental dollar. That 
is why the Constitution is clear that only gold and silver should be 
legal tender in the United States. In 1792, the Coinage Act also 
authorized the death penalty for any private citizen who counterfeited 
the currency. Too bad they weren't explicit that counterfeiting by 
government officials is just as detrimental to the economy and the 
value of the dollar.
  In wartime many nations actually operated counterfeiting programs to 
undermine the dollar, but never to a disastrous level. The enemy knew 
how harmful excessive creation of new money could be to the dollar and 
our economy. But it seems we never learned the dangers of creating new 
money out of thin air. We don't need an Arab nation or the Chinese to 
undermine our system with a counterfeiting operation. We do it to 
ourselves with the all the disadvantages that would occur if others did 
it to us.
  Today we hear threats from some Arab, Muslim and some Far Eastern 
countries about undermining the dollar system not by dishonest 
counterfeiting, but by initiating an alternative monetary system based 
on gold. Wouldn't that be ironic? Such an event theoretically could do 
great harm to us. This day may well come not so much as a direct 
political attack on the dollar system, but out of necessity to restore 
confidence in money once again.
  Historically paper money never has lasted for long periods of time, 
while gold has survived thousands of years of attacks by political 
interests and big government. In time the world once again will restore 
trust in the monetary system by making some currency as good as gold.
  Gold or any acceptable market commodity money is required to preserve 
liberty. Monopoly control by government of a system that creates fiat 
money out of thin air guarantees the loss of liberty. No matter how 
well intended our militarism is portrayed or how happily the promises 
of wonderful programs for the poor are promoted, inflating the money 
supply to pay these bills makes government bigger.
  Empires always fail, and expenses always exceed projections. Harmful 
unintended consequences are the rule, not the exception. Welfare for 
the poor is inefficient and wasteful. The beneficiaries are rarely the 
poor themselves, but, instead, the politicians, the bureaucrats or the 
wealthy. The same is true of all foreign aid. It is nothing more than a 
program that steals from the poor in a rich country and gives to the 
rich leaders of a poorer country.
  Whether it is war or welfare payments, it always means higher taxes, 
inflation and debt. Whether it is the extraction of wealth from the 
productive economy, the distortion of the market by interest rate 
manipulation or spending for war and welfare, it can't happen without 
infringing upon personal liberty.
  At home the war on poverty, terrorism, drugs or foreign rulers 
provide an opportunity for authoritarians to rise to power, individuals 
who think nothing of violating the people's rights to privacy and 
freedom of speech. They believe their role is to protect the secrecy of 
government rather than protect the privacy of citizens.
  Unfortunately, that is the atmosphere under which we live today with 
essentially no respect for the Bill of Rights. Though great economic 
harm comes from a government monopoly, fiat monetary system, the loss 
of liberty associated with it is equally troubling.
  Just as empires are self-limiting in terms of money and manpower, so, 
too, is a monetary system based on illusion and fraud.
  When the end comes, we will be given an opportunity to choose once 
again between honest money and liberty on one hand, chaos, poverty and 
authoritarianism on the other. The economic harm done by a fiat 
monetary system is pervasive, dangerous and unfair.
  Though runaway inflation is injurious to almost everyone, it is more 
insidious for certain groups. Once inflation is recognized as a tax, it 
becomes

[[Page H1732]]

clear that tax is regressive in nature, penalizing the poor and the 
middle class more than the rich and the politically privileged. Price 
inflation, a consequence of inflating the money supply by the central 
bank, hits poor and marginal workers first and foremost. It especially 
penalizes savers, retirees, those on fixed incomes, and anyone who 
trusts government promises.

                              {time}  2300

  Small businesses and individual enterprises suffer more than the 
financial elite, who borrow large sums before the money loses value. 
Those who are on the receiving end of government contracts, especially 
in the military industrial complex during wartime, receive undeserved 
benefits.
  It is a mistake to blame high gasoline and oil prices on price 
gouging. If we impose new taxes or fix prices while ignoring monetary 
inflation, corporate subsidies and excessive regulations, shortages 
will result. The market is the only way to determine the best price for 
any commodity. The law of supply and demand cannot be repealed. The 
real problems arise when government planners give subsidies to energy 
companies and favor one form of energy over another.
  Energy prices are rising for many reasons: inflation, increased 
demand from China and India, decreased supply resulting from our 
invasion into Iraq, anticipated disruption of supplies as we push 
regime change in Iran, regulatory restrictions on gasoline production, 
government interference in the free market development of alternative 
fuels, and subsidies to Big Oil, such as free leases and grants for 
research and development.
  Interestingly, the cost of oil and gas is actually much higher than 
we pay at the retail level. Much of the DOD budget is spent protecting 
``our'' oil supplies; and if such spending is factored in, gasoline 
probably costs us more than $5 a gallon. The sad irony is that the 
military efforts to secure cheap oil supplies inevitably backfire and 
actually curtail supplies and boost prices at the pump. The waste and 
fraud in issuing contracts to large corporations for work in Iraq only 
adds to price increases.
  When problems arise under conditions that exist today, it is a 
serious error to blame the little bit of the free market that still 
functions. Last summer, the market worked efficiently after Katrina. 
Gasoline hit $3 a gallon, but soon supplies increased, usage went down, 
and the price returned to $2. In the 1980s, market forces took oil from 
$40 a barrel down to $10 a barrel, and no one cried for the oil 
companies that went bankrupt. Today's increases are for the reasons 
mentioned above. It is natural for labor to seek its highest wage and 
businesses to strive for the greatest profits. That is the way the 
market works. When the free market is allowed to work, it is the 
consumer who ultimately determines price and quality, with labor and 
businesses accommodating consumer choices. Once this process is 
distorted by government, prices rise excessively, labor costs and 
profits are negatively affected, and problems emerge.
  Instead of fixing the problem, politicians and demagogues respond by 
demanding windfall profits taxes and price controls, while never 
questioning how previous government interference caused the whole mess 
in the first place. Never let it be said that high oil prices and 
profits cause inflation. Inflation of the money supply causes higher 
prices.
  Since keeping interest rates below market levels is synonymous with 
new money creation by the Fed, the resulting business cycle, higher 
cost of living and job losses all can be laid at the doorstep of the 
Fed. This burden hits the poor the most, making Fed taxation by 
inflation the worst of all regressive taxes. Statistics about revenues 
generated by the income tax are grossly misleading. In reality, much 
harm is done by our welfare-warfare system supposedly designed to help 
the poor and tax the rich. Only sound money can rectify the blatant 
injustice of this destructive system.
  The Founders understood this great danger and voted overwhelmingly to 
reject ``emitting bills of credit,'' the term they used for paper money 
or fiat currency. It is too bad the knowledge and advice of our 
Founders and their mandate in the Constitution are ignored, and it is 
ignored at great peril. The current surge in gold prices, which 
reflects our dollar's devaluation, is warning us to pay closer 
attention to our fiscal, monetary, entitlement, and foreign policy.
  A recent headline in the financial press announced that gold prices 
surged over concern that confrontation with Iran will further push oil 
prices higher. This may well reflect the current situation, but higher 
gold prices mainly reflect monetary expansion by the Federal Reserve. 
Dwelling on current events and their effect on gold prices reflects 
concern for symptoms rather than an understanding of the actual cause 
of these price increases. Without an enormous increase in the money 
supply over the past 35 years and a worldwide paper monetary system, 
this increase in the price of gold would not have occurred.
  Certainly geopolitical events in the Middle East under a gold 
standard would not alter its price, though they could affect the supply 
of oil and cause oil prices to rise. Only under conditions created by 
excessive paper money would one expect all or most prices to rise. This 
is a mere reflection of the devaluation of the dollar.

  Here are a few particular things that we should remember: if one 
endorses small government and maximum liberty, one must support 
commodity money.
  One of the strongest restraints against unnecessary war is a gold 
standard.
  Deficit financing by government is severely restricted by sound 
money.
  The harmful effects of the business cycle are virtually eliminated 
with an honest gold standard.
  Saving and thrift are encouraged by gold standard and discouraged by 
paper money.
  Price inflation, with generally rising price levels, is 
characteristic of paper money. Reports that the Consumer Price Index 
and the Producer Price Index are rising are distractions. The real 
cause of inflation is the Fed's creation of new money.
  Interest rate manipulation by central banks helps the rich, the 
banks, the government, and the politicians.
  Paper money permits the regressive inflation tax to be passed off on 
the poor and the middle class.
  Speculative financial bubbles are characteristic of paper money, not 
gold.
  Paper money encourages economic and political chaos, which 
subsequently causes a search for scapegoats rather than blaming the 
central bank.
  Dangerous protectionist measures frequently are implemented to 
compensate for the dislocations caused by paper money.
  Paper money, inflation, and the conditions they create contribute to 
the problems of illegal immigration.
  The value of gold is remarkably stable.
  The dollar price of gold reflects dollar depreciation.
  Holding gold helps preserve and store wealth; but technically, gold 
is not a true investment.
  Since 2001, the dollar has been devalued by over 60 percent. In 1934, 
FDR devalued the dollar by 41 percent. In 1971, Nixon devalued the 
dollar by 7.9 percent. In 1973, Nixon devalued the dollar by 10 
percent.
  These were momentous monetary events, and every knowledgeable person 
worldwide paid close attention. Major changes were endured in 1979 and 
1980 to save the dollar from disintegration. This involved a severe 
recession, interest rates over 21 percent, and general price inflation 
of 15 percent.
  Today, we face a 60 percent devaluation and counting, yet no one 
seems to care. It is of greater significance than the three events 
mentioned above, and yet the one measurement that best reflects the 
degree of inflation, the Fed and our government denies us. Since March, 
M3 reporting has been discontinued. For starters, I would like to see 
Congress demand that this report be resumed. I fully believe the 
American people and Congress are entitled to this information.
  Will we one day complain about false intelligence, as we have with 
the Iraq war? Will we complain about not having enough information to 
address monetary policy after it is too late?
  If ever there was a time to get a handle on what sound money is and 
what it means, that time is today. Inflation, as exposed by high gold 
prices, transfers

[[Page H1733]]

wealth from the middle class to the rich, as real wages decline while 
the salaries of CEOs, movie stars, and athletes skyrocket, along with 
the profits of the military industrial complex, the oil industry, and 
other special interests.
  A sharply rising gold price is a vote of no confidence in the 
Congress' ability to control the budget, the Fed's ability to control 
the money supply, and the administration's ability to bring stability 
to the Middle East.
  Ultimately, the gold price is a measurement of trust in the currency 
and the politicians who run the country. It has been that way for a 
long time, and it is not about to change.
  If we care about the financial system, the tax system, and the 
monumental debt we are accumulating, we must start talking about the 
benefits and discipline that come only with a commodity standard of 
money: money the government and central banks absolutely cannot create 
out of thin air.
  Economic law dictates reform at some point, but should we wait until 
the dollar is \1/1000\ of an ounce of gold or \1/2000\ of an ounce of 
gold? The longer we wait, the more people will suffer and the more 
difficult reforms become. Runaway inflation inevitably leads to 
political chaos, something numerous countries have suffered throughout 
the 20th century. The worst example, of course, was the German 
inflation of the 1920s that led to the rise of Hitler.

                              {time}  2310

  Even the Communist takeover of China was associated with runaway 
inflation brought on by the Chinese nationalists.
  The time for action is now, and it is up to the American people and 
the U.S. Congress to demand it.

                          ____________________