End the Fed

by Ron Paul

  On the helicopter flight to Andrews, the subject of the gold standard naturally came up. “Ron,” the President told me, “no great nation that abandoned the gold standard has remained a great nation.” He indeed was sympathetic, as he was to many libertarian constitutional ideas, but he was also swayed by staff pressure to be pragmatic on most issues.

  Arthur Costamagna, a friend of Reagan’s and a member of the commission signed on our dissenting views with a minor qualification. Lew Lehrman, later to run for governor of New York, signed as well. Then my staff and I scheduled a meeting with the President, the goal of which was to present him a copy and get a photo opportunity. The meeting was scheduled without a specific purpose, and I didn’t want to surprise him with my plan. We called back to clarify the intent of the meeting. It wasn’t too long after that that we received a callback from the White House staff saying that the meeting was canceled. The presentation and picture taking never occurred.

  I’m sure Jim Baker, and especially Don Regan, made sure that it did not take place. Don Regan, as chairman of the Gold Commission, was the one who demanded the whole series of hearings be kept secret without minutes. The first report was filed March 31, 1982.

  The political system essentially works this way. Staff, if not perfectly loyal to the philosophy of the officeholder, can block progress. Ultimately, though, the responsibility falls on the officeholder to pick the right staff.

  Surviving the 1970s gave the dollar a reprieve and set the stage for one giant financial bubble to be formed over the next twenty-seven years to get us to today. If, as a result of the Gold Commission, we had returned to our senses in 1981, the problems and grave dangers we now face could have been averted.

  Murray Rothbard argued in his testimony before the commission that it was not the gold standard that caused the Depression of the 1930s; rather, it was the misuse of the gold standard that led up to it. In the closing part of his statement, he urged that if gold were ever to return as a standard, it must be a gold coin standard where citizens have the right to have their paper currency redeemed in gold coins.

  Alan Greenspan also testified, and it was a rather decent statement; although he did not call for a gold standard, he advocated issuing treasury bonds that were backed by gold as an interim step in moving in that direction. In 1981, he was not as strong for the gold standard as he was in the 1960s, but not as hostile as he became later on.

  Hans Sennholz also submitted a statement to the Gold Commission. He, of course, was a strong supporter of the gold standard, but he was perceptive in not being very optimistic about it occurring in the near future. Sennholz said: “They are indulging in daydreaming when they envision an early return (to the gold standard). The fiat money forces are much too strong and public support for deficit spending yet too powerful to expect the currency reform in the foreseeable future.”

  Of course, if support for deficit spending was strong in 1981, all we need do is take a look at the pressures today to spend money that we don’t have. It will be a while before there’s serious consideration for currency reform associated with a restructuring of the worldwide financial system. But the day is fast approaching when it won’t be out of choice but out of necessity that we will have to face this issue.

  There will be no new Gold Commission, no open discussion regarding gold as money in the current administration. There will be, behind the scenes, the Fed and other elites planning a new system, international in scope and fiat in nature. It will not be smooth sailing, considering the task at hand.

  The countries with the greatest financial and military might will have the most influence, as the United States has had since World War II. Our military might remains supreme. Our economic strength is still first, but the trends tell us that that won’t last. Without economic strength and currency superiority, the military might well be steadily diminished. Although we’ll not see a second Gold Commission, one more serious than the first, the intellectual fight between fiat money and commodity money will rage, and the winner will decide our economic fate and what kind of society we will be living in.

  Paul Volcker was called to stop inflation and restore confidence in the dollar in the 1970s, which to a large degree he did. It was in 1982, when the Fed turned on the monetary spigots once again, that we returned to the boom-bust cycles. In some ways, the sophistication of the Fed in controlling necessary corrections created a false sense of security. Many came to believe Greenspan to be a great maestro of the economy; his reputation soared among Republicans and Democrats.

  Many, including Greenspan, believed that a new economic paradigm was upon us. There was a belief that serious economic downturns could be prevented by wise monetary policy. But their “wise monetary policy” had nothing to do with sound money or interest rates and credit being determined by the market. The economic planners literally believed that there would never be a price to pay for inflating a currency, manipulating interest rates, and monetizing debt. In reality, this “sophistication” in managing the economy was merely postponing the inevitable consequences, and it guaranteed they would be much worse.

  One of the wonderful products of the Gold Commission was our minority report, which remains in print today. 1 Only three members of the Gold Commission signed it, but the full committee recommended to Congress to mint a gold coin. Since gold was legal to own by Americans once again, this was a concession to the pro-gold supporters around the country. In addition, it was meant to challenge the near monopoly of the South African Krugerrand being sold in the United States.

  I argued for a gold coin without a dollar denomination stated as legal tender. I wanted people to think of money as a weight. My ultimate goal is to repeal legal tender laws. It’s just as well, though, that I lost that argument, since some are now testing the legal tender status of this coin by forcing it into circulation at face value.

  By the time the coin bill was finally passed in 1985, as a result of our effort in the Gold Commission, I was no longer in Congress. I introduced the original bill, but I left Congress at the end of 1984. Later there was a separate bill to mint the Silver Eagle.

  The bill authorized the minting of gold coins in four sizes: 1 ounce, ½ ounce, ¼ ounce, and . The 1 ounce coin was legal tender for $50, the ½ ounce was $25, the ¼ ounce was $10, and the ounce was $5. Do a little bit of arithmetic and you realize the ¼ ounce or $10 coin makes no sense at all. Those who made the final decision on the bill wanted it to be confusing. The one ounce of silver made legal tender for $1 further compounds the problem of defining a dollar when compared to a Federal Reserve note, an old silver dollar, or a Double Eagle.

  Making the coins legal tender was ridiculous and nonsensical and was done to guarantee that people wouldn’t consider paying a $50 debt with an ounce of gold, nor would they do it with silver dollars.

  I always assumed that the IRS would never accept for tax purposes true exchange at the face value of the new coins. But some enterprising and brave constitutionalists challenged this law in Las Vegas and paid the employees in silver and gold coins, and taxes were reported at the much lower level. Many paid no tax due to the lower minimum wage. As expected, it was challenged in court, and miraculously, litigants “won” their case in a hung jury. The silliness of our legal tender laws and the impossibility of defining a “dollar” convinced the jury that those charged did not commit fraud and it was the confusion of the law that was at fault.

  We have not yet heard the final word in this challenge. I’m delighted it’s being fought, and any favorable precedent may be helpful if an economic breakdown occurs and a lot more people do the same thing. But courts, as they did in the Civil War and the 1930s, have always ruled in favor of the tyrants when push comes to shove in dealing with the money issue. My bet is the government will not permit the use of new gold and silver bullion coins, that is, until the End the Fed revolution comes to fruition.

  CHAPTER 6

  CONVERSATIONS WITH GREENSPAN

  Over the years I’ve had
many interesting interchanges with Federal Reserve chairmen. The most occurred with Alan Greenspan. He fascinated me the most because of my early exposure to his support for the gold standard and disdain for the Federal Reserve and paper money.

  I was a subscriber to Ayn Rand’s objectivist newspaper of the 1960s and studied closely Greenspan’s 1966 article “Gold and Economic Freedom” in that publication. 1 I told him that he had made a favorable impression on me—once. He always was aware of exactly where I was coming from, and at times, even when I did not explicitly mention gold in my questions, he would answer in the context of the gold standard. Although frequently annoyed, and more so as the years went on, he never seemed quite as annoyed or dismayed as Ben Bernanke is with my questions.

  Greenspan’s claim, in an answer to one of my questions, was that the central bankers essentially had become smart enough to achieve all the benefits of the gold standard without its limitations. Of course, it’s the limitations that are so valuable, and the reason the gold standard is so important to a free society. These thoughts he stated brilliantly in his own historic article, “Gold and Economic Freedom”:

  In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits as silver or copper or any other good and thereafter decline to accept checks as payments for goods, bank deposits would lose their purchasing power and government-credited bank credit would be worthless as claims on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

  This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.

  According to his own logic, Greenspan had simply become a statist.

  I once asked Greenspan about his views on the work of Mises and the Austrian economists. Here is a transcript from June 25, 2000.

  RON PAUL: Basically, the way I understand the Austrian free market explanation of a business cycle is once we embark on inflation, the creation of new money, we distort interest rates and we cause people to do dumb things. They overinvest, there is malinvestment, there is overcapacity and there has to be a correction, and the many good members or well-known members of the Austrian school, I am sure you are well aware of them, Mises, Hayek, and Rothbard, as well as Henry Hazlitt, have written about this, and really did a pretty good job on predicting. It was the reason I was attracted to their writing, because certainly, Mises understood clearly that the Soviet system wouldn’t work.

  In the 1920s, the Austrian economic policy explained what would probably come in the 1930s. None of the Austrian economists were surprised about the bursting of the bubble in Japan in 1989, and Japan, by the way, had surpluses. And, of course, the best prediction of the Austrian economists was the breakdown of the Bretton Woods Agreement, and that certainly told us something about what to expect in the 1970s.

  But the concerns from that school of thought would be that we still are inflating. Between 1995 and 1999, our M3 money supply went up 41 percent. It increased during that period of time twice as fast as the GDP, contributing to this condition that we have. We have had benefits as a reserve currency of the world, which allows us to perpetuate the bubble, the financial bubble. Because of our huge current account deficit, we are now borrowing more than a billion dollars a day to finance, you know, our prosperity, and most economists, whether they are from the Austrian school or not, would accept the notion that this is unsustainable and something would have to happen.

  Even recently I saw a statistic that showed total bank credit out of the realm of day-to-day activity in control of the Fed is increasing at the rate of 22 percent. We are now the biggest debtor in the world. We have $1.5 trillion foreign debt, and that now is 20 percent of the GDP, and these statistics concern many of the economists as a foreboding of things to come.

  And my question dealing with this is, where do the Austrian economists go wrong? And where do you criticize them and say that we can’t accept anything that they say?

  My second question deals with productivity. There are various groups that have said that our statistics are off. Estevao and Lach claim, and this was written up in the St. Louis Fed pamphlet, that the temps aren’t considered and that distorts the views. Stephen Roach at Morgan Stanley said we don’t take into consideration overtime. Robert Gordon of Northwestern University says that 99 percent of the productivity benefits were in the computer industry and had very little to do with the general economy, and therefore, we should not be anxious to reassure ourselves that the productive increases will protect us from future corrections that could be rather serious.

  ALAN GREENSPAN: Well, I will be glad to give you a long academic discussion on the Austrian school and its implications with respect to modern views of how the economy works having actually attended a seminar of Ludwig Mises, when he was probably ninety, and I was a very small fraction of that. So I was aware of a great deal of what those teachings were, and a lot of them still are right. There is no question that they have been absorbed into the general view of the academic profession in many different ways, and you can see a goodly part of the teachings of the Austrian school in many of the academic materials that come out in today’s various journals, even though they are rarely, if ever, discussed in those terms.

  We have an extraordinary economy with which we have to deal both in the United States and the rest of the world. What we find over the generations is that the underlying forces which engender economic change themselves are changing all the time, human nature being the sole apparent constant throughout the whole process. I think it is safe to say that economists generally continuously struggle to understand which particular structure is essentially defining what makes the economy likely to move in one direction or another in the period immediately ahead, and I will venture to say that that view continuously changes from one decade to the next. We had views about inflation in the 1960s, and in fact, the desirability of a little inflation, which we no longer hold anymore, at least the vast majority no longer hold as being desirable.

  The general elements which contribute to stability in a market economy change from period to period as we observe that certain hypotheses about how the system works do not square with reality. So all I can say is that the long tentacles, you might say, of the Austrian school have reached far into the future from when most of them practiced and have had a profound and, in my judgment, probably an irreversible effect on how most mainstream economists think in this country.

  RON PAUL: You don’t have time to answer the one on productivity, but in some ways, I am sort of hoping you would say don’t worry about these Austrian economists, because if you worry too much about them, and these predictions they paint in the past came true, in some ways we should be concerned, and I would like you to reassure me that they are absolutely wrong.

  ALAN GREENSPAN: Let me distinguish between analyses of the way economies work and forecasts people make as a consequence of those analyses. The remarkable thing about the behavior of economies is they rarely square with forecasts as much as one should hope they did. I know there is a big dispute on the issue of productivity data. I don’t want to get into that. We would be here for the rest of the month. I think the evidence, in my judgment, is increasingly persuasive that there has been an indeed underlying structural change in productivity in this country.

  Prior to one of our biannual meetings with Greenspan, we were given a photo opportunity. Since it was a scheduled event, I brought with me my copy of the original faded green objectivist newspaper of 1966. During the short visit and picture taking, I
showed him a copy of the letter and asked if he recalled the newsletter, which he quickly acknowledged.

  Upon opening the small booklet to his “Gold and Economic Freedom” article, I asked if he would autograph the article for me, which he promptly did. As he was signing the article, I asked if he would like to put a disclaimer on it. Astoundingly, he answered that he had just recently reread it and wouldn’t change a word of it.

  In a hearing July 21, 2004, the exchange in which I discussed the housing bubble went as follows:

  RON PAUL: As the economy slowed in 2000, 2001, of course, there was an aggressive approach by inflating and lowering the interest rates to an unprecedented level of 1 percent. But lo and behold, when we look back at this, we find out that manufacturing really hasn’t recovered, savings hasn’t recovered, the housing bubble continues, the current account deficit is way out of whack, continuing to grow as our foreign debt grew, and consumer debt is rising as well as government debt.

  So it looks like this 1 percent really hasn’t done much good other than prevent the deflating of the bubble, which means that, yes, we have had a temporary victory, but we have delayed the inevitable, the pain and suffering that must always come after the distortion occurs from a period of time of inflating.

  So my question to you is: how unique do you think this period of time is that we live in and the job that you have? To me, it is not surprising that half the people think you are too early and the other half think you are too late on raising rates. But since fiat money has never survived for long periods of time in all of history, is it possible that the funnel of tasks that you face today is a historic event, possibly the beginning of the end of the fiat system that replaced Bretton Woods thirty-three years ago? And since there is no evidence that fiat money works in the long run, is there any possibility that you would entertain that, quote, “We may have to address the subject of overall monetary policy not only domestically but internationally in order to restore real growth”?