by Ron Paul
Our carelessness in allowing our government, with congressional complicity, to finance foreign entanglements with Federal Reserve credit makes it easy for Congress to neglect its responsibility to avoid any war that is not specifically declared by Congress. Whether it’s fighting illegal wars or financing them with fiat money, lack of respect for the Constitution and congressional apathy for its responsibility got us into the crises in which we find ourselves.
There’s strong support for the current system, especially when the boom part of the cycle is still in place. The beneficiaries are numerous and well represented in Washington.
Military spending is said to be needed to make us safe. The result is that the military-industrial complex thrives—and we’re made far less safe and much poorer.
Spending on housing programs and Federal Reserve–driven low interest rates are designed to get more people into homes of their own. The result is that government bureaucrats and politicians benefit. Builders, bankers, mortgage companies, insurers, and developers thrive, and when the bubble bursts, the poor for whom the programs were designed lose their homes and their jobs.
This is true in every government-subsidized program, including medicine, banking, education, and agriculture. Fiat money looks like a panacea. The results are tragic: poverty and chaos ultimately ensue, and powerful special interests demand a bailout from the victims.
If we’re not careful, a lot of anger will result from the collapse of this house of cards that the bank of paper built.
The American housing market was built on a financial structure with smoke and mirrors. It’s dangerous because today’s wealth is shrinking and the same people who benefited during the boom years are still in charge, and their sole goal is to maintain wealth and power and come out on top. The special interests benefited and will need to find victims to pay the bills. All the efforts we hear about in Washington are designed to position the winners in such a way that they can pick up the pieces and pass on the bill to the innocent. This process will not go smoothly, and those who suffer will soon realize that some Americans are more equal than others.
The worse the economy gets, the more power Congress is willing to grant to the Federal Reserve. Who would have ever believed that it would come to this? Trillions of dollars created and distributed by the Fed with no requirement to submit to any oversight.
Nationalization goes on with hardly a whimper from Congress or the people. The buying up of corporate assets is financed through the inflationary policies of the Fed, which is the very process that brought our economy to its knees.
As a way to patch up the system, there is now new talk of the old Keynesian dream of a world currency. I seriously doubt that it will happen. It will falter for the same reason that it has always faltered: nationalist pressure. It is one thing to create a new composite currency for Europe. Not even that is entirely stable. But the world elites will not likely get their act together in a way that would do the same for the world.
I’m happy about that. It is true that a world currency would achieve great gains in terms of efficiency. The classical gold standard was a world currency of sorts, albeit with different names for national currencies. This is an ideal I would like to see restored. But a world currency of fiat paper money would be even more vulnerable to inflationary pressure than the current system. The last check on inflationary finance that remains in the system is the prospect of a falling value of one currency relative to others. A new world currency would remove that one check, however ineffective it is.
There are other outcomes of the current crisis that are more likely, and even scarier. The great threat that we will likely face will be the willingness of our policy makers to bring an end to the “depression” as they claim was done in 1941: with war. We’re hearing this ridiculous argument all the time, that the Depression only ended with World War II, as if killing millions of people and giving up all consumer goods are good for the economy. We have a dangerous foreign policy; we follow foolish economic theories; and the people, it’s argued, need a distraction. Too often that distraction is war.
There is a much better alternative.
CHAPTER 15
THE WAY OUT
I’ll tell you what I think about the way
This city treats her soundest men today:
By a coincidence more sad than funny,
It’s very like the way we treat our money.
The noble silver drachma that of old we were
So proud of, and the recent gold coins that
Rang true, clean-stamped and worth their weight
Throughout the world, have ceased to circulate.
Instead, the purses of Athenian shoppers
Are full of shoddy silver-plated coppers
Just so, when men are needed by the nation,
The best have been withdrawn from circulation.
From The Frogs by Aristophanes, about 400 B.C.
Even in 400 B.C., as Aristophanes explains, and in ancient Egypt as described in the Old Testament, dishonesty in maintaining sound money coincided with the absence of moral leaders and excesses in foreign military aggression. Our money has gone bad. Our financial system is a mess. Abuse of power and abuse of money bring a nation down.
More people are coming to understand that the Federal Reserve is responsible for the crisis we’re in and that it must be ended. Total U.S. debt is at a historic high. It is now greater than 350 percent of GDP. The worst this debt was previously was 300 percent in 1933, not a very good year for America. In 1971, the year Bretton Woods ended, this debt was a more sensible 150 percent of GDP. Since 1971, with the new fiat dollar standard established, the debt grew exponentially as one would have expected with no restraint on the Fed to create new money out of thin air. With growth now decreasing rapidly and U.S. government debt expanding by trillions of dollars each year, this number will quickly soar.
Today we would be hard-pressed to find any movement in the right direction by our leaders. Just in the past year, we have had a barrage of new programs, all based on bigger government, more dollar debasement, and greater power given to the Fed and the executive branch of government. These new federal programs include the Primary Dealer Credit Facility, the Term Auction Facility, the Term Securities Lending Facility, and the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility. These are in addition to the routine technique of low interest rates and low reserve requirements directed by the Federal Reserve to keep the new money flowing.
It’s sad, because our future hangs in the balance, and what we do is crucial to the outcome.
Congress passed the first stimulus package of more than $100 billion in 2008. The Troubled Asset Relief Program (TARP) of $700 billion became law in October 2008. The new administration promised to pass another stimulus package early in 2009, worth up to a trillion dollars. It is engaging in every manner of tricky finance that will end in effectively nationalizing the banking system.
Despite the fact that there are no beneficial results, the worse the economy gets, the greater are the demands for more of the same. The total commitment at the end of 2009 will exceed $9 trillion.
There is another path, but it requires a complete turnaround. It requires only the political will to unplug the machinery of the Fed. Contrary to what people might think at first, this will not mean an end to the financial system as we know it. In a post-Fed world, we will still have the dollar, banks, ATMs, online trading, Web-based systems of fund transfer—none of this is going anywhere. What will be added to the system will be vastly more financial options that are currently being kept at bay, including trading and contracting in many different currencies and new, sounder investment opportunities.
When we unplug the Fed, the dollar will stop its long depreciating trend, international currency values will stop fluctuating wildly, banking will no longer be a dice game, and financial power will cease to gravitate toward a small circle of government-connected insiders. The entire banking industry would u
ndoubtedly go through an upheaval of sorts as sound banks thrive and unsound banks go the way of the investment banking industry of last year: out of business as they should be. Those who are dependent on Fed welfare would have to clean up their act or shut down. Depositors would become intensely aware of which banks are sound and which are not.
Returning again to the theme at the outset of this book, the only unique power that the Fed possesses is the power to inspire and support the creation of new money out of nothing. Who needs that? Banks like it. Government likes it. High-flying financiers like it. But the people do not benefit—just the reverse. A lesson that was taught by the classical economists that remains true: there is no ideal supply of money in a society. Any quantity of money will do, so long as the quality of the money is sound. Prices adjust based on the existing money supply. New quantities of money injected into society confer no social benefit. If production rises and the money supply remains stable, the purchasing power of the money will rise. If production falls while the supply of money remains stable, the purchasing power of money will fall.
We should think of money as nothing more than it was at its origin: a market-created good that emerged out of trade. The most valuable commodity in society, the one good that could be traded for all other goods and thereby help facilitate complex exchange, emerges as money, whether that be beads or animal skins or jewels or precious metals. Gold became money because it had all the properties people look for in a good money. Government had nothing to do with it.
In an ideal world, the Fed would be abolished forthwith and the money stock frozen in place. That doesn’t mean that there would be no more credit; rather, credit would be rooted in money saved, not money created. Congress would remove the Fed’s charter, and the president would stop appointing Fed governors. Its buildings could be used for other purposes, perhaps bought by private banks that would operate as regular businesses. At the same time, the dollar would be reformed so that it again would become redeemable in gold. The federal government’s gold stock could be used to guarantee this convertibility at home and abroad. All remaining powers associated with money could then be transferred to the U.S. Treasury, but now there would be a check on what government did with its power.
The gold standard with no Fed would impose discipline. A new culture would emerge quickly in Washington. There would be a new clarity about the cost of wars and government programs. Just as in our household budgets in hard times, lawmakers would realize that they can’t do all things. They must make choices. They must make cuts. Accounting rules would come to rein in ambitions, just as in the rest of the real world. We might even see the emergence of a new generation of political leaders who speak frankly and do what they say.
While a gold standard would be a wonderful change, we shouldn’t wait for one before we end the Fed. The dollar has a preeminent role in the world economy. It benefits from its long history as a hard money. This will not change in a post-Fed world. The dollar could continue on as it is today, and its value would start to rise once markets were convinced that the money supply would be fixed.
The federal government would finance its operations the way that state governments do today. Note that states do not have miniature central banks and they manage just fine. The money that the state governments spend is taken in by either floating bonds or by taxation. The legislators and executives are on a short leash in every way. They raise or cut spending based on real factors. Also, the bonds issued by states and municipalities are evaluated and priced by the market. They contain a default premium based on their soundness.
In the same way, without a Fed, the pricing of the debt of the federal government would become more realistic. There would be a built-in default premium that is absent from the current system, which deludes people into believing there is such a thing as a 100 percent safe way to earn interest on money. I have no doubt that ending the Fed would lead to the introduction of a substantial discount on government-issued bonds relative to how they trade now. But this is a very good thing, a truth-telling moment. The value of the debt will fluctuate based on the market’s assessment of government policy. Some new, expensive war or corporate welfare program, and the value would fall, as it should, meaning we would have fewer of both.
An end to the money-creating power and a transfer of remaining oversight authority from the Fed to the Treasury would be marvelous steps in the right direction. But let us stretch these ideas a bit further and reconsider the entire idea of a government monopoly on money. The Founding Fathers never set out to create a single national monetary system. Money and banking were left to the states, with the proviso that the states themselves could only make gold and silver legal tender. At the same time, there were no restrictions on private minters and private (free) banking. We should embrace this system again, repealing legal tender laws and letting everyone get into the business of the production of money. This would create a competitive market in which the best monies would emerge over time to compete directly with the federal government’s dollar.
This system is ever more viable in an age of digital trading and communication. Everyone with an Internet connection now has the world financial system available at their fingertips. No longer should people be forced to use one money over another. Any and every monetary instrument should be made available to all. Let’s put the power of free enterprise to work in the area of choosing which money is best.
It surprises me that even with all the legal restrictions on alternative money and payment systems many gold currencies are today thriving on the Internet, as well as complex private payment systems such as Paypal. The market will bring forth as many blessings in the area of monetary entrepreneurship as it does in all other goods and services. And it would be the same in banking. Banks would no longer be rewarded for leveraging deposits as high and long as possible. Soundness and safety would be the marks of successful banks, and their basis of profitability.
Ending the Fed need not be in one bold stroke. We could transition toward the goal. There are many small steps we can take toward sound money. The power of the Fed to increase the money supply could be curtailed. The Fed could be restricted in its open-market operations. We could, by legislation, deny authority to the Fed to monetize any debt. We could prohibit the Fed from participating in central economic planning.
We could stop the Fed bailout of its friends on Wall Street. We could have a true audit of the Federal Reserve and demand transparency for all its actions and collaborative plans with other central banks. Congressional authority to regulate the Fed should replace regulation of the financial markets. We would eliminate restrictions on starting new banks. We could permit alternative currencies. Those who want out of the monetary system should be protected by law. All taxes, sales, and capital gains must be removed from gold and silver when used as money.
The only way to bring about any of these changes is for the people to speak, and to speak clearly. Protests do a world of good. So does running for office. So does teaching the truth in high schools, home schools, colleges, and universities. Letters, seminars, articles, talk shows, all of these work to bring about political change. Educating yourself is the first step. (See my suggested reading list at the end of this book.)
Will we soon see the Congress, the courts, and the executive branch acting responsibly and working for a graceful transition to sound money? That is not likely. It did happen, under somewhat similar circumstances, with the Resumption Act of 1875, when we went back on the gold standard after it was suspended during the Civil War, and the return to gold was essentially a nonevent.
It’s a different story today. We have a corporate welfare-warfare constituency demanding financing well beyond what could be paid for through taxes or even borrowing. The mentality is that there’s no way we will give up our grandiose ideas of the role of government. The bailout psychosis that prevails prevents a sensible approach to transitioning away from the current deeply flawed system. Most people, especially those in Washington
, still believe this system can be salvaged. They are wrong, and dangerously wrong.
We should work for reform and sound economics with a strict adherence to the Constitution, but, absent such change, we should be prepared for hyperinflation and a great deal of poverty with a depression and possibly street violence as well. The worse the problem, the greater the chance a war will erupt, especially as protectionist sentiments around the world grow. These are the wages of central banking.
Personal safety and economic security are our own personal responsibility. We can only hope that the government will not interfere in any effort of citizens to protect their families and their personal property.
I founded an organization called the Campaign for Liberty to bring like-minded people together. Efforts to pressure the government and politicians for positive change must continue, despite the pessimism that’s sure to grow. I started the Foundation for Rational Economics and Education, which teaches economic liberty. I’m also a dedicated reader every morning of LewRockwell.com and Mises.org, the Web site of the Ludwig von Mises Institute, for which I serve as Distinguished Counselor.
Understanding the issues and how the free market offers the only answer to concerns about the well-being of our fellow man is crucial. Most supporters of big government are not malicious but are misled. Intellectually and compassionately explaining the reason freedom works is required for credibility. But first we must learn those reasons well ourselves. And that is entirely in our own hands.
The most encouraging part is that truth is on the side of liberty. Prosperity and social well-being are never a consequence of government’s running the economy or regulating personal behavior. Our goals can only be achieved with a society that respects and equally protects the rights of every human being, old and young, rich and poor, regardless of gender, color, race, or creed. We must reject the initiation of violence by individuals or governments as morally repugnant.
