by Ron Paul
The gold standard has historically been a bulwark against inflation. It is politically manipulated money such as we have had since the 1930s that causes our inflation. That should not be unexpected, or difficult to understand. The supply of gold is relatively fixed and grows only modestly. But in a free economy, capital investment leads to ever-greater productivity, and the ability to produce more and more goods over time. So with gold relatively stable on the one hand and the supply of goods growing by leaps and bounds on the other, the gold will tend to be worth more and more, and the prices of these goods will be lower and lower.
History bears this out. An item that cost $100 in 1913 (when the Federal Reserve Act was passed) would cost $2014.81 in 2006. An item that cost $100 in 2006 would have cost $4.96 in 1913. As we can see, the dollar has lost nearly all its value since the Fed was established. Now, if the gold standard had brought about such an outcome, we would never hear the end of all the howls of outrage. But the Fed does it and . . . utter silence. The Fed has managed to insulate itself from the kind of criticism that is normally directed at all other institutions that harm Americans.
And in fact the gold standard did no such thing. People's money increased in value under the gold standard. They were not looted by inflation. An item that cost $100 in 1820 would have cost only $63.02 in 1913.
The Federal Reserve now no longer reports the figures on M3, the total money supply. Spokesmen claim that among the reasons for this change is that it costs too much money to gather these figures--this from an institution that creates however much money it wants, is off the books, and is never audited. To the contrary, the real reason we don't get these figures anymore, I am certain, is that they are too revealing. They tell us more about what the Fed has been up to and the damage it has been doing to our dollar than they care for us to know.
Any government that inflates the money supply runs the risk of hyperinflation, which occurs when the money supply is increased so much as to render the currency completely worthless. It can occur very quickly and suddenly, and has a very rapid snowballing effect.
The textbook case in the twentieth century took place in Germany in 1923 (although a worse hyperinflation occurred in Hungary after World War II). When in that year the French occupied the Ruhr Valley, an industrial and resource-rich part of western Germany, the German government encouraged workers there to go on a general strike and refuse to work. It paid their salaries during that strike by simply printing the necessary money.
But the process spun out of the government's control. People could see their money was losing value. They knew that the longer they held it, the less it would buy. So they rushed out to buy anything they could, since just about anything was worth more than the valueless pieces of paper that German marks were rapidly becoming. And the more they spent, the higher prices rose, leading still more people to unload their currency on whatever was for sale in anticipation of still higher prices in the future. The result was the complete ruin of the German mark, which German children began gluing together to make kites and German adults burned in order to keep warm.
Who can be surprised to learn that it was also in 1923 that Adolf Hitler made his first attempt to seize power? Intolerance and extremism always find a readier audience in unfavorable or (as in this case) chaotic economic times.
In the United States, November 2007 alone saw wholesale prices increase by 3.2 percent--an annualized rate of nearly 40 percent. With all manner of bailouts contemplated for mortgage lenders and a Federal Reserve committed to ever more money creation, are we so sure that hyperinflation could not occur here? In fact, that outcome becomes more likely every day.
Inflation of the money supply also produces financial bubbles and instability. The monetary inflation of the 1990s helped yield $145 billion in profits for the NASDAQ companies between 1996 and 2000. That entire amount was then lost in a single year--not to mention the trillions of dollars of paper losses in stock values from their peak in early 2000. Politicians are all tears and pity about large stock-market losses, but they never make a connection between the bubble economy and the monetary inflation generated by the Federal Reserve. Congress has chosen instead to blame the analysts for misleading investors--a drop in the bucket compared to the misleading information for which the Federal Reserve has been responsible, what with the artificially low interest rates it has brought about and a financial market made flush with generous new credit at every sign of a correction over the past ten years. By preventing the liquidation of bad debt and the elimination of malinvestment and overcapacity, the Federal Reserve's actions help keep financial bubbles inflated and make the eventual collapse all the more severe.
It is this, the Fed's policy of artificially cheap credit, that caused the housing bubble that has caused so many Americans so much grief. Banks, awash in reserves created out of thin air by the Fed, began making mortgage loans to just about anyone. With credit freely available, people bought larger and more expensive homes than would otherwise have made sense. They were set up for disaster, when reality would inevitably reassert itself amid the fantasy world the Fed had created. Using Money Zero Maturity figures, we find that the increase in mortgage debt since the 2001 recession is equal to the Fed's increase in the money supply. That is where the new money went, and it is where the housing bubble came from.
And it wasn't just that people were enticed by all the available credit into living beyond their means. The housing bubble caused them to make other destructive and unwise decisions as well. With real estate prices artificially inflated, people felt wealthier. In light of how wealthy the value of their homes made them feel, they saved less. And as economist Mark Thornton puts it, Americans began using their homes as giant ATMs to withdraw cash from the equity they had built up.
The 1990s witnessed a dramatic upward trend in new housing starts. Revealingly, no downturn in housing starts was observed during the 2001 recession, the only recession on record in which no such downturn has taken place.
Few Americans will be surprised at the statistics: between 1998 and 2005, home prices increased by 45 percent. As Thornton points out, that figure is all the more remarkable when we remember all the forces that were simultaneously putting downward pressure on home prices, including new home-building technology, an increased supply of lower-priced labor, mainly from Mexico, and the fact that new housing tends to be built on lower-priced land. That prices could nevertheless rise so sharply is a sign of the severity of the bubble.
All this has real consequences for real people. As the bubble bursts, many will face foreclosure or bankruptcy and will see their credit ratings decimated. Construction firms will face hard times, and unemployment in the industry will rise sharply. The effects on the wider economy could be equally devastating.
In the midst of this disaster, where are those who will point the finger where it belongs? Who will call the Federal Reserve to account for injecting into the economy all the funny money that created the housing bubble in the first place?
Former Fed chairman Alan Greenspan once boasted that the Fed's policy had helped many more people buy homes. Those boasts became scarcer as the bubble began to burst and people's lives were thrown into turmoil. Government intervention always has unintended consequences that cause harm, a truism that applies just as strongly to interventions into the monetary system. Devastated homeowners are only the latest victims.
All kinds of easy options were available to just about anyone with any creditworthiness, including tiny or no down payments and adjustable-rate or interest-only mortgages. People who wanted to follow a more traditional path to homeownership, such as a fixed-rate mortgage and a 20 percent down payment, were completely shut out of this housing market, yet another perverse effect of the bubble.
So what should be done?
First of all, it's long past time to put the monetary issue back on the table as a subject for genuine discussion, and then to start asking some forbidden questions. For over a hundred years, the money issue h
as been absent from our political process. No political campaign has focused on it or even said much of anything about it. For most people, in fact, the Fed is a complete mystery, its operations incomprehensible. That seems to be just the way the Fed likes it. We are supposed to be bored by it. We are supposed to treat it as a given, like the air we breathe. We are supposed to have confidence in it--surely the experts who run our monetary system for us (and who of course have a vested interest in perpetuating the system we now have) couldn't be giving us bad advice! But point to it as the source of our eroding standard of living, the ravages of the boom-bust business cycle, and the financial bubbles that have ruined countless Americans? That is simply not to be found anywhere along the spectrum of allowable opinion in America.
It's time for some fresh thinking for a change--an unbiased, rational reappraisal of a monetary system that is presented to us as the best of all possible worlds, but whose dangers grow clearer and more urgent with each passing day.
The first practical measure that should be taken is to legalize competition. Restore to Americans their right to use precious metals as a medium of exchange--a simple and reasonable initial step if we believe in freedom. It is essential that Americans be given the chance to escape from this system and protect themselves from possible financial ruin, by being able to use gold and silver if they so desire. If anyone would rather continue to transact in the depreciating dollar, he would be free to do so. But anyone who prefers a currency that holds its value and won't become worthless before his eyes just because his government ran the printing press one too many times would have real options.
Right now, various disabilities make it difficult for gold to be used in market transactions. Sales and capital gains taxes on precious metals should be promptly repealed, and the enforceability of gold clauses in private contracts definitively reaffirmed.
What other policy for sheltering Americans from the collapse of the dollar is being advanced? Is there any, apart from comforting delusions that the Federal Reserve, which is itself responsible for our financial mess, can be trusted to put everything right? For one thing, how can we be expected to place so much trust in a Federal Reserve System we're not even allowed to audit? And even if the Fed chairman really possessed the singular genius our media and politicians regularly ascribe to him (no matter who he is), what if things have reached a point at which the Fed simply cannot stop the collapse? What if economic law, which the Fed can no more defy than it can repeal the law of gravity, is about to hit the Fed and the American people like a tidal wave, before which little rate cuts here and there are like the tiny umbrella Wile E. Coyote puts over his head to protect himself from falling boulders?
In other words, what if I and other sound-money advocates are right?
If we're wrong, then all we've done is eliminate some taxes on gold and silver. No harm done. But if we're right, we've given the American people a crucial safety net against financial collapse.
Tinkering here and there is not the solution, but as I've said, it is the only proposal Americans are permitted to hear. It is long past time that we begin asking fundamental questions rather than trivial ones, that we educate the people rather than distract or confuse them. Simply trying to patch up monetary problems after they've occurred, whether it is the NASDAQ bubble or the housing bubble, neglects to treat the root of the problem and must therefore fail. We cannot solve the problems of inflation with more inflation. We need to ask: How did we get here? What causes these bubbles? Financial bubbles simply happen, the political establishment tells us; these bubbles are an unfortunate but inevitable side effect of a market economy. That is nonsense. But it is convenient nonsense for some people, and that's why it gets repeated so often. It gives the perpetrators of the financial debacle that now confronts us a chance to get off the hook. We shouldn't let them.
CHAPTER 7
The Revolution
I have heard it said that mankind does not want freedom, that people are happy to be slaves as long as they are entertained and well fed. I have likewise heard it said that most Americans have bought into the version of events they are given in the mainstream media and are perfectly content to be told what to think--what is good, what is bad, who is politically acceptable, who is politically unacceptable.
I don't believe this for a second. For one thing, our own American Revolution would have been impossible if this mentality had prevailed. Contrary to what many Americans have been taught, a majority, not a minority, of the colonists supported the fight for liberty against Great Britain.*
The fact is, liberty is not given a fair chance in our society, neither in the media, nor in politics, nor (especially) in education. I have spoken to many young people during my career, some of whom had never heard my ideas before. But as soon as I explained the philosophy of liberty and told them a little American history in light of that philosophy, their eyes lit up. Here was something they'd never heard before, but something that was compelling and moving, and which appealed to their sense of idealism. Liberty had simply never been presented to them as a choice.
We are engaged in a great battle of ideas, and the choices before us could not be clearer. I urge those who agree with this important message to educate themselves in the scholarship of liberty. Read some of the books I recommend in my reading list. Learn from the Mises Institute and Mises.org, the most heavily trafficked economics Web site in the world. Visit LewRockwell.com, an outstanding and crucially important Web site I visit every day.
I have devoted this book to ideas that I consider important, if typically neglected, if our country is to restore its former self. How much of my program could be accomplished in a presidential term, or in a decade or two, I do not know. But a bare minimum of what the successor to George W. Bush should seek to achieve? I suggest the following.
First, we need to rethink what the role of government ought to be, and fast. If we continue to think of our government as the policeman of the world and as the Great Provider from cradle to grave, our problems will grow worse and worse and our downward economic spiral, the first signs of which we are now witnessing, will only accelerate. The role of world policeman has made our country poorer and less safe. The welfare state likewise threatens our financial solvency and has caused the once-robust institutions of civil society--which are no longer needed when government performs all functions--to atrophy.
Right now our government is borrowing $2.2 billion every day, mainly from China and Japan, to pay for our overseas empire. As our dollar continues to decline, thanks to Federal Reserve inflation, the American debt instruments that these countries are holding lose their value. We cannot expect these and other countries to hold on to them forever. And when they decide that they no longer wish to, our fantasy world comes crashing down on us. No more empire, no more pledging ever more trillions in new entitlements. Reality will set in, and it will be severe.
Our present course, in short, is not sustainable. Recall the statistics: in order to meet our long-term entitlement obligations we would need double-digit growth rates for 75 consecutive years. When was the last time we had double-digit growth for even one year? Our spendthrift ways are going to come to an end one way or another. Politicians won't even mention the issue, much less face up to it, since the collapse is likely to occur sometime beyond their typical two-to-four-year time horizon. They hope and believe that the American people are too foolish, uninformed, and shortsighted to be concerned, and that they can be soothed with pleasant slogans and empty promises of more and more loot.
To the contrary, more and more intelligent Americans are waking up to the reality of our situation every day. Now we can face the problem like adults and transition our way out of a financially impossible situation gradually and with foresight, with due care for those who have been taught to rely on government assistance. In the short run, this approach would continue the major federal programs on which Americans have been taught to be dependent, but in accordance with our Constitution it would eventually
leave states, localities, and extended families to devise workable solutions for themselves. Or we can wait for the inevitable collapse and try to sort things out in the midst of unprecedented economic chaos. I know which option I prefer.
No one who has learned to be dependent on these programs needs to be thrown into the street. But in the long run these programs are insolvent. If we do not begin a transition process funded by savings from our bloated overseas presence, everyone will be out in the street because the programs will simply collapse.
Americans were given an implied contract when they began paying into Social Security, so we should not want to strip away from them the resources they understandably anticipated receiving upon retirement. Contrary to popular belief, right now money for Social Security recipients comes not from some "trust fund" into which people have paid over the course of their working lives. If congressmen had voted the way I consistently have--I have never voted to spend a single penny out of Social Security--then we would not face nearly so serious a problem. The fact is, there is no money in any trust fund. The government spent it on other things. The money that retirees receive comes directly from current workers. Current workers are not building up a Social Security nest egg for themselves; they are giving their money to current recipients and hoping there will be enough workers to support them when they reach retirement age. But no part of the system involves paying money to the government and receiving that money with interest after a certain age. The government feeds into that illusion, but it is an illusion all the same.
I have long favored giving young people the right to opt out of Social Security, since such an option follows naturally from my belief in individual liberty. But since current Social Security recipients are being supported by tax receipts from current workers, how would those people be cared for if young people began opting out? The transition period should be funded by curtailing our overseas expenditures, which are not only out of control but have also compromised our real security interests by spreading our forces so thin. If we really oppose Big Government, we cannot make an artificial exception for bloated military bureaucracies, which traditional budget-minded conservatives never hesitated to look at seriously as a source of potential savings. As many empires throughout history have learned too late, more is not always better. In this way we can phase in the ideas of responsibility and self-reliance, commonsense ideas to which young people respond very favorably when I mention them.
