by Rep. Ron Paul, MD
US House of Representatives
September 5, 2003
All great republics throughout history cherished sound money. This
meant that 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” (The Objectivist, July
1966), Greenspan starts by saying:
“An almost hysterical antagonism
toward the gold standard is an issue that unites statists of all
persuasions. They seem to sense…that gold and economic freedom
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.
“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
“In the absence of the gold
standard, there is no way to protect savings from confiscation
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 Alan 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 a 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’s why people hardly objected when
Roosevelt and his statist friends confiscated gold and radically
debased the currency, ushering in the age of worldwide fiat
currencies with which the international economy struggles today.
If honest money and freedom are inseparable, as Mr. Greenspan
argued, and paper money leads to tyranny, one must wonder why it’s
so popular with economists, the business community, bankers, and our
government officials. The simplest explanation is that it’s 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 increased 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 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 of the destructiveness of the Continental dollar.
Mason of Virginia said that he had a “Mortal hatred to paper money.”
Constitutional Convention delegate
Oliver Ellsworth 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 the delegates to the convention, and was
the reason the Constitution limited congressional authority to deal
with the issue and mandated 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
“The necessary confidence between man and man,
on 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 issue.
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 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
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.
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’s 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
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,
the Federal Reserve manipulating its value to serve
a Moral Issue
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
remains strong. No one would welcome a counterfeiter to town, yet
this same authority is blindly given to our 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’s paper currency or a computer entry,
it’s morally identical to the counterfeiter who illegally prints
currency. Both ways, it’s 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 money or credit early in its circulation. The
insidious and eventual cost falls on unidentified victims who are
usually oblivious to the cause of their plight. This system of
legalized plunder (though not constitutional) allows one group to
benefit at the expense of another. An actual transfer of wealth goes
from the poor and the middle class to those in privileged financial
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 can’t 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 easy-credit policy. The
easy credit helps investors and consumers who have no qualms about
going into debt and even declaring bankruptcy.
If one 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’s 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.
a Political Issue
Although the money issue today is of little political interest to
the parties and politicians, it should not be ignored. Policy makers
must contend with the consequences 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 chose 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 huge hoards of gold in 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. This post-war 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
Andrew Jackson, a strong proponent of gold and opponent of central
banking (the Second Bank of 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
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
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 behind McKinley’s bland but
correct arguments 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 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 ’70s,
as well as the current ongoing economic crisis.
A central bank and fiat money enable 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 cost 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
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’s wise to do so or not.
The money issue should indeed be a gigantic political issue. Fiat
money hurts the economy, finances wars, 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 of
whether 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’m
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 promoting grand
worldwide military operations, while arguing that “deficits don’t
matter” as long as marginal tax rates are lowered, 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
This is not the kind of interest in the Fed that we need. I’m
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 no value. We have just gone through two-and-a-half years
of tinkering with 13 rate cuts, and recovery has not yet been
achieved. It’s just possible that we’re 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
an Economic Issue
For a time, the economic consequences of paper money may seem benign
and even helpful, but are always disruptive to economic growth and
Economic planners of the Keynesian-socialist type have always
relished control over money creation in their efforts to regulate
and plan the economy. They have no qualms with using this 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’s the
only system they have known. The principles of sound money and
market banking are not taught in our universities. 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 commodities 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 and political structure becomes
unstable. There’s 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’s 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% of its value,
the national debt of $6.5 trillion is reduced in real terms by $650
billion. That’s a pretty neat trick and quite helpful – to the
That’s why the Fed screams about a coming deflation, so it can
continue the devaluation of the dollar unabated. The politicians
don’t 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 debt cannot be the source of long-term wealth. Individuals and
corporations who borrow too much eventually must cut back and pay
off debt and start anew, but governments rarely do.
But where’s the hitch? This process, which seems to be a creative
way of paying off debt, eventually undermines the capitalist
structure of the economy, thus making it difficult to produce
wealth, and that’s 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 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 – 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.
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, mal-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 other 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 saving 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,
5, or even 6% below the market rate, and the savers – many who 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 early in the stages of
monetary debasement, will produce the desired effects and stimulate
another boom-bust cycle. But eventually the distortions and
imbalances between consumption and production, and the excessive
debt, prevent the monetary stimulus from doing very much to boost
the economy. Just look at what’s been happening in 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
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 left is for the Fed to do more of the same – only
faster. If our problem stems 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
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’ve 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% increase. Our national
debt in 1971 was $408 billion; today it stands at $6.8 trillion, a
1600% increase. Since that time, our dollar has lost almost 80% 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
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 benefit of the dollar being the key reserve currency of
the world, and the relative weakness of other nation’s 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 economy with consumer
prices, to some degree, 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 this 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
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 reserve 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
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. The process put us into a position of being a huge debtor
nation, with our current account deficit of more than $600 billion
per year now exceeding 5% of our GDP. We now owe foreigners more
than any other nation ever owed in all of history, over $3 trillion.
A debt of this sort always ends by the currency of the debtor nation
decreasing in value. And that’s what has started to happen with the
dollar, although it still has 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 with the dollar’s future value.
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 instead. The official explanation is
that this is due to an economic rebound with an increase in demand
for loans. Yet a decrease in demand for our debt and 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 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 goods 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 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’s true that the system
encourages exportation of jobs as we buy more and more foreign
But nobody understands the Fed 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 an 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 (movie stars, CEOs, stock
brokers, speculators, professional athletes), others see their
incomes 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 toward those
who have benefited.
The long-term philosophic problem with this is that the central bank
and the fiat monetary system are not blamed; instead free market
capitalism is. This is what happened in the 1930s. The Keynesians,
who grew to dominate economic thinking at the time, erroneously
blamed the gold standard, balanced budgets, 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 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 make a lot of money. 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. 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 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
the spending for welfare for 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 – corporations and banking interests. That’s 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 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
Our current economic problems are directly related to the monetary
excesses of three 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 debt, 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 knock-down, 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 excess 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 revaluation of the stock market. In this
go-around, the Fed has pulled out all the 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% 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 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 didn’t want a vote of no
confidence in the dollar, and for a couple of decades, the price of
gold was artificially held at $35 per ounce. That, of course, did
In recent years, there has been a coordinated effort by the world
central bankers to keep the gold price in check by dumping part of
their large horde 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 Bretton 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 an answer to a
question I asked before the Financial Services Committee in February
2003, Chairman Greenspan made an effort to convince me that paper
money now works as well as gold:
“I have been quite surprised, 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
“The record of the past 20 years
appears to underscore the observation that, although pressures
for excess 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
First, efficient central bankers will never
replace the invisible hand of a commodity monetary standard.
using government price indexes to measure the success of a managed
fiat currency should not be reassuring. These indexes can be
arbitrarily altered to imply a successful monetary policy.
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’s right that sound money is no longer necessary,
and also because it’s 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’s 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 don’t 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.”
observed here is a sea change in attitude by investors shifting
their investment 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 three years, the economy remains sluggish and interest rates
are actually rising. What can the Fed do? If this trend continues,
there’s little they can do. Not only do I believe this trend will
continue, I believe it’s likely to accelerate. This policy plays
havoc with our economy; it 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 are 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 huge and significant interest
rate reductions 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’re at the bottom of the cycle and interest rates
not only can’t 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 if any
The odds aren’t very good that the Fed will adopt a policy of not
inflating the money supply because of some very painful consequences
that would result. 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’s not about to happen. Poverty is going to worsen due to our
monetary and fiscal policies, so spending on the war on poverty will
Our obsession with policing the world,
nation building, and pre-emptive war are not likely to soon go away,
since both Republican and Democratic 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,
It’s now admitted that the deficit is out of control, with next
year’s deficit reaching over one-half trillion dollars, not counting
the billions borrowed from “trust funds” like Social Security. I’m
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 don’t
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 big step in this
direction. Gold was illegal to own between 1933 and 1976. Today
millions of Americans do own some 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 transactions 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 checking
account of these funds.
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 all 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 runaway deficits in a weakening economy with
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 to do 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’s 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 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 government 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
is in liberty and self-reliance are lost in the shuffle. Though left
and right have different goals and serve different special-interest
groups, they are only too willing to compromise and support each
If unchecked, the economic and political chaos that comes from
currency destruction inevitably leads to tyranny – a consequence of
which the Founders were well aware. For 90 years we have lived with
a central bank, with the last 32 years absent of any restraint on
money creation. The longer the process lasts, the faster the
printing presses have to run in an effort to maintain stability.
They are currently running at record rate. It was predictable and is
understandable that our national debt is now expanding at a record
The panicky effort of the Fed to stimulate economic growth does
produce what it considers favorable economic reports, recently
citing second quarter growth this year at 3.1%. But in the
footnotes, we find that military spending – almost all of which is
overseas – was up an astounding 46%. 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%. This is
hardly a reassuring report on the health of our economy and merely
reflects the bankruptcy of current economic policy.
Real economic growth won’t return until confidence in the entire
system is restored. And 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.
Dr. Ron Paul is a Republican member of Congress from Texas.