Category Archives: Political Opinion

Ron Paul – Legalize Competing Currencies

ron paul

I recently held a hearing in my congressional subcommittee on the subject of competing currencies.  This is an issue of enormous importance, but unfortunately few Americans understand how the Federal Reserve and Treasury Department impose a strict monopoly on money in America.

This monopoly is maintained using federal counterfeiting laws, which is a bit rich.  If any organization is guilty of counterfeiting dollars, it is our own Treasury.  But those who dare to challenge federal legal tender laws by circulating competing currencies– at least physical currencies– risk going to prison.

Like all government created monopolies, the federal monopoly on money results in substandard product in the form of our ever-depreciating dollars.

Yet governments have always sought to monopolize the issuance of money, either directly or through the creation of central banks. The expanding role of the Federal Reserve in the 20th century enabled our federal government to grow wildly larger than would have been possible otherwise.  Our Fed, like all central banks, encourages deficits by effectively monetizing Treasury debt.  But the price we pay is the terrible and ongoing debasement of our money.

Allowing individuals and business to use alternate currencies, especially currencies backed by gold and silver, would expose the whole rotten system because the marketplace would prefer such alternate currencies unless and until the Fed suddenly imposed radical discipline on its dollar inflation.

Sadly, Americans are far less free than many others around the world when it comes to protecting themselves against the rapidly depreciating US dollar.  Mexican workers can set up accounts denominated in ounces of silver and take tax-free delivery of that silver whenever they want.  In Singapore and other Asian countries, individuals can set up bank accounts denominated in gold and silver.  Debit cards can be linked to gold and silver accounts so that customers can use gold and silver to make point of sale transactions, a service which is only available to non-Americans.

The obvious solution is to legalize monetary freedom and allow the circulation of parallel and competing currencies.  There is no reason why Americans should not be able to transact, save, and invest using the currency of their choosing.  They should be free to use gold, silver, or other currencies with no legal restrictions or punitive taxation standing in the way.  Restoring the monetary system envisioned by the Constitution is the only way to ensure the economic security of the American people.

After all, if our monetary system is fundamentally sound– and the Federal Reserve indeed stabilizes the dollar as its apologists claim–then why fear competition?  Why do we accept that centralized, monopoly control over our money is compatible with a supposedly free-market economy?  In a free market, the government’s fiat dollar should compete with alternate currencies for the benefit of American consumers, savers, and investors.

As Austrian economist Ludwig von Mises explained, sound money is an instrument that protects our civil liberties against despotic government. Our current monetary system is indeed despotic, and the surest way to correct things simply is to legalize competing currencies.

Fractional Reserve Banking, Government, and Moral Hazard

ron paul

Last week my subcommittee held a hearing on fractional reserve banking and the moral hazard created by government (taxpayer) insured deposits.  Fractional reserve banking is the practice by which banks accept deposits but only keep a fraction of those deposits on hand at any time. In practice, nearly 100% of deposits are loaned out, yet depositors believe that they can withdraw the full amount of their deposit at any time. Loaned funds are then redeposited and reloaned up to the limit of the bank’s reserve requirements, compounding the effect.

As Murray Rothbard put it, “Fractional reserve banks … create money out of thin air.  Essentially they do it in the same way as counterfeiters. Counterfeiters, too, create money out of thin air by printing something masquerading as money or as a warehouse receipt for money. In this way, they fraudulently extract resources from the public, from the people who have genuinely earned their money. In the same way, fractional reserve banks counterfeit warehouse receipts for money, which then circulate as equivalent to money among the public. There is one exception to the equivalence: The law fails to treat the receipts as counterfeit.” *

While mainstream economists extol this “money multiplier” as a nearly miraculous process that results in a robust economy, low reserve requirements actually enable banks to create trillions of dollars of credit out of thin air, a process that distorts the structure of production and gives rise to the business cycle. Once the boom phase of the business cycle has run its course and the bust commences, some people will naturally look to hold cash. So they withdraw money from their bank accounts in order to hold physical currency. But bank deposits consist of a huge amount of credit pyramided on top of a small of amount of original cash deposits. Each dollar of cash that is withdrawn unwinds the multiplier, resulting in a contraction in credit. And if depositors en masse attempt to withdraw more funds than are available in reserves, the entire of house of cards comes crashing down. This is the very real threat facing some European banks today.

Since the amount of deposits always exceeds the amount of reserves, it is obvious that fractional reserve banks cannot possibly pay all of their depositors on demand as they promise – thus making these banks functionally insolvent. While the likelihood of all depositors pulling their money out at once is relatively rare, bank runs periodically do occur. The only reason banks are able to survive such occurrences is because of the government subsidy known as deposit insurance, which was intended to backstop the stability of the banking system and prevent bank runs. While deposit insurance arguably has succeeded in reducing the number and severity of bank runs, deposit insurance is still an explicit bailout guarantee. It thereby creates a moral hazard by encouraging bank deposits into fundamentally unsound financial institutions and contributes to instability in the financial system.

The solution to the problem of financial instability is to establish a truly free-market banking system. Banks should no longer have a government backstop of any sort in the event of failure. Banks, like every other business, should have to face the spectre of market regulation. Those banks which engage in sound business practices, keep adequate reserves on hand, and gain the confidence of their customers will survive, while others fall by the wayside.

Banking, like any other financial activity, is not without risk – and the government should not continue its vain and futile pursuit of trying to eliminate risk. Get government out of the way and allow the market to function. This will result in a more stable system that meets the needs of consumers, borrowers, and investors.

* Murray N. Rothbard, The Mystery of Banking, 2nd ed. (Auburn, Alabama: Ludwig von Mises Institute, 2008), p. 98.

Failed Fed Policies Prolong the Agony

ron paul

The Federal Reserve’s interest rate price-setting board, the FOMC, met last week.  They will continue to set the federal funds rate at well below 1%, and plan to keep it low until the end of 2014.  That’s a year and half longer than they planned when they met just last month.  Chairman Bernanke says they are keeping interest rates so low for so long because the economic outlook warrants it.

The fallacies in their reasoning would be amusing if they weren’t so dangerous.  The Fed wants to keep the price of money at essentially zero – in other words “free” – to boost the economy.  But the boost they are attempting won’t get here for another three years.  That’s not a recovery.  And we’ve already tried this tactic.  That’s how we got into this mess in the first place: with interest rates artificially low for a very long time.  Free money doesn’t stimulate growth, as Japan’s two lost decades clearly show.  Artificially low interest rates only serve to punish saving, distort market signals, and cause further malinvestment.  They also do nothing to address the only real solution to our economic woes: liquidation of the bad debt that hangs around the neck of the world’s economy, preventing recovery.  Artificially low interest rates merely ensure that we remain a debt-financed consumer economy guaranteed to end up with a weaker economy and higher prices.

What baffles me even more is that two decades after the collapse of Soviet planning and decades more since the U.S. and economists purportedly rejected the idea of price setting, we find nothing wrong with the Fed setting the price of money.  We all agree it is a bad idea to have a board saying the price of wheat should be $250 a ton today, or carpenters wages should be $25 an hour until the end of 2014.  But we are perfectly comfortable with having a board set the price of one half of every transaction in our economy.  And our markets are supposedly free.

The Fed policies of low interest rates, Operation Twist, and rounds of quantitative easing are all attempts to keep the economy alive artificially. But the 12 FOMC participants cannot manage the economy any better than the bureaucrats of the Soviet Union.  The policies haven’t worked. They won’t work. Real economic recovery cannot come until we liquidate the bad debt, until we eradicate the poor decisions we made over the last decade, and start with a sound foundation. It is time we acknowledge the truth of the Fed’s activities: they are merely using fancy words for price setting.

Treasury Secretary Andrew Mellon was correct in the 1920s when he said “liquidate everything.”  That’s what we did in the severe depression of 1920-21, and we recovered so quickly it is never even talked about.  We didn’t take his advice after the 1929 crash, and ended up with the Great Depression.  We are committing the same mistakes, destined to live in this Great Recession for a decade or more—it has already been four years, the Fed says it will be at least three more!  It’s time we start rethinking what the Fed’s policies are really doing to our economy, because obviously, by their own admission, they haven’t helped.

Ron Paul

Stop Internet Censorship

Although Congress was back in session for scarcely more than a day last week, private citizens across the country managed to cause an uproar felt across Capitol Hill.  The uproar took the form of hundreds of thousands of phone calls to both Senators and Representatives, urging them to oppose two draconian new bills that threaten the free and unbridled flow of information on the internet.

On Wednesday last week, dozens of prominent websites like Wikipedia, Reddit, and Craigslist, were blacked out in protest of two bills known in DC jargon as SOPA and PIPA.  SOPA is the House bill; PIPA is its Senate companion. These bills ostensibly will combat internet piracy, and of course we also are told they will help us wage the never ending “war on terror.”

What these bills actually do is force website owners to police the internet; create entry barriers to the only relatively free and open medium of communication; and threaten to break the technological structure of the internet itself.  They also violate our 1st Amendment right to freedom of speech and our 4th Amendment freedom from unreasonable searches and seizures.

SOPA and PIPA have been drafted not only without respect for the Constitution, but also without an understanding of the how the internet works.  These bills attack the very system upon which the entire orderly organization of the web depends.  Search engines, internet service providers, advertising sites, and sites with user-generated content such as Facebook, YouTube, and Twitter–all magnificent creations of the market– are directly threatened by these bills. They will be held responsible if even a single of their millions of users posts even one link to a website that a copyright holder claims is violating a copyright.

Note that under the bills as written, the Department of Justice or a copyright holder do not have to prove that their copyright was violated– they simply have to claim copyright infringement and an entire site is shut down.  The burden of these regulations on the internet will be enormous, shifting resources away from productivity and innovation and into monitoring and censoring.  It turns internet companies into involuntary tools for Big Brother government, further eroding our Constitutional rights.

As is typical of so many bills in Congress, SOPA and PIPA were not crafted to make life better for the American people, but rather were written at the behest of big business trying to enlist the federal government as its strong-arm.  For example, the Motion Picture Association of America spent more than $1.2 million so far lobbying for their passage.

But the internet community is fighting back effectively, not just with websites that went black but with millions of users who expressed their solidarity.  Congressional sponsors of both bills have been jumping ship in response to the outrage. The House Judiciary Committee canceled the SOPA hearing they were planning to hold last Wednesday; the House leadership announced they have no intention of considering this bill; and at the end of the week Senator Reid announced he was postponing the vote until a “compromise” could be reached.  The American people are speaking, and with their continued grassroots efforts the marketplace for free ideas and communication will prevail over government controls and censorship.

Ron Paul

Reply to Ron Paul’s views on the European financial framework

Hello folks.

A while back I posted an article by Ron Paul in which he expressed his opinion that the current European debt crisis threatens the dollar. I received a few e-mails from my readership expressing both agreement and disagreement with Mr. Ron Paul’s viewpoint. One of them stood out though, and I thought I’d publish it because I believe it is important to get a different side of the story. This e-mail came from a currency specialist from a popular UK forex brokerage firm. Letter follows below:

–begin letter–

Hi Alan,

I read with great interest your recent post written by Ron Paul, evaluating the problems with continuing to support the ailing European financial framework and the cost of US involvement in this.

On most points I think Mr. Paul makes a convincing case. For instance, he is right to point out the dangerous position of the US as global lender of last resort. In spite of White House remarks to the contrary, it does seem that significant US funds have gone to propping up the European system in the last six months. This creates dangerous US exposure in addition to that already shouldered by US banks and financial funds. In addition he is right that the cost of a breakup of the Eurozone is overestimated. Recent reports by banks including UBS for instance (detailing the possible cost should either Germany or Greece exit the euro) have been branded gross exaggerations and sensationalist. These are the product of organisations that stand to lose in the event of a euro breakup and so are engaged in scare mongering.

In spite of this though, it seems to me that in his eagerness to avoid exposing the US to the European crisis, Mr. Paul overextends his case. For example he tells us it is impossible to bail out either France or Germany, as opposed to small European countries such as Greece. True enough, but this of course gives an immediate (and misleading) impression that France and Germany are in need of bailing out. This is not the case: both nations possess (for the moment!) AAA credit ratings from all 3 credit rating agencies, unlike (it is worth pointing out) the United States. In other words it seems that here Mr. Paul is not above a little scare mongering himself. In addition it seems that, though European organisations have to date provided an exaggerated impression of the cost of a euro breakup, Mr. Paul gives us an underestimation. He notes for instance that Greeks are using bartering as an alternative to euros, as though this were a pseudo-democratic uprising against failing financial structures. Is he then suggesting that the entirety of Europe do the same thing? This strikes me as an irresponsible and (in the hands of an elected politician) dangerous underestimation of the crisis facing Europe.

In short, it seems to me that in spite of Mr. Paul’s admirable desire to see banks contribute to the cost of the financial crisis, he doesn’t grasp the scale of the European debt crisis. In particular, his proposed solutions are idealistic to the point of being fantastical.

Yours kindly,

Peter Lavelle
Foreign currency exchange specialist Pure FX


Obama Gets Real

Peter Schiff

By: Peter Schiff, CEO of Euro Pacific Capital

For most of his time as a national political figure, Barack Obama has been careful to cloak his core socialist leanings behind a veil of pro-capitalist rhetoric. This makes strategic sense, as Americans still largely identify as pro-capitalist. However, based on his recent speech in Osawatomie, Kansas, the President appears to have reassessed the political landscape in advance of the 2012 elections. Based on the growth of the Occupy Wall Street movement, and the recent defeat of Republicans in special elections, he has perhaps sensed a surge of left-leaning sentiment; and, as a result, he finally dropped the pretense.

According to our President’s new view of history, capitalism is a theory that has “never worked.” He argues that its appeal can’t be justified by results, but its popularity is based on Americans’ preference for an economic ideology that “fits well on a bumper sticker.” He feels that capitalism speaks to the flaws in the American DNA, those deeply rooted creation myths that elevate the achievements of individuals and cast unwarranted skepticism on the benefits of government. He argues that this pre-disposition has been exploited by the rich to popularize policies that benefit themselves at the expense of the poor and middle class.

But Obama’s knowledge of history is limited to what is written on his teleprompter. And his selection of the same location that Teddy Roosevelt used to chart an abrupt departure into populist politics is deeply symbolic in the opposite way to that which he intended. It is not by some genetic fluke that Americans distrust government. It is an integral and essential part of our heritage. The United States was founded by people who distrusted government intensely and was subsequently settled, over successive generations, by people fleeing the ravages of government oppression. These Americans relied on capitalism to quickly build the greatest economic power the world had ever seen – from nothing.

But according to Obama’s revisionist version of American history, we tried capitalism only briefly during our history. First, during the Robber Barron period of the late 19th Century, the result of which was child labor and unprecedented lower-class poverty. These ravages were supposedly only corrected by the progressive policies of Teddy Roosevelt and Woodrow Wilson. We tried capitalism again in the 1920s, according to Obama, and the result was the Great Depression. This time, it allegedly took FDR’s New Deal to finally slay that capitalist monster. Then, the account only gets more farcical. Apparently, we tried capitalism again under George W. Bush, and the result was the housing bubble, financial crisis, and ensuing Great Recession. Obama now argues that government is needed once again to save the day.

This view is complete fiction and proves that Obama is not qualified to teach elementary school civics, let alone serve as President of the United States. I wonder what other economic system he believes we followed prior to the 1890s and 1920s (and during the 1950s and 1960s) that that he now seeks to restore? Capitalism did not start with J.P. Morgan in 1890s or John D. Rockefeller in the 1920s as the President suggests. In fact, it was about that time that capitalism came under attack by the progressives. We were born and prospered under capitalism. The Great Depression did not result from unbridled capitalism, but from the monetary policy of the newly created Federal Reserve and the interventionist economic policies of both Hoover and Roosevelt – policies that were decidedly un-capitalist.

The prosperity enjoyed during mid-20th century actually resulted from the incredible progress produced by years of capitalism. Contrary to Obama’s belief, the New Deal and Great Society did not create the middle class; it was, in fact, a direct result of the capitalist industrial revolution. The socialist programs of which Obama is so fond are the reasons why the middle class has been shrinking. America’s economic descent began in the 1960s, when we abandoned capitalism in favor of a mixed economy. By mixing capitalism with socialism, we undermined economic growth, and reversed much of the progress years of laissez-faire had bestowed on average Americans. The back of the middle class is being broken by the weight of government and the enormous burden taxes and regulation place on the economy.

America’s first experiment with socialism, the Plymouth Bay Colony, ended in failure, and our most successful colonies – New York, Virginia, Massachusetts  – were begun primarily as commercial enterprises. When the founding fathers gathered to write the Constitution, they represented capitalist states and granted the federal government severely limited powers.

Apparently, Obama thinks our founders’ mistrust of government was delusional, and that we were fortunate that far wiser groups of leaders eventually corrected those mistakes. The danger, as Obama sees it, is that some Republicans actually want to reverse course and adopt the failed ideas espoused by great American fools like George Washington, Thomas Jefferson, John Adams, and Benjamin Franklin.

The President unknowingly illustrated his own contradictory thinking with the importance he now places on extending the temporary payroll tax cuts. If all that stands between middle-class families and abject poverty is a small tax cut, imagine how much damage the far more massive existing tax burden already inflicts on those very households! If Obama really wants to relieve middle-class taxpayers of this burden, he needs to reduce the cost of government by cutting spending. After all, there is no way to pay for all the government programs Obama wants by simply by taxing the rich.

History has proven time-and-again that capitalism works and socialism does not. Taking money from the rich and redistributing it to the poor does not grow the economy. On the contrary, it reduces the incentives of both parties. It lowers savings, destroys capital, limits economic growth, and lowers living standards. Maybe Obama should take his eyes off the teleprompter long enough to read some American history. In fact, he could start by reading the Constitution that he swore an oath to uphold.