Tag Archives: Ron Paul

Gold is Good Money

ron paul

Last year the Chairman of the Federal Reserve told me that gold is not money, a position which central banks, governments, and mainstream economists have claimed is the consensus for decades.  But lately there have been some high-profile defections from that consensus.  As Forbes recently reported, the president of the Bundesbank (Germany’s central bank) and two highly-respected analysts at Deutsche Bank have praised gold as good money.

Why is gold good money?  Because it possesses all the monetary properties that the market demands: it is divisible, portable, recognizable and, most importantly, scarce – making it a stable store of value. It is all things the market needs good money to be and has been recognized as such throughout history.  Gold rose to nearly $1800 an ounce after the Fed’s most recent round of quantitative easing because the people know that gold is money when fiat money fails.

Central bankers recognize this too, even if they officially deny it.  Some analysts have speculated that the International Monetary Fund’s real clout is due to its large holdings of gold.  And central banks around the world have increased their gold holdings over the last year, especially in emerging market economies trying to protect themselves from the collapse of Western fiat currencies.

Fiat money is not good money because it can be issued without limit and therefore cannot act as a stable store of value. A fiat monetary system gives complete discretion to those who run the printing press, allowing governments to spend money without having to suffer the political consequences of raising taxes.  Fiat money benefits those who create it and receive it first, enriching government and its cronies.  And the negative effects of fiat money are disguised so that people do not realize that money the Fed creates today is the reason for the busts, rising prices and unemployment, and diminished standard of living tomorrow.

This is why it is so important to allow people the freedom to choose stable money.  Earlier this Congress I introduced the Free Competition in Currency Act (H.R. 1098) to permit people to use gold as money again. By eliminating taxes on gold and other precious metals and repealing legal tender laws, people are given the option between using good money or fiat money. If the government persists in debasing the dollar – as money monopolists have always done – then the people would be able to protect themselves by using alternatives such as gold that are both sound and stable.

As the fiat money pyramid crumbles, gold retains its luster.  Rather than being the barbarous relic Keynesians have tried to lead us to believe it is, gold is, as the Bundesbank president put it, “a timeless classic.”  The defamation of gold wrought by central banks and governments is because gold exposes the devaluation of fiat currencies and the flawed policies of government.  Governments hate gold because the people cannot be fooled by it.

Ron Paul

Ron Paul – Legalize Competing Currencies

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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.

House Votes Overwhelmingly to Audit the Fed!

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Good news for a change…

WASHINGTON, July 24 – Congressman Ron Paul today applauded the passage by the House of Representatives of H.R. 459, the Federal Reserve Transparency Act.  The bill, which calls for a full audit of the Federal Reserve System– including its lending facilities and critical monetary policy operations– passed overwhelmingly by a bipartisan vote of 327-98.

“I am very pleased that the House passed my Audit the Fed legislation today,” Congressman Paul stated.  “It has been a long, hard fight, but Congress finally is getting serious about exercising its oversight responsibility over the Federal Reserve.  Auditing the Fed is a common sense issue supported by the overwhelming majority of the American people.  The Fed’s trillions of dollars worth of asset purchases and its ongoing support of foreign central banks cannot be allowed to continue without Congressional oversight.  Today’s passage of H.R. 459 is a good first step towards full Fed transparency, and I hope that the Senate will consider the bill before the end of the year.”



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

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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