A Monetary History

In a pamphlet written in 1981, "Gold, Peace, and Prosperity: The Birth of a New Currency," there is a section where Ron Paul gave an overview of how money was ruined. For us to grasp how the global monetary system reaches the existing critical stage, we have to take a look at four significant events in monetary history:

• Gold Coin Standard

• Gold Bullion Standard

• Gold Exchange Standard

• Managed Fiat Currency Standard

The deterioration of the monetary system has undergone a long and slow process, which resulted from a series of decisions of the US Congress. The Gold Coin Standard was the monetary system prior to the Gold Reserve Act of 1934, the law that served as the basis for the Gold Bullion Standard. 

Twenty-one years earlier, the way had been paved for the deterioration of the monetary system caused by the Federal Reserve Act of 1913. For Ron Paul, the establishment of the Federal Reserve is just an implementation of an advice mentioned by Karl Marx on 1848 in Communist Manifesto where the latter talks about the "Centralization of credit in the hands of the state, by means of a national bank with state capital and an exclusive monopoly." It shows that there is a 65 year gap from the time Marx shared such idea until the approval of the Federal Reserve Act of 1913. 

The formation of the Federal Reserve was followed by massive inflation in the 1920s with the "economic interventionism" of both Republican and Democratic administrations that culminated in the Great Depression of 1930s.

Gold Coin Standard

The Gold Coin Standard protects the people from the attempts of the government "to inflate, control the economy, run up deficits, and fight senseless wars, . . . ." But for central planners, the Gold Coin Standard was a great barrier that must be removed. Such desire was fulfilled through the "Gold Reserve Act of 1934, which outlawed private ownership of gold, prohibited the use of 'gold clause' contracts, and abolished the gold coin standard. This "law created the gold bullion standard," which lasted "for only ten years."

Ron Paul mentioned that the Federal Reserve was established under the influence of "American Bankers Association and the nation’s biggest bankers, such as J. P. Morgan and Paul Warburg." The goal was to protect their industry "against bank failures and to provide a more 'elastic' currency," where bankers and big corporations would greatly benefit. 

Ron Paul quoted the words of John Maynard Keynes in 1919 as an appropriate description of what happened in the formation of the Federal Reserve: 

“There is no subtler nor surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

Gold Bullion Standard

The establishment of the Gold Bullion Standard opened the way to sow seeds destructive both to US and world economy. It prohibits private ownership of gold and considered the making of "goldclause contracts" illegal. For Ron Paul, this did not only violate American's "constitutional rights," but also removed the protection of the people "from spendthrift and untrustworthy government."

After WW2, gold had kept entering the US until 1948. This "massive accumulation of gold in the U.S. Treasury" gave an opportunity to return to "full gold coin standard." However, leaders that time ignored the legislation introduced by Congressman Howard Buffett of Nebraska, and instead, they went to "Bretton Woods, drew up an agreement with bankers from other nations, and set America on a disaster course." 

Gold Exchange Standard

The "monetary reforms" created at Bretton Woods, New Hampshire on July 1944 provided the basis for 44 countries to form the WB and the IMF, which started operation in 1946 under the "new" Gold Exchange Standard, that gave permission to treat USD "as good as gold" and be considered as the "international reserve currency." The goals of this new monetary system is “to maintain exchange stability and stimulate world economic activity,” in which in the eyes of Ron Paul is "nothing more than an international Federal Reserve System." This agreement lasted for 27 years.

Managed Fiat Currency Standard

The Bretton Woods agreement died at the age of 27 on August 15, 1971 when President Nixon closed the "gold window," and refused to redeem the USD overseas with gold. A great door has been opened for massive inflation that made the bureaucrats, politicians, international bankers, TNCs, and some labor leaders to celebrate. Managed Fiat Currency Standard was born. 

As a result of this new monetary system, the US found a well to provide fund for the "Vietnam War and the Great Society, as well as massive business malinvestments." With the end of Bretton Woods agreement, the USD also died on the same date in the sense that its connection to gold has been removed. 

Personal Remarks

Remember that Ron Paul wrote all of this 33 years ago. Many things have changed since then. Personally, I only have a superficial knowledge about the four key important events in monetary history. Among many information that I encountered so far, two subjects caught my attention - exportation of inflation and transfer of wealth. 

Ron Paul mentioned that keeping bigger portion of printed USD outside of US shores would give an appearance that the American economy was not really in bad shape as analyzed by the critics of the Fed. The danger is that once countries who hold the depreciated USD began to feel the harm of the excessive quantity of USD to their economies, and will decide to return them to their source. That's the time that the American people will realize the extent of economic devastation caused by massive inflation coming from the Fed.

Concerning wealth transfer, I just want to mention two ideas that I consider popular these days. The first one is taken from the Bible where many Christians believe that a time will come that the wealth of the wicked will be transfered into the hands of the righteous. I just could not understand how they seem to believe that the existing global economic crisis would usher into the fulfillment of their favorite biblical passages. The second idea is inspired by information explosion. It is believed that the advent of the Internet opened doors of opportunities for entrepreneurs. The successful will experience this transfer of wealth. Ron Paul was talking about a different kind of wealth transfer. He describes the kind of wealth transfer that is actually happening in the real world caused by the existing monetary system. This is a transfer of wealth "from the less well-off to the well-to-do." 

In concluding this article, a question comes to my mind. Giving a grade to Federal Reserve, IMF, and WB on the basis of their performance, we could say that after more than a century (in the case of the Fed) and 68 years ( in the case of IMF and WB) in existence, it seems that these financial institutions failed to achieve their goals. Are the stability and stimulation of world economy their real goals? Or are these goals just subtle devices only good in paper to convince the public but hiding the real agenda behind "noble intentions?"

Angry at what?

Summary:

Robert Reich claims that the Americans are so angry right now and "more contemptuous of almost every major institution - government, business, the media." He identifies several factors that contribute to the spread of this negative emotion. He mentioned first the impact of irresponsible online remarks using social media. Net surfers too enjoy watching gladiatorial fights. And add to it the absence of public figures to convincingly explain what's going on. And then he finally specified that the source of anger is economic in nature. Reich described this economic cause:

"Meanwhile, income, wealth and power have become more concentrated at the top than they’ve been in 90 years ... As a result, many have come to believe that the deck is stacked against them. Importantly, both the Tea Party and the Occupier movements began with the bailouts of Wall Street ― when both groups concluded that big government and big finance had plotted against the rest of us. The former blamed government; the latter blamed Wall Street."

Reich saw that such economic inequality described above is very dangerous. However, Americans due to emotional response failed to identify the real cause for their misery. In a way, Reich implies that politicians have been successful so far in using anger to divert the mind of the people from real issues. 

Personal Response:

Robert Reich failed to mention precisely the object of Americans' anger. I suspect that though he did not mention, by implication, the capitalists are to blame. He simply emphasized the evil and danger of economic inequality, but failed to point out the real source of such inequality. And also I can't understand why he is lamenting the absence of "trusted arbiters of truth" to convince the American people. He is either not listening to Ron Paul's analysis or finds the message of the retired libertarian Congressman not really convincing. Maybe, he is looking for a "trusted" voice coming from the establishment. 

Monetary Policy

Restating the meaning of monetary policy taken from Mises' Wiki, I understand it as the manipulation of money supply advocated by both the monetarist and Keynesian school of economics through central banking to maintain economic growth and limit unemployment. Only the Austrian school criticizes monetary policy for its destructive results on the economy such as redistribution of wealth, business cycle and other disastrous economic distortions. In this article, I want to explore further this idea of monetary policy as seen in US economy. To accomplish this goal, I glean relevant ideas  from four US Congressional Records in the past taken from Ron Paul's book, The Pillars of Prosperity. 

The Foolishness of Existing Monetary Policy

In December 1, 1982, then US Congressman Ron Paul described the American monetary policy as foolish. It was so because of the reliance to centralized monetary planning, which only strategy to boost the economy was to increase the money supply. This made the stock market that time soar. For Dr. Paul, that was just a temporary economic relief resulted from additional paper money together with the manipulation of interest rates. The American monetary policy was foolish for the decision makers ignored long-term results such as economic stagnation, higher rates of unemployment, soaring interest rates and runaway inflation. 

Above is the description of US monetary policy 31 years ago. The Fed is still committed to such folly. Since such folly is presented as wisdom by professional economists through mainstream media, no wonder almost all countries in the world are following the American example. 

After 15 Years

Fifteen years after that 1982 US Congressional Record, the US was still persistent in its foolish monetary policy. In March 5, 1997, the US House of Representatives recorded Ron Paul's exchange of ideas with Allan Greenspan about the conduct of monetary policy. Each shared their point of view about CPI and currency debasement. For Dr. Paul, CPI discussion was a diversion from the real issue. He identified that currency debasement was the real issue that would have the following results: higher price of goods, malinvestment, distorted interest rates, higher deficits, benefits for few and economic suffering for many. 

The content of the Congressional Record after three months and that's July 22 was just a repetition of the previous one. The only relevant material I found was the identification of those who benefit and those who suffer from currency debasement. So those who benefit are the early users of credit and they include people who borrow, the bankers, the big business and the government. Those who suffer are the middle class, the late users of credit and the little guy. 

IMF and the Asian Crisis

After two previous banking committee hearings, another hearing was made one year later. This happened in February 24, 1998. I find the discussion on the role of IMF and the impact of US monetary policy on Asian crisis very important. 

For Dr. Paul, the real mission of the IMF is not to help the poor of developing countries, but to assist multinational banks and corprorations. The record of the IMF proved this point particularly in relation to the impact of IMF's structural adjustment programs in Africa and Latin America. Instead of economic development, what Ron Paul saw was an increase in poverty, major cutbacks in health and education and increase in unemployment. 

After dealing with the failure of IMF, Dr. Paul raised the issue about the connection of Asian crisis to US domestic monetary policy. From this we can see that the consequence of the foolishness of American monetary policy is not only limited on their shores. Countries in Southeast Asia were also affected. Ron Paul explained this connection:

"...we certainly do export a lot of our currency. More than 60 percent ends up in foreign hands. And it serves a great benefit to us because it is like a free loan...so we get to export our inflation...So again, we get to export our inflation, and the detriment is the consequence of what we are seeing in Southeast Asia" (Pillars of Prosperity, 2008, p. 180).

Source: Paul, Ron. (2008). Pillars of Prosperity: Free Markets, Honest Money, Private Property. Auburn, Alabama: Ludwig von Mises Institute.

Political Freedom and Monetary Policy 2

The present article intends to share about a US Congressional Record, "Paper Money and Tyranny" and to use the paper to reflect on Philippine situation. Though written in September 5, 2003, I see that its content remains relevant after 10 years. 

Personal Observation in Social Network

Allow me to share first a personal observation in my involvement in some politically inclined Facebook groups. Cynicism is widespread. Debate concentrating on political personalities is still very strong, which to me is a major distraction. Most Filipino netizens advocate bigger government. Discussion on economic and monetary policies is almost absent. 

I still believe in social change. Changing people's understanding about the basic role of the government is a good start. Focusing on economic and monetary policies instead of personalities will lead to a fresh understanding of Philippine reality. 

Unfortunately, not many Filipinos today see the connection between our pressing economic problems and the absence of sound monetary policy. Furthermore, the discussion about political freedom and monetary policy is also largely missing. 

The above scenario is understandable. The kind of economic perspective that is prevalent today fails to provide the necessary "lens" to see beyond the similarities of ultimate messages propagated by intellectuals coming from both the progressives and the "conservatives". In order to see beyond the mainstream conversation, a different approach to the study of economics is necessary. Both the Austrian school and libertarian philosophy provide such needed lens. 

Introducing the Importance of Studying Economics

Ludwig von Mises, considered as a prominent personality in the Austrian school, argues that the study of "alternative" (real) economics is the primary civic duty of any responsible citizen (Human Action, 1998, p.874). Fulfilling this duty will enlighten the minds of the citizens about the pressing issues of today both nationally and globally. In fact, ignorance of this duty is the reason for the perpetuation of existing economic situation. But it is sad to say that for most Filipinos, the only civic duty they know is during time of political campaign and election.

Dr. Ron Paul believes in the importance that his mentor placed on the study of economics. In this Congressional Record, we will see how the libertarian Congressman expounded the meaning of money in relation to threefold issues - morality, politics and economics. I will just mention the moral and economic issues and skip the political issue for its content is directly applicable to American setting. 

Money as a Moral Issue

Ron Paul wrote, "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." (Pillars of Prosperity, 2008, p.235). Based on this quotation, we can reflect on Philippine situation. Our economic situation is obvious. What is not obvious is the connection of our economic situation to existing monetary policy. 

For Dr. Paul, the existing monetary system not only of the US but of the entire world can be appropriately qualified as "legal plunder". Printing of paper money, which in reality is the real meaning of inflation "is nothing more than a sinister and evil form of hidden taxation." (p.240). The Congressman further elaborates the nature of this plunder:

"This system of legalized plunder 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 positions...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." (p. 239).

If the analysis of Ron Paul is correct, do we now wonder why most Filipinos are poor? Popular rhetoric that we hear about the plight of the poor is usually blamed on big corporations. Most Filipinos fail to see the role of the government and monetary policy. 

Money as an Economic Issue

Under this section, you will read the reason why the economic situation of the world is in a bad shape and the results of existing monetary system. Pinciples of sound money are not taught in schools and that is why many sincere politicians, bureaucrats and bankers strongly support the existing system for it is the only system they know. The outcomes of current monetary system include the following:

• Inflation
• Speculation
• Excessive debts
• Malinvestment
• Unemployment
• Protectionism
• Impoverishment of the middle class
• Short-term benefits for politicians, bankers and special interest groups
• And finally, collapse of monetary system 

I encounter not a few remarks from Filipinos in social network saying that the issues surrounding the Federal Reserve, the status of the USD and other similar issues are purely American and have nothing to do with Philippine situation. This kind of mindset is due to the absence of understanding of the impact of US monetary policy on global economy. I suspect that most Filipinos do not see the significance of a very important date on global economy. August 15, 1971 was the day when President Nixon refused to honor the Bretton Woods and removed the last connection to sound money. Since that day, the entire world has been flooded by paper money, which in 2003 the libertarian physician foresaw that the world has seen "the beginning of the end of that system...tough times are ahead...for world economy." (p.246).

Today, there are mainstream economists who are now seeing what Dr. Paul saw 10 years ago. Many influential personalities are presently joining the voice of the libertarian politician in sounding the alarm. 

The Strength of US Dollar

If it is really true that the USD is in critical situation today as Dr. Paul describes, why is it that the predicted collapse of USD is not happening and there are some indications that it's actually strengthening? Ron Paul mentioned 5 other factors that influence the value of USD aside from continuous printing:

• The strength of American economy
• Political stability
• Military power
• The benefit of USD as world reserve currency
• And weakness of other nations' economies and currencies

The first two are now under serious threats; the third factor though remains intact is now also seriously questioned; the fourth factor is now being challenged by the yuan; and I think only the last factor remains strong for other nations are also inflating their money supply. And Japan is the most notorious example.

Conclusion

Ron Paul is worried that nations would still not be able to identify the real source of the crisis as what happened in the 1930s. Central banking and fiat money escaped public scrutiny. Instead, free market capitalism was blamed. In the mind of Ron Paul there is no doubt that "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." (p. 245).

Dr. Paul could not see any way to avoid the approaching crisis. One way to minimize the difficulty is by repealing all legal tender laws. This is the way to limit the power of the government. To me, this appears to say that no solution is coming for I doubt if any nation would follow Dr. Paul's proposal. 

Reference: Paul, Ron. (2008). Pillars of Prosperity: Free Markets, Honest Money, Private Property. Auburn, Alabama: Ludwig von Mises Institute.

Political Freedom and Monetary Policy

For Ron Paul, the retired libertarian US Congressman, the choice between political freedom and tyranny is closely associated to monetary policy. In other words, no matter how nations imagine that they are free but if their monetary system tells otherwise, in reality their present situation is heading towards tyranny and will get even worse not until the primary cause has been removed. 

I found this argument while reading "Five Myths of the Gold Standard" (Pillars of Prosperity, 2008, pp.122-128), a testimony made by Ron Paul before the subcommittee on mines and mining in October 2, 1980. In this testimony, he demolished five tales surrounding the gold standard. Allow me to enumerate them with corresponding refutation based on my understanding of Ron Paul's testimony:

Tale # 1 - The supply of gold is insufficient.

This is a scare tactic used by those who reject the gold standard. This kind of incident can only happen if someone manipulates the gold supply. The tale is simply untrue for it violates basic economic principles concerning price of any commodity. The increase in price will always guarantee the continuous supply of that commodity.

Tale # 2 - Both Soviet Union and South Africa not only would greatly profit in a gold standard, but they could even take the US economy under hostage for they are the world's primary gold producers.

There is no way that both Soviet Union and South Africa could hostage US economy in a gold standard. It is also not true that their profit will increase compared to what has been happening since 1980 due to inflationary monetary policy, which is the real threat to US economy with its "politically-printed paper money and a fractional gold reserve" (p.224). The present monetary system is the one causing fear and panic among the people. Therefore, a return to gold standard will actually accomplish three things - giving stability to gold price, an end to inflation and elimination of fear and panic.

Tale # 3 - It would cause a depression.

A return to gold standard will cause depression only if it is done improperly. I understand this improper return to gold standard in two ways - not taking into consideration the total quantity of printed USD and government interference in setting up an artificial price for gold. Besides, even a return to gold standard is just part and parcel of an entire sound monetary system. With it, there must also be an end to budget deficit, printing of paper money together with tax cuts and reduction of regulations.

Tale # 4 - It will cause inflation.

Whether your understanding of inflation is the popular one, still this tale is baseless. For Ron Paul, the gold standard instead of resulting to inflation as the myth makers assert is in reality the way to solve it. He said, "...the gold standard does promise a way out of our current inflationary impasse. Rather than causing inflation, the gold standard has historically been a bulwark against inflation."

Tale # 5 - The gold standard is prone to "undesirable speculative influences". 

The speculative influences is said to be connected to the fact that gold as commodity is used in jewelry. Here we find the vast difference a sound economic theory makes in seeing tales like this. Mainstream economists see speculation where there is none and they don't see "undesirable speculative influences" that happens daily related to USD. For an Austrian economist like Ron Paul, it is the other way around. What's happening daily in the USD is real speculation and the fact that gold is a commodity safeguards it from those speculative influences. So the gold standard is actually providing us the remedy from those baseless fears.

There is no better way to finally silence this myth than giving a full paragraph from the book:

"A gold standard would eliminate all speculation about the political motivations of the monetary authorities in governing the supply of money. The great virtue of the gold standard is that it removes discretionary power over the money supply from any one agency, thus ending the most fertile source of speculation. A gold standard puts the power of the monetary system into the hands of its people and takes it away from the politicians and the bankers, thus removing a potential vehicle for establishing a tyranny." (p. 127). 

In closing his testimony, Ron Paul issued a challenge: "Shall we have gold and political freedom or shall we have paper and political tyranny?" (p. 128) It is our hope that increasing number of people not only in the US but also in the Philippines as well as other parts of the world will see the relevance of this question. 

Reference: Paul, Ron. (2008). Pillars of Prosperity: Free Markets, Honest Money, Private Property. Auburn, Alabama: Ludwig von Mises Institute.

Pillars of Prosperity

Last September 10, 2012, I shared in my previous blog, Studies in Economics about my list of priority readings. I started with "Pillars of Prosperity" but was not able to finish my original intention. Among 9 parts in that book, I find three parts not only interesting but still relevant. Part 4 is appropriate for those who want to see ways of bringing back money to taxpayers while Part 6 is suitable for those who want to clear the fog surrounding free trade. Even my plan in studying Part 5 was not successful because after reading "At The Brink" or "Day of Reckoning 2", I was not able to proceed reading about Federal Reserve, monetary policy, fiat money, economy, honest money and tyranny. 

The 10 links below are the results of my initial study of "Pillars of Prosperity". In the coming days, I intend to continue where I stopped and by God's grace be able to finish my original goal and then proceed to the next book. Once it is done, I will update this list:

The Result of Erroneous Political Ideas

Assessment of the US Republic

Capitalism's "Failures"

Ron Paul's Political Career

Inflation

US Dollar

US Dollar 2

Gold and the US Dollar

Day of Reckoning

Day of Reckoning 2 

At the Brink

I think even though 30 years have passed that the US Tea Party Congressman first delivered his speech, At the Brink, its message is relevant now than ever in the light of recent events in global economy and politics. I am referring to alarming news that happened last second week of September. They include China’s decision to trade oil in Yuan, QE3, coercing Iran, death of US ambassador in Libya, and Japan’s declaration of nationalization of a traditional Chinese territory.

http://www.examiner.com/article/dollar-no-longer-primary-oil-currency-as-china-begins-to-sell-oil-using-yuan

http://money.cnn.com/2012/09/13/news/economy/federal-reserve-qe3/index.html

http://www.telegraph.co.uk/news/worldnews/middleeast/iran/9545597/Armada-of-international-naval-power-massing-in-the-Gulf-as-Israel-prepares-an-Iran-strike.html

http://abcnews.go.com/blogs/politics/2012/09/ambassador-susan-rice-libya-attack-not-premeditated/

http://www.thedailybell.com/4315/Undisclosed-Looming-War-in-East-Asia-A-Historical-Inevitability

Specifically, At the Brink pertains to the collapse of the US dollar and to the threat of impending war. We witnessed the fulfillment of the second part of this prediction in the Middle East, but the first part of it is still in the making as the US dollar continues to struggle.

Dr. Paul delivered this speech on September 22, 1982 at the US House of Congress. It is found on pages 133 to 139 of the book, Pillars of Prosperity. In this speech, the Congressman expounded his foreseen economic danger. I just want to touch the subjects on the certainty of default, the detrimental economic policies, and the necessary economic solution.

The Certainty of Default

Ron Paul opened his 1982 speech with the discrepancy between the original goal for the formation of the IMF and its present practice of becoming a “social welfare agency” lending funds for nations immersed in debts. He specifically identified Mexico, Argentina, Eastern bloc Communist nations, and Third World nations that with their huge debts, it is unrealistic to expect payment from them. Dr. Paul disliked such “welfare program” for its serious consequence on US economy due to huge funding coming from the US for its implementation.

He then proceeded to describe the attitude among financial authorities in downplaying the international banking crisis. Default is considered impossible. Dr. Paul predicted otherwise that default is inevitable. It is just a matter of time.

The time the US Congressman wrote this speech, he described the insolvency of SSS, $11 trillion US liabilities, and $1.1 trillion national debt. Compared that data to the present, one will still wonder why Ron Paul’s prediction about the certainty of default is not yet taking place. I am not an expert in reading financial data, but checking usdebtclock.org, I notice that US national debt now is more than $16 trillion and the total unfunded liabilities is more than $120 trillion.

http://usdebtclock.org/

Such attitude of denial persists even until now. The best recent example is John T. Harvey’s Forbes’ article written last September 10. John T. Harvey, with the backing of the messages of financial experts, was confident about the impossibility for US to default. He is bold in his claim that “there is 0% chance that the US will be forced to default on the debt.” Even though without sufficient grounding both in monetary and economic matters, my personal impression in reading the article is that the writer is either deliberately lying and misleading the public or sincerely mistaken in his analysis due to his economic perspective.

http://www.forbes.com/sites/johntharvey/2012/09/10/impossible-to-default/

The Congressman mentioned two methods of default. In the fashion of 1929 deflation, the first method is by declaring bankruptcy and liquidating debt. However, Dr. Paul is also certain that politicians and bankers will not allow this method of default.

The other method is the 1923 German style deflation and that is paying “the debt with the rapidly depreciating newly created dollars” (p. 135). This method is actually “the policy of currency destruction through the inflationary process” (ibid.). Dr. Paul further describes this second method: “When the dollar is worthless, or approaching worthlessness, real debt disappears … As new money appears out of thin air, real assets of the savers and the debt denominated dollars evaporate into thin air” (ibid.).

I think the US government preferred the latter method. For Dr. Paul, choosing the second method is an indication that the US government is failing to learn the lessons of history and is bound to repeat the mistake that caused untold sufferings for many nations in the past.

Detrimental Economic Policies

Detrimental economic policies need to be stopped. That’s the message emphasized by the Congressman 30 years ago. His message never changed, but still the government failed to listen. Inflation, excessive taxation, central planning, protectionism, and economic isolationism must be stopped if we want to see genuine and lasting economic reforms. These are bad economic policies that reduce people’s standard of living. However, the loss of personal liberty is the greater threat resulting from such kind of economic policies. Dr. Paul raised such threat to personal liberty by asking a series of questions:

“How is it that the people cry out for less taxes and they get more? How is it that the people cry out for balanced budgets and they get greater deficits? How is it that the people cry out for sound money and they get more inflation and higher interest rates? They cry out for peace and they get war” (p. 138).

The Solution

One concrete solution offered by Dr. Paul is for the US to stop subsidizing both its political allies and enemies. He was referring both to the “free gifts” offered to strengthen the defense of Germany and Japan and the subsidy given to China to build a steel plant at the expense of American taxpayers. These actions have been justified for the sake of national interest. Dr. Paul could not see the wisdom of such actions. He saw it as absurd and continuing to do so is an act of “economic suicide.”

Dr. Paul has been calling for the active participation of an informed public to provide a base for legislators to stop inflation and the destruction of the US dollar. He warned the American public about the danger of failure to respond. He has been calling:

“A bold step is required…The opportunity for positive change is available to us in this decade, and if we fail to respond in a positive way, it could be years or decades before the damage can be undone and a free society restored. It is literally up to us” (p. 139).

Related Article:

David Gordon 

Day of Reckoning

The present article is based on Ron Paul’s paper about “The U. S. Dollar and the World Economy” written on September 6, 2001. In dealing with various economic issues throughout the paper, Dr. Paul keeps on mentioning about the “day of reckoning.” We will find this expression as the Congressman discussed about constitutional duty to maintain sound money, global economic crisis, advantage of the US dollar, new globalism, real estate bubble, and economic solution. Intentionally, I omit other topics, which are too difficult for me.

Constitutional Duty

Comparing the July 20, 1979 speech of Dr. Paul to his speech in September 6, 2001, it surprises me knowing that the former speech talks about the US government destroying the dollar, while the latter speech indicates the constitutional responsibility of the Congress to protect the value of the dollar. Dr. Paul talks about this constitutional duty “to maintain the value of the dollar by making only gold and silver legal tender…” (p. 214). This is a strange concept for most people today. But if Ron Paul is right that monetary history and economic law support the soundness of this concept, it is to our own peril that we keep ignoring it.

1913 and 1971 are two important dates in financial history. The Federal Reserve System was established in 1913 and President Nixon disconnected the US dollar from gold in 1971. Our present day economic woes can all be traced from these two serious mistakes.

Global economic crisis is here to stay as long as those who are responsible to provide solution remain in the dark as to what is really going on. Dr. Paul describes this blindness of the US Congress as inability to realize the relationship between inflation and the bubble economy. As a result of such blindness, the US Congress wrongly identifies the root cause of the crisis. Due to wrong diagnosis, inflating the money supply is the only solution given ignoring the serious warning from Austrian economists that such action would lead to far deeper economic crisis.

Economic Crisis

For Dr. Paul, the worsening crisis was a product of several decades of disregard of sound money that started in 1971. In his mind, the world was already suffering recession in 2001 while the mainstream hesitatingly accepted this fact only in 2008 due to obvious visibility of real estate bubble. This is the reason why Ron Paul was not surprised seeing the collapse of real estate industry while most “professional economists” were caught unprepared.

In this crisis, Dr. Paul describes the dangerous status not only of the dollar, but including all the currencies of the world. It is a danger that the world has never experienced before due to its scope. Its severity depends primarily on the nature and the time of response of both the Federal Reserve and the US Congress. If the response is the usual creation of fiat money, the collapse will be more catastrophic and the time for recovery will be prolonged.

Advantage of the US Dollar

For citizens outside the US, the analysis of Dr. Paul as to the status of the US dollar deserves careful attention. He claims that the dollar as reserve currency of the world is more advantageous for American citizens than citizens of other countries that follow the US in her monetary policy. It is because the US is permitted to export their inflation by purchasing goods from other countries and at the same time lending back the dollars to finance American deficit.

New Globalism

Dr. Paul mentions an alarming truth that most people consider as delusional. This truth is connected to the dominance of fiat currency. Dr. Paul talks about a new form of globalism.

Unlike in ancient time where the goal of globalism “was honest trade and the currency was gold” (p. 217), the goal of this new form of globalism is world government through fiat currency and international organizations like IMF, WB, and WTO. The connection of the US dollar to other currencies of the world is critical in the success or failure of this goal. For Dr. Paul this goal is nothing but a socialist dream that will certainly collapse along with the destruction of fiat money. The existence of fiat money, international organizations intensely engaged in nations’ economies, and new globalism confirms that the final end of the worsening economic crisis will be far all-encompassing than the Great Depression in the 1930s.

Real Estate Bubble

Among numerous insights in this congressional speech, I find that the information on real estate bubble invaluable. Mainstream media misleads the public as to the primary source of the 2008 crisis. It never touches the primary role of the Federal Reserve in the expansion and explosion of the bubble. I will just restate here ideas that are comprehensible to me.

It all started with Federal Reserve credit expansion. Huge size of the credit went into real estate, stirred up by the “$3.2 trillion of debt maintained by the GSEs” (p. 219). The GSEs by the way, was composed of Fannie Mae, Freddie Mac, and the Federal Home Loan Bank. The GSEs received a special treatment through low interest rates and the Federal Reserve monetizing them “just as if they were U. S. Treasury bills” (p. 220). This action of the Federal Reserve sent an attractive message to foreign central banks causing these banks to purchase great quantity of GSEs.

At this point, the details that follow concerning real estate bubble are too intricate for me. For fear of distorting the Congressman’s message, let me just select three relevant paragraphs from the report.

About the relationship between the collapse of NASDAQ in 2000 and the boom in real state:

“After the NASDAQ collapsed last year, the flow of funds into real estate accelerated. The GSEs accommodated by borrowing without restraint to subsidize new mortgages, record sales, and refinancing. It’s no wonder the price of houses are rising to record levels” (p. 220).

About the direction of new money supply into real estate industry:

“Refinancing especially helped the consumers to continue spending even in a slowing economy. It isn’t surprising for high credit card debt to be frequently rolled into second mortgages, since interest on mortgage debt has the additional advantage of being tax deductible. When financial conditions warrant it, leaving financial instruments (such as paper assets), and looking for hard assets (such as houses), is commonplace and is not a new phenomenon. Instead of the newly inflated money being directed toward the stock market, it now finds its way into the rapidly expanding real estate bubble” (ibid.).

About possible dumping of GSEs: 

“A weak dollar will prompt dumping of GSE securities before Treasuries, despite the Treasury’s and the Fed’s attempt to equate them with government securities. This will threaten the whole GSE system of finance, because the challenge to the dollar and the GSEs will hit just when the housing market turns down and defaults rise. Also a major accident can occur in the derivatives markets where Fannie Mae and Freddie Mac are deeply involved in hedging their interest rate bets” (p. 221).

Among the above three paragraphs, I find the last one familiar. It has been clearly reported in the news. However, the information provided by the first two paragraphs appears to me that it fails to reach public awareness most especially the role of inflation in expanding the real estate industry.

Economic Solution

For Congressman Paul, the solution to global economic crisis must first start with the change in mind that created the crisis in the first place. This would mean an end to Keynesian-monetarist mindset. This would also mean exposure of the powerful identities behind oil corporations, international banking, and the military-industrial complex that serve as the driving force to perpetuate the warfare state. In concrete terms, this tells us to do everything we can to stop the following: regulating the prices of goods, giving artificial low interest rates, centralized economic planning, and manipulating money and credit.

Dr. Paul argues that the above economic and monetary policies are unconstitutional and destructive to the economy not only of the US, but of also of the world. There must be change in these policies if we want to see lasting peace and economic growth.

However, Dr. Paul after several decades of experience in advocating monetary reform is realistic that such change is not easily accomplished. It is hard to change the way both the government and the people think. On the part of the Congress, it is difficult to surrender the monopoly on the supply of money. On the part of the people, it is also difficult to give up the welfare programs of the government. Other sectors of society are also unwilling to give up the benefits they receive from inflating the money supply.

Providing genuine solution to global crisis, the US must give up the obsession to police the world and the constant interfering with free market activity. The Congress must take its responsibility to restore honest monetary system. This would mean an end to the power of the Federal Reserve.

Source: Paul, Ron. (2008). Pillars of Prosperity: Free Markets, Honest Money, Private Property. Auburn, Alabama: Ludwig von Mises Institute.

Ron Paul on “Gold and the Dollar”

This final article about the value of the US dollar serves as a transition to our next subject, the Gold Standard. This article is based on the speech of Congressman Ron Paul dated June 5, 2002. Compared with the previous two speeches on the same subject, we see here a progression in the way the value of the US dollar has been treated. Ron Paul indicated in July 20, 1979 speech that the US government was guilty of destroying the dollar. In September 6, 2001 speech, the Congressman reminded the US Congress of their constitutional responsibility to protect the dollar. After 9 months, this June 5, 2002 speech shows that the US Congress is not fulfilling its responsibility to protect the value of its own currency.

Reading the last speech, I keep on encountering familiar themes that have already been mentioned in previous speeches like the connection of the price of gold and the dollar, inflation, the loss of trust in the US dollar, social tensions, and the call to return to gold standard. This only shows that the call of Dr. Paul for change in monetary policy has been ignored even after several decades of admonishing the US Congress.

Instead of protecting the dollar, the Congress, says Dr. Paul, is either deliberately or by default promotes a monetary policy that erodes the value of the dollar. This erosion is dangerous not only to US economy, but also to world economy since the dollar is the reserve currency of the world.

Repeatedly and consistently, despite of the Congressman’s awareness that politicians dislike the limiting power inherent in a monetary system connected to gold, he has kept on reminding the US Congress about its task to maintain a stable currency by attaching the dollar into gold once again. He believes that monetary history and economic laws show the value of a stable currency in maintaining a system of healthy economic growth and wealth preservation.

Related Article:

After the Dollar: What Comes Next? 

Personal Prayer

Creator of heaven and earth and the Ultimate Owner of all things, I pray that you remove whatever forces that exist in the US Congress that prevents reform of monetary policy leading to a sound, honest, and stable system of currency. Grant knowledge, courage, and tenacity for lawmakers and politicians working to see this change. Help us enjoy your gift of freedom through the Gospel of your Son. Help us live in peace and productivity. Amen!

Ron Paul on the Value of US Dollar

Eight years after President Nixon removed the connection of the US dollar from gold, Congressman Ron Paul delivered three speeches about the value of the US dollar. The first speech was given on July 20, 1979 admonishing the US government to stop the destruction of the value of the dollar. Two months after, on September 28, the second speech was delivered and it is about the connection of the changing prices between gold and the dollar. The last speech was given one month after, on October 17 and it concerns about the relationship between the dollar and inflation.

Stop Destroying the Dollar

Simply reading the first speech, one wonders why the Congressman was talking about the US government to stop destroying the dollar. If only an ordinary person is making this charge, people can easily dismiss it that the person talking is out of his mind. But it was an American Republican Congressman himself who upholds personal liberty, the US constitution, and the free market issuing this warning. The public is missing something important if we fail to grasp why the Republican Congressman was insisting that the US government is indeed destroying its own currency by increasing its supply. We are missing to see the implications of this act of dollar destruction on our personal and economic freedom.

The Gold Panic

The second speech about the relationship between the values of dollar and gold makes me think of the present trend among investing advisors counseling their clients to protect their wealth by buying gold. Good for those who have extra cash to follow such advice.

After reading the second speech, I realized that the gold panic has already started 33 years ago. I have no Internet access upon writing this article and therefore have no way to know the exact price of gold in 1979. The only data I have is that in 1995 the price of gold per ounce was $380.90 and the last time I checked its price two months ago was $1,615.00 per ounce. In other words, in 1979, the price of gold was far below $380.90 per ounce and yet there was already an indication of panic that time. The question is: if there was gold panic in 1979 when the price of gold was still very low, how people now ought to respond when the price of gold has already reached $1,615.00 per ounce? I am thinking that perhaps the conventional answer works within the span of 33 years that the gold panic that Ron Paul mentioned was somehow cooled down. Or maybe we are in the latter stage of that panic. Or perhaps, there are still other reasons. I do not know.

All I know is that the increasing price of gold is an indication of the declining value of the dollar resulting from its continuous creation out of thin air. Just a week ago, I readGeorge Soros and central banks storing gold. One writer indicates that such action is a preparation for something big that is about to happen. For Ron Paul, such big shift is a sure sign that increasing number of people all over the world no longer trusts governments and fiat money. The only way to calm the panic is to stop printing fiat money and restore the official connection of the dollar to the gold once again.

Strong Dollar is a Deception

One month after that second speech, the Republican Congressman delivered another speech concerning the value of US dollar. In this speech, Dr. Paul exposed the prevailing deception reported in mainstream media that the dollar was getting stronger. It was a deception for the whole story was not told to the public and the basis measuring the strength of the dollar was misleading.

For Ron Paul, compared to other currencies, the dollar could appear strong simply because other countries were also inflating their money supply. Instead of using other currencies, Dr. Paul suggested two reliable tests to assess the strength of the dollar: in terms of its purchasing power and in relation to the price of gold.

Which of the two is telling the truth, the report of the mainstream media or the speech of Dr. Paul? Obviously, the two are not telling the same thing. Believing one would mean disregarding the other. Unfortunately, only few are able to see beyond the appearances of things due to absence of education in Austrian way of thinking.

Ron Paul on the Future of US Dollar

I am done with inflation. It is now time for me to study the value of US dollar from the speeches of Congressman Paul. The speeches are taken from Part 5 of the book,Pillars of Prosperity. There are actually 6 speeches concerning the value of the US dollar. I selected the longest one, which Dr. Paul delivered in February 15, 2006 at the US House of Congress. Its title is The End of Dollar Hegemony.

Meaning of Hegemony

I first encountered the word “hegemony” while taking my Ed. D. at AGST. Despite of repeated reading and listening, still I find it hard to remember the exact meaning of the term. When I encountered the word again in my study of Pillars of Prosperity, I tested my memory if I could still remember the meaning of the term.

Hegemony to me is a kind of unjust or oppressive mainstream practice or system that the victims of it delight in perpetuating. Then I checked the meaning of the term in the New International Webster’s Dictionary and Thesaurus. The definition given is “predominant influence of one state over others as in a league or alliance.” I forgot where my definition came from. It is obviously subjective, but I prefer it.

Concise Lecture on Monetary History

The Congressman’s speech on dollar hegemony centers on the future of US dollar. He was talking about the end of its hegemony. He did not specify the precise date that his foresight would take place. All we know is that after six years of delivering this speech, we are now nearer to see its fulfillment.

Dr. Paul did not use a crystal ball in his prediction. He is well-informed about the history of money, the power of the market, and the abuses of the governments once they gained monopoly over the money supply. He gave us a concise lecture on monetary history that includes taxes, inflation, fiat money, militarism, imperialism, moral decline, and the downfall of empires. In this piece of history, he narrated the transition from the “dollar diplomacy” during the time of William Taft in late 19thcentury to “dollar hegemony” in the second half of 20th century.

The Transition to Dollar Hegemony

I understand the “dollar diplomacy” as an attempt of the US to protect its commercial interests in the Far East and Latin America from European influence. The transition took place as new monetary policy was introduced and that the US dollar has also undertaken a radical change. Dr. Paul was referring to the printing of the US dollar since the creation of the Federal Reserve in 1913 and its separation from gold standard that started in 1971. Through these changes, the transition to “dollar hegemony” was achieved.

Another special arrangement that added dominance to the US dollar was the “agreement with OPEC to price oil in U.S. dollars exclusively for all worldwide transactions” (p. 261). The other side of this agreement was the maintenance of US military presence in the Persian Gulf to protect its own interests.

Depreciation, Loss of Trust and Use of Force

The Congressman mentioned other details exposing the distortions in the new economic and monetary systems resulting from dollar hegemony. However, the new systems were gradually eroding the value of the US dollar through the increasing quantity of money supply. As nations of the world would come to realize the decreasing value of the US dollar, we would also see the end of the dollar hegemony.

A typical and controversial example of this loss of trust in the US dollar was the decision of Saddam Hussein in November 2000 to demand Euros for his oil. Such decision was a threat to dollar supremacy. It is alarming that in the following year, 9/11 took place and the dominant rhetoric was about Saddam Hussein and the overthrow of his government. Seen from this perspective, it is logical to think that the war against Iraq was actually a war to maintain the supremacy of the US dollar. Dr. Paul shared similar stories concerning Venezuela’s and Iran’s loss of trust in the US dollar.

Using force to maintain the supremacy of US dollar, the real victims are unaware about the manner they financially support the perpetuation of these new systems. Dr. Paul explains the subtlety of the scheme:

“The license to create money out of thin air allows the bills to be paid through price inflation. American citizens, as well as average citizens of Japan, China, and other countries suffer from price inflation, which represents the ‘tax’ that pays the bills for our military adventures” (p. 267).

No wonder the people remains passive. This is not reported in mainstream media. Conventional education does not train us to think this way. And so the dollar hegemony continues to thrive through the use of force and US militarism in return depends on the ongoing supply of fiat currency. This connection between militarism and the US dollar is clearly expressed by Dr. Paul: “Ironically, dollar superiority depends on our strong military, and our strong military depends on the dollar” (p. 268).

Conclusion

The golden rule has been changed. For several decades, the US dollar has been considered the “new gold” and its printers have been making the rules. But the times are changing. The dominance of the US dollar is about to end. The free market will demand a return to monetary system based on honest money.

After 5 to 6 Years

Dollar Collapse Inevitable

It is Impossible for the US to Default

Personal Prayer

Creator of heaven and earth, our Lord and Savior, you are just and holy. You demand honesty from men in our economic and monetary transaction (Leviticus 19:35-36). You hate currency debasement (Isaiah 1:22). You do not tolerate unjust economic and financial systems to continue. Certainly, there is an end to all of this. As the day of reckoning is becoming nearer in the passing of months and years, let this global economic crisis cause people to return back to you. Amen!