Rep. Ron Paul, MD
Abolish the Fed
Sun Sep 15 06:00:34 2002
208.152.73.29

Abolish the Fed

by Rep. Ron Paul, MD



In the House of Representatives, September 10, 2002

Mr. Speaker, I rise to introduce legislation to restore financial stability to America's
economy by abolishing the Federal Reserve. I also ask unanimous consent to insert the
attached article by Lew Rockwell, president of the Ludwig Von Mises Institute, which
explains the benefits of abolishing the Fed and restoring the gold standard, into the record.

Since the creation of the Federal Reserve, middle and working-class Americans have
been victimized by a boom-and-bust monetary policy. In addition, most Americans have
suffered a steadily eroding purchasing power because of the Federal Reserve's inflationary
policies. This represents a real, if hidden, tax imposed on the American people.

From the Great Depression, to the stagflation of the seventies, to the burst of the dotcom
bubble last year, every economic downturn suffered by the country over the last 80 years
can be traced to Federal Reserve policy. The Fed has followed a consistent policy of
flooding the economy with easy money, leading to a misallocation of resources and an
artificial "boom" followed by a recession or depression when the Fed-created bubble
bursts.

With a stable currency, American exporters will no longer be held hostage to an erratic
monetary policy. Stabilizing the currency will also give Americans new incentives to save
as they will no longer have to fear inflation eroding their savings. Those members
concerned about increasing America's exports or the low rate of savings should be
enthusiastic supporters of this legislation.

Though the Federal Reserve policy harms the average American, it benefits those in a
position to take advantage of the cycles in monetary policy. The main beneficiaries are
those who receive access to artificially inflated money and/or credit before the inflationary
effects of the policy impact the entire economy. Federal Reserve policies also benefit big
spending politicians who use the inflated currency created by the Fed to hide the true
costs of the welfare-warfare state. It is time for Congress to put the interests of the
American people ahead of the special interests and their own appetite for big government.

Abolishing the Federal Reserve will allow Congress to reassert its constitutional authority
over monetary policy. The United States Constitution grants to Congress the authority to
coin money and regulate the value of the currency. The Constitution does not give
Congress the authority to delegate control over monetary policy to a central bank.
Furthermore, the Constitution certainly does not empower the federal government to
erode the American standard of living via an inflationary monetary policy.

In fact, Congress' constitutional mandate regarding monetary policy should only permit
currency backed by stable commodities such as silver and gold to be used as legal tender.
Therefore, abolishing the Federal Reserve and returning to a constitutional system will
enable America to return to the type of monetary system envisioned by our nation's
founders: one where the value of money is consistent because it is tied to a commodity
such as gold. Such a monetary system is the basis of a true free-market economy.

In conclusion, Mr. Speaker, I urge my colleagues to stand up for working Americans by
putting an end to the manipulation of the money supply which erodes Americans' standard
of living, enlarges big government, and enriches well-connected elites, by cosponsoring my
legislation to abolish the Federal Reserve.

WHY GOLD?
By Llewellyn H. Rockwell, Jr.

As with all matters of investment, everything is clear in hindsight. Had you bought gold
mutual funds earlier this year, they might have appreciated more than 100 percent. Gold
has risen $60 since March 2001 to the latest spot price of $326.

Why wasn't it obvious? The Fed has been inflating the dollar as never before, driving
interest rates down to absurdly low levels, even as the federal government has been
pushing a mercantile trade policy, and New York City, the hub of the world economy,
continues to be threatened by terrorism. The government is failing to prevent more
successful attacks by not backing down from foreign policy disasters and by not allowing
planes to arm themselves. These are all conditions that make gold particularly attractive.

Or perhaps it is not so obvious why this is true. It's been three decades since the dollar's
tie to gold was completely severed, to the hosannas of mainstream economists. There is
no stash of gold held by the Fed or the Treasury that backs our currency system. The
government owns gold but not as a monetary asset. It owns it the same way it owns
national parks and fighter planes. It's just another asset the government keeps to itself.

The dollar, and all our money, is nothing more and nothing less than what it looks like: a
cut piece of linen paper with fancy printing on it. You can exchange it for other currency at
a fixed rate and for any good or service at a flexible rate. But there is no established
exchange rate between the dollar and gold, either at home or internationally.

The supply of money is not limited by the amount of gold. Gold is just another good for
which the dollar can be exchanged, and in that sense is legally no different from a gallon of
milk, a tank of gas, or an hour of babysitting services.

Why, then, do people turn to gold in times like these? What is gold used for? Yes, there
are industrial uses and there are consumer uses in jewelry and the like. But recessions and
inflations don't cause people to want to wear more jewelry or stock up on industrial metal.
The investor demand ultimately reflects consumer demand for gold. But that still leaves us
with the question of why the consumer demand exists in the first place. Why gold and not
sugar or wheat or something else?

There is no getting away from it: investor markets have memories of the days when gold
was money. In fact, in the whole history of civilization, gold has served as the basic money
of all people wherever it's been available. Other precious metals have been valued and
coined, but gold always emerged on top in the great competition for what constitutes the
most valuable commodity of all.

There is nothing intrinsic about gold that makes it money. It has certain properties that lend
itself to monetary use, like portability, divisibility, scarcity, durability, and uniformity. But
these are just descriptors of certain qualities of the metal, not explanations as to why it
became money. Gold became money for only one reason: because that's what the
markets chose.

Why isn't gold money now? Because governments destroyed the gold standard. Why?
Because they regarded it as too inflexible. To be sure, monetary inflexibility is the friend of
free markets. Without the ability to create money out of nothing, governments tend to run
tight financial ships. Banks are more careful about the lending when they can't rely on a
lender of last resort with access to a money-creation machine like the Fed.

A fixed money stock means that overall prices are generally more stable. The problems of
inflation and business cycles disappear entirely. Under the gold standard, in fact, increased
market productivity causes prices to generally decline over time as the purchasing power
of money increases.

In 1967, Alan Greenspan once wrote an article called Gold and Economic Freedom. He
wrote that:
"An almost hysterical antagonism toward the gold standard is one issue which unites
statists of all persuasions. They seem to sense – perhaps more clearly and subtly than
many consistent defenders of laissez-faire – that gold and economic freedom are
inseparable, that the gold standard is an instrument of laissez-faire and that each implies
and requires the other. . . . This is the shabby secret of the welfare statists' tirades against
gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the
way of this insidious process. It stands as a protector of property rights."

He was right. Gold and freedom go together. Gold money is both the result of freedom
and its leading protector. When money is as good as gold, the government cannot
manipulate the supply for its own purposes. Just as the rule of law puts limits on the
despotic use of police power, a gold standard puts extreme limits on the government's
ability to spend, borrow, and otherwise create crazy unworkable programs. It is forced to
raise its revenue through taxation, not inflation, and generally keep its house in order.

Without the gold standard, government is free to work with the Fed to inflate the currency
without limit. Even in our own times, we've seen governments do that and thereby spread
mass misery.

Now, all governments are stupid but not all are so stupid as to pull stunts like this. Most of
the time, governments are pleased to inflate their currencies so long as they don't have to
pay the price in the form of mass bankruptcies, falling exchange rates, and inflation.

In the real world, of course, there is a lag time between cause and effect. The Fed has
been inflating the currency at very high levels for longer than a year. The consequences of
this disastrous policy are showing up only recently in the form of a falling dollar and higher
gold prices. And so what does the Fed do? It is pulling back now. For the first time in
nearly ten years, some measures of money (M2 and MZM) are showing a falling money
stock, which is likely to prompt a second dip in the continuing recession.

Greenspan now finds himself on the horns of a very serious dilemma. If he continues to
pull back on money, the economy could tip into a serious recession. This is especially a
danger given rising protectionism, which mirrors the events of the early 1930s. On the
other hand, a continuation of the loose policy he has pursued for a year endangers the
value of the dollar overseas.

How much easier matters were when we didn't have to rely on the wisdom of exalted
monetary central planners like Greenspan. Under the gold standard, the supply of money
regulated itself. The government kept within limits. Banks were more cautious. Savings
were high because credit was tight and saving was rewarded. This approach to economics
is the foundation of a sustainable prosperity.

We don't have that system now for the country or the world, but individuals are showing
their preferences once again. By driving up the price of gold, prompting gold producers to
become profitable again, the people are expressing their lack of confidence in their
leaders. They have decided to protect themselves and not trust the state. That is the
hidden message behind the new luster of gold.

Is a gold standard feasible again? Of course. The dollar could
be redefined in terms of gold. Interest rates would reflect the
real supply and demand for credit. We could shut down the
Fed and we would never need to worry again what the
chairman of the Fed wanted. There was a time when
Greenspan was nostalgic for such a system. Investors of the
world have come to embrace this view even as Greenspan has
completely abandoned it.

What keeps the gold standard from becoming a reality again is
the love of big government and war. If we ever fall in love with
freedom again, the gold standard will once more become a
hot issue in public debate.
Dr. Ron Paul is a Republican member of Congress from Texas.
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• A Phone Call To The Fed — Dan Benham, Sun Sep 15 06:05