Ron Paul on the Federal Reserve


Richard Moore

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Monetary Policy and the State of the Economy
by Ron Paul

Statement at Hearing of the House Financial Services Committee, February 15, 

Transparency in monetary policy is a goal we should all support.  I've often 
wondered why Congress so willingly has given up its prerogative over monetary 
policy.  Astonishingly, Congress in essence has ceded total control over the 
value of our money to a secretive central bank.

Congress created the Federal Reserve, yet it had no constitutional authority to 
do so.  We forget that those powers not explicitly granted to Congress by the 
Constitution are inherently denied to Congress ­ and thus the authority to 
establish a central bank never was given.  Of course Jefferson and Hamilton had 
that debate early on, a debate seemingly settled in 1913.

But transparency and oversight are something else, and they're worth 
considering.  Congress, although not by law, essentially has given up all its 
oversight responsibility over the Federal Reserve.  There are no true audits, 
and Congress knows nothing of the conversations, plans, and actions taken in 
concert with other central banks.  We get less and less information regarding 
the money supply each year, especially now that M3 is no longer reported.

The role the Fed plays in the President's secretive Working Group on Financial 
Markets goes unnoticed by members of Congress.  The Federal Reserve shows no 
willingness to inform Congress voluntarily about how often the Working Group 
meets, what actions it takes that affect the financial markets, or why it takes 
those actions.

But these actions, directed by the Federal Reserve, alter the purchasing power 
of our money.  And that purchasing power is always reduced.  The dollar today is
worth only four cents compared to the dollar in 1913, when the Federal Reserve 
started.  This has profound consequences for our economy and our political 
stability.  All paper currencies are vulnerable to collapse, and history is 
replete with examples of great suffering caused by such collapses, especially to
a nation's poor and middle class.  This leads to political turmoil.

Even before a currency collapse occurs, the damage done by a fiat system is 
significant.  Our monetary system insidiously transfers wealth from the poor and
middle class to the privileged rich.  Wages never keep up with the profits of 
Wall Street and the banks, thus sowing the seeds of class discontent.  When 
economic trouble hits, free markets and free trade often are blamed, while the 
harmful effects of a fiat monetary system are ignored. We deceive ourselves that
all is well with the economy, and ignore the fundamental flaws that are a source
of growing discontent among those who have not shared in the abundance of recent

Few understand that our consumption and apparent wealth is dependent on a 
current account deficit of $800 billion per year.  This deficit shows that much 
of our prosperity is based on borrowing rather than a true increase in 
production.  Statistics show year after year that our productive manufacturing 
jobs continue to go overseas.  This phenomenon is not seen as a consequence of 
the international fiat monetary system, where the United States government 
benefits as the issuer of the world's reserve currency.

Government officials consistently claim that inflation is in check at barely 2%,
but middle class Americans know that their purchasing power ­ especially when it
comes to housing, energy, medical care, and school tuition ­ is shrinking much 
faster than 2% each year.

Even if prices were held in check, in spite of our monetary inflation, 
concentrating on CPI distracts from the real issue.  We must address the 
important consequences of Fed manipulation of interest rates. When interests 
rates are artificially low, below market rates, insidious mal-investment and 
excessive indebtedness inevitably bring about the economic downturn that 
everyone dreads.

We look at GDP numbers to reassure ourselves that all is well, yet a growing 
number of Americans still do not enjoy the higher standard of living that 
monetary inflation brings to the privileged few.  Those few have access to the 
newly created money first, before its value is diluted.

For example:  Before the breakdown of the Bretton Woods system, CEO income was 
about 30 times the average worker's pay.  Today, it's closer to 500 times.  It's
hard to explain this simply by market forces and increases in productivity.  One
Wall Street firm last year gave out bonuses totaling $16.5 billion.  There's 
little evidence that this represents free market capitalism.

In 2006 dollars, the minimum wage was $9.50 before the 1971 breakdown of Bretton
Woods.  Today that dollar is worth $5.15.  Congress congratulates itself for 
raising the minimum wage by mandate, but in reality it has lowered the minimum 
wage by allowing the Fed to devalue the dollar.  We must consider how the 
growing inequalities created by our monetary system will lead to social discord.

GDP purportedly is now growing at 3.5%, and everyone seems pleased.  What we 
fail to understand is how much government entitlement spending contributes to 
the increase in the GDP.  Rebuilding infrastructure destroyed by hurricanes, 
which simply gets us back to even, is considered part of GDP growth.  Wall 
Street profits and salaries, pumped up by the Fed's increase in money, also 
contribute to GDP statistical growth.  Just buying military weapons that 
contribute nothing to the well being of our citizens, sending money down a rat 
hole, contributes to GDP growth!  Simple price increases caused by Fed monetary 
inflation contribute to nominal GDP growth.  None of these factors represent any
kind of real increases in economic output.  So we should not carelessly cite 
misleading GDP figures which don't truly reflect what is happening in the 
economy.  Bogus GDP figures explain in part why so many people are feeling 
squeezed despite our supposedly booming economy.

But since our fiat dollar system is not going away anytime soon, it would 
benefit Congress and the American people to bring more transparency to how and 
why Fed monetary policy functions.

For starters, the Federal Reserve should:

€ Begin publishing the M3 statistics again.  Let us see the numbers that most 
accurately reveal how much new money the Fed is pumping into the world economy.

€ Tell us exactly what the President's Working Group on Financial Markets does 
and why.

€ Explain how interest rates are set.  Conservatives profess to support free 
markets, without wage and price controls.  Yet the most important price of all, 
the price of money as determined by interest rates, is set arbitrarily in secret
by the Fed rather than by markets!  Why is this policy written in stone? Why is 
there no congressional input at least?

€ Change legal tender laws to allow constitutional legal tender (commodity 
money) to compete domestically with the dollar.

How can a policy of steadily debasing our currency be defended morally, knowing 
what harm it causes to those who still believe in saving money and assuming 
responsibility for themselves in their retirement years?  Is it any wonder we 
are a nation of debtors rather than savers?

We need more transparency in how the Federal Reserve carries out monetary 
policy, and we need it soon.

February 17, 2007

Dr. Ron Paul is a Republican member of Congress from Texas.

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