History and economic law are on the side of the gold. Paper money always fails. Unfortunately, though, this occurs only after many innocent people have suffered the consequences of the fraud that paper money represents. Monetary inflation is a hidden tax levied more on the poor and those on fixed incomes than the wealthy, the bankers, or the corporations. In the past two years, gold has been the strongest currency throughout the world in spite of persistent central bank selling designed to suppress the gold price in hopes of hiding the evil caused by the inflationary policies that all central bankers follow. This type of depreciation only works for short periods; economic law always rules over the astounding power and influence of cen- tral bankers. That is what is starting to happen, and trust in the dollar is being lost. The value of the dollar this year is down 18 percent compared to gold. This drop in value should not be ignored by Congress. We should never have permitted this policy that was deliberately designed to undermine the value of the currency. There are a lot of reasons the market is pushing down the value of the dollar at this time. But only one is foremost. Current world economic and political conditions lead to less trust in the dollar’s value. Economic strength here at home is questionable and causes concerns. Our huge foreign debt is more than $2 trillion, and our current account deficit is now 4 percent of GDP and growing. Financing this debt requires borrowing $1.3 billion per day from overseas. But these problems are ancillary to the real reason that the dollar must go down in value. For nearly seven years the U.S. has had the privilege of creating unlimited amounts of dollars with for- eigners only too eager to accept them to satisfy our ravenous appetite for consumer items. The markets have yet to discount most of this monetary inflation. But they are doing so now; and for us to ignore what is happening, we do so at the nation’s peril. Price infla- tion and much higher interest rates are around the corner. Misplaced confidence in a currency can lead money managers and investors astray, but eventually the piper must be paid. Last year’s record interest rate drop by the Federal Reserve was like pouring gasoline on a fire. Now the policy of the past decade is being recognized as being weak for the dollar; and trust and con- fidence in it is justifiably being questioned. 228 Pillars of Prosperity Trust in paper is difficult to measure and anticipate, but long- term value in gold is dependable and more reliably assessed. Printing money and creating artificial credit may temporarily lower interest rates, but it also causes the distortions of malinvest- ment, overcapacity, excessive debt, and speculation. These condi- tions cause instability, and market forces eventually overrule the intentions of the central bankers. That is when the apparent bene- fits of the easy money disappear, such as we dramatically have seen with the crash of the dot-coms and the Enrons and many other stocks. Now it is back to reality. This is serious business, and the cor- rection that must come to adjust for the Federal Reserve’s mischief of the past 30 years has only begun. Congress must soon consider significant changes in our mone- tary system if we hope to preserve a system of sound growth and wealth preservation. Paper money managed by the Federal Reserve System cannot accomplish this. In fact, it does the opposite.  Hard Questions for Federal Reserve Chairman Greenspan Financial Services Committee Congressional Record—U.S. House of Representatives July 17, 2002 Rep. PAUL. “Welcome Chairman Greenspan. I’ve listened care- fully to your testimony but I get the sense I may be listening to the Chairman of the Board of Central Economic Planning rather than the chairman of a board that has been entrusted with protecting the value of the dollar. “I have for quite a few years now expressed concern about the value of the dollar which I think we neglect here in the Congress, Money and Banking: Gold versus Fiat 229 here in the committee and I do not think that the Federal Reserve has done a good job in protecting the value of the dollar. And it seems that maybe others are coming around to this viewpoint because I see that the head of the IMF this week, Mr. Koehler has expressed a concern and made a suggestion that all the central bankers of the world need to lay plans in the near future to possi- bly prop up the dollar. So others have this same concern. “You have in your testimony expressed concern about the greed factor which obviously is there. And you implied that this has come out from the excessive capitalization/excessive valua- tions, which may be true. But I believe where you have come up short is in failing to explain why we have financial bubbles. I think when you have fiat money and excessive credit you create finan- cial bubbles and you also undermine the value of the dollar and now we are facing that consequence. We see the disintegration of some of these markets. At the same time we have potential real depreciation of the value of our dollar. And we have pursued ram- pant inflation of the money supply. Since you have been Chairman of the Federal Reserve we have literally created $4.7 trillion worth of new money in M3. Even in this last year with this tremendous burst of inflation, the money supply has gone up since last January over $1 trillion. You can’t have anything but lower value of that unit of account if you keep printing and creating new money. “Now I would like to bring us back to sound money. And I would like to quote an eminent economist by the name of Alan Greenspan who gives me some credibility on what I am interested in. A time ago you said, In the absence of the gold standard there is no way to protect savings from the confiscation through inflation. There is no safe store of value without gold. This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the hidden con- fiscation of wealth. Gold stands in the way of this insid- ious process that stands as a protector of property rights. [Congressman Paul then added that he strongly believed this statement by Greenspan taken from a 1966 article that was included in an article he had written titled, “Gold & Economic Freedom” was true. Congressman Paul continued,] 230 Pillars of Prosperity “But gold has always had to be undermined if fiat money is to work and there has to be an illusion of trust for paper to work. And I think this has been happening for thousands of years. At one time the kings clipped coins. Then they debased the metals. Then we learned how to print money. Even as recently as the 1960s for us to perpetuate a myth about our monetary system, we dumped 2/3 of our gold, or 500 million ounces of gold at $35 per ounce in order to try to convince people to trust the money. And even today, there is a fair amount of trading by central banks, the dumping of hundreds of tonnes of gold, loaning of gold for the sole purpose that this indi- cator of gold does not discredit the paper money and I think there is a definite concerted effort to do that. “My questions are twofold relating to gold. One, I have been trying desperately to find out the total amount of gold either dumped and sold on to the markets by all the central banks of the world or loaned by the central banks of the world. And this is in hundreds and hundreds of tons. But those figures are not available to me. Maybe you can help me find this. I think it would be impor- tant to know since all central banks still deal with and hold gold whether they are dumping, or loaning, or buying for that matter. “But along this line, I have a bill that would say that our govern- ment, our Treasury could not deal in gold and could not be involved in the gold market unless the Congress knows about it. Now that to me seems like such a reasonable approach and reasonable request. But they say they don’t use it (gold) so we don’t need the bill. But if they are not trading in gold, what would be the harm in the Con- gress knowing about handling and dealing about this asset, gold?” Chairman GREENSPAN. “Well first of all, neither we nor the Treasury trade gold. And my impression is that were we to do so, we would announce it. It is certainly the case that others do. There are data published monthly or quarterly which shows the reported gold holdings of central banks throughout the world, so you do know who holds what. The actual trading data, ah, I don’t think is available though the London gold exchange does show what its volume numbers are. And periodically, individual central banks do indicate when they are planning to sell gold. But they all report what they own. So it may well be the case that you can’t find spe- cific transactions. I think what you can find is the net result of those transactions and they are published. But so far as the United States is concerned, we don’t do it.”  Money and Banking: Gold versus Fiat 231 Bring Back Honest Money Congressional Record—U.S. House of Representatives July 25, 2003 Mr. Speaker, I rise to introduce the Honest Money Act. The Honest Money Act repeals legal tender laws, a.k.a. forced tender laws, that compel American citizens to accept fiat (arbitrary) irre- deemable paper-ticket or electronic money as their unit of account. Absent legal tender laws, individuals acting through the mar- kets, rather than government dictates, determine what is to be used as money. Historically, the free-market choice for money has been some combination of gold and silver, whenever they were available. As Dr. Edwin Vieira, the nation’s top expert on consti- tutional money, states: “A free market functions most efficiently and most fairly when the market determines the quality and the quantity of money that’s being used.” While fiat money is widely accepted thanks to legal tender laws, it does not maintain its purchasing power. This works to the disadvantage of ordinary people who lose the purchasing power of their savings, pensions, annuities, and other promises of future payment. Most importantly, because of the subsidies our present monetary system provides to banks, which, as Federal Reserve Chairman Alan Greenspan has stated, “induces” the financial sec- tor to increase leverage, the Federal Reserve can create additional money, in Mr. Greenspan’s words, “without limit.” For this reason, absent legal tender laws, many citizens would refuse to accept fiat irredeemable paper-ticket or electronic money. Legal tender laws disadvantage ordinary citizens by forcing them to use money that is vulnerable to vast depreciation. As Stephen T. Byington wrote in the September 1895 issue of the American Federationist: “No legal tender law is ever needed to make men take good money; its only use is to make them take bad money. Kick it out!” Similarly, the American Federation of Labor asked: “If money is good and would be preferred by the people, 232 Pillars of Prosperity then why are legal tender laws necessary? And, if money is not good and would not be preferred by the people, then why in a democracy should they be forced to use it?” The American Federation of Labor understood how the erosion of the value of money cheated working people. Further, honest money, i.e., specie, was one of the three issues that encouraged ordinary people to organize into unions when the union move- ment began in the U.S. circa 1830. While harming ordinary citizens, legal tender laws help expand the scope of government beyond that authorized under the Con- stitution. However, the primary beneficiaries of legal tender laws are financial institutions, especially banks, which have been improperly granted the special privilege of creating fiat irre- deemable electronic money out of thin air through a process com- monly called fractional reserve lending. According to the Federal Reserve, since 1950 these private companies (banks) have created almost $8 trillion out of nothing. This has been enormously advan- tageous to them. The advantages given banks and other financial institutions by our fiat monetary system, which is built on a foundation of legal tender laws, allow them to realize revenues that would not be available to these institutions in a free market. This represents legalized plunder of ordinary people. Legal tender laws thus enable the redistribution of wealth from those who produce it, mostly ordinary working people, to those who create and move around our irredeemable paper-ticket electronic money which is, in essence, just scrip. The drafters of the Constitution were well aware of how a gov- ernment armed with legal tender powers could ravage the peo- ple’s liberty and prosperity. That is why the Constitution does not grant legal tender power to the federal government, and the states are empowered to make legal tender only out of gold and silver (see Article 1, Section 10). Instead, Congress was given the power to regulate money against a standard, i.e., the dollar. When Alexander Hamilton wrote the Coinage Act of 1792, he simply made into law the market-definition of a dollar as equaling the sil- ver content of the Spanish milled dollar (371.25 grains of silver), which is the dollar referred to in the Constitution. This historical definition of the dollar has never been changed, and cannot be Money and Banking: Gold versus Fiat 233 changed any more than the term “inch,” as a measure of length, can be changed. It is a gross misrepresentation to equate our irre- deemable paper-ticket or electronic money to “dollars.” However, during the 20th century, the legal tender power enabled politicians to fool the public into believing the dollar no longer meant a weight of gold or silver. Instead, the government told the people that the dollar now meant a piece of government- issued paper backed up by nothing except the promises of the gov- ernment to maintain a stable value of currency. Of course, history shows that the word of the government (to protect the value of the dollar) is literally not worth the paper it is printed on. Tragically, the Supreme Court has failed to protect the Ameri- can people from unconstitutional legal tender laws. Salmon Chase, who served as Secretary of the Treasury in President Lincoln’s administration, when he was Chief Justice of the Supreme Court, dissenting in Knox vs. Lee, summed up the argument against legal tender laws in twelve words: “The legal tender quality [of money] is only valuable for the purposes of dishonesty” [emphasis added]. Another prescient Justice was Stephen Field, the only Justice to dissent in every legal tender case to come before the Court. Justice Field accurately described the dangers to our constitutional repub- lic posed by legal tender laws: The arguments in favor of the constitutionality of legal tender paper currency tend directly to break down the barriers which separate a government of limited powers from a government resting in the unrestrained will of Congress. Those limitations must be preserved, or our government will inevitably drift from the system estab- lished by our Fathers into a vast, centralized, and con- solidated government. A government with unrestrained powers is properly characterized as tyrannical. Repeal of legal tender laws will help restore constitutional gov- ernment and protect the people’s right to a medium of exchange chosen by the market, thereby protecting their current purchasing power as well as their pensions, savings, and other promises of future payment. Because honest money serves the needs of ordi- nary people, instead of fiat irredeemable paper-ticket electronic money that improperly transfers the wealth of society to a small 234 Pillars of Prosperity specially privileged financial elite along with other special inter- ests, I urge my colleagues to cosponsor the Honest Money Act.  Paper Money and Tyranny Congressional Record—U.S. House of Representatives September 5, 2003 All great republics throughout history cherished sound money. This meant that the monetary unit was a commodity of honest weight and purity. 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. Alan Greenspan, years before he became Federal Reserve Board Chairman in charge of flagrantly debasing the U.S. dollar, wrote about this connection between sound money, prosperity, and free- dom. In his article “Gold and Economic Freedom” (The Objectivist, July 1966), Greenspan starts by saying: “An almost hysterical antagonism toward the gold standard is an issue that unites sta- tists of all persuasions. They seem to sense . . . that gold and eco- nomic freedom are inseparable.” Further he states that: “Under the gold standard, a free banking system stands as the protector of an economy’s stability and balanced growth.” Astoundingly, Mr. Greenspan’s analysis of the 1929 market crash, and how the Fed precipitated the crisis, directly parallels current conditions we are experiencing under his management of the Fed. Greenspan explains: “The excess credit which the Fed pumped into the econ- omy spilled over into the stock market—triggering a fantastic speculative boom.” And, “…By 1929 the speculative imbalances had become overwhelming and unmanageable by the Fed.” Greenspan concluded his article by stating: “In the absence of the Money and Banking: Gold versus Fiat 235 gold standard, there is no way to protect savings from confiscation through inflation.” He explains that the “shabby secret” of the pro- ponents of big government and paper money is that deficit spend- ing is simply nothing more than a “scheme for the hidden confis- cation of wealth.” Yet here we are today with a purely fiat mone- tary system, managed almost exclusively by Alan Greenspan, who once so correctly denounced the Fed’s role in the Depression while recognizing the need for sound money. The Founders of this country, and a large majority of the Amer- ican people up until the 1930s, disdained paper money, respected commodity money, and disapproved of a central bank’s monopoly control of money creation and interest rates. Ironically, it was the abuse of the gold standard, the Fed’s credit-creating habits of the 1920s, and its subsequent mischief in the 1930s, that not only gave us the Great Depression, but also prolonged it. Yet sound money was blamed for all the suffering. That’s why people hardly objected when Roosevelt and his statist friends confiscated gold and radi- cally debased the currency, ushering in the age of worldwide fiat currencies with which the international economy struggles today. If honest money and freedom are inseparable, as Mr. Greenspan argued, and paper money leads to tyranny, one must wonder why it’s so popular with economists, the business com- munity, bankers, and our government officials. The simplest explanation is that it’s a human trait to always seek the comforts of wealth with the least amount of effort. This desire is quite positive when it inspires hard work and innovation in a capitalist society. Productivity is improved and the standard of living goes up for everyone. This process has permitted the poorest in today’s capi- talist countries to enjoy luxuries never available to the royalty of old. But this human trait of seeking wealth and comfort with the least amount of effort is often abused. It leads some to believe that by certain monetary manipulations, wealth can be made more available to everyone. Those who believe in fiat money often believe wealth can be increased without a commensurate amount of hard work and innovation. They also come to believe that sav- ings and market control of interest rates are not only unnecessary, but actually hinder a productive growing economy. Concern for liberty is replaced by the illusion that material benefits can be more 236 Pillars of Prosperity easily obtained with fiat money than through hard work and inge- nuity. The perceived benefits soon become of greater concern for society than the preservation of liberty. This does not mean pro- ponents of fiat money embark on a crusade to promote tyranny, though that is what it leads to, but rather they hope they have found the philosopher’s stone and a modern alternative to the challenge of turning lead into gold. Our Founders thoroughly understood this issue, and warned us against the temptation to seek wealth and fortune without the work and savings that real prosperity requires. James Madison warned of “The pestilent effects of paper money,” as the Founders had vivid memories of the destructiveness of the Continental dol- lar. George Mason of Virginia said that he had a “Mortal hatred to paper money.” Constitutional Convention delegate Oliver Ellsworth from Connecticut thought the convention “A favorable moment to shut and bar the door against paper money.” This view of the evils of paper money was shared by almost all the del- egates to the convention, and was the reason the Constitution lim- ited congressional authority to deal with the issue and mandated that only gold and silver could be legal tender. Paper money was prohibited and no central bank was authorized. Over and above the economic reasons for honest money, however, Madison argued the moral case for such. Paper money, he explained, destroyed “The necessary confidence between man and man, on necessary confidence in public councils, on the industry and morals of people and on the character of republican government.” The Founders were well aware of the biblical admonitions against dishonest weights and measures, debased silver, and watered-down wine. The issue of sound money throughout history has been as much a moral issue as an economic or political issue. Even with this history and great concern expressed by the Founders, the barriers to paper money have been torn asunder. The Constitution has not been changed, but is no longer applied to the issue of money. It was once explained to me, during the debate over going to war in Iraq, that a declaration of war was not needed because to ask for such a declaration was “frivolous” and that the portion of the Constitution dealing with congressional war power was “anachronistic.” So too, it seems that the power over money Money and Banking: Gold versus Fiat 237 [...]... the passage of the Federal Reserve Act of 1913, which allows the federal government to erode the value of the currency at the will of the central bank Congress’s embrace of fiat money is directly responsible for the instability in the banking system that created the justification for deposit insurance 258 Pillars of Prosperity The End of Dollar Hegemony Congressional Record—U.S House of Representatives... banks have been able to effectively simulate many of the characteristics of the gold standard by constraining the degree of finance in a manner which effectively brought down the general price levels 252 Pillars of Prosperity Earlier, in December 2002, Mr Greenspan spoke before the Economic Club of New York and addressed the same subject: The record of the past 20 years appears to underscore the observation... currency, since debt cannot be the source of long-term wealth Individuals 244 Pillars of Prosperity and corporations who borrow too much eventually must cut back and pay off debt and start anew, but governments rarely do But where’s the hitch? This process, which seems to be a creative way of paying off debt, eventually undermines the capitalist structure of the economy, thus making it difficult to... printing press In the same quarter, after-tax corporate profits fell 3.4 percent This is hardly a reassuring report on the health of our economy and merely reflects the bankruptcy of current economic policy Real economic growth won’t return until confidence in the entire system is restored And that is impossible as long as it 2 56 Pillars of Prosperity depends on the politicians not spending too much... this arrangement is ending The process put us into a position of being a huge debtor nation, with our current account deficit of more than $60 0 billion per year now exceeding 5 percent of our GDP We now owe foreigners more than any other nation ever owed in all of history, over $3 trillion A debt of this sort always ends by the currency of the debtor nation decreasing in value And that’s what has started... accompanies fiat money 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 Fiat money is also immoral... Banking: Gold versus Fiat 251 exists, and justifying unlimited expansion of the dollar money supply To maintain confidence in the dollar, gold prices must be held in check In the 1 960 s our government didn’t want a vote of no confidence in the dollar, and for a couple of decades, the price of gold was artificially held at $35 per ounce That, of course, did not last In recent years, there has been a coordinated... the definition of the dollar and what money should consist of The current superficial discussion about money merely shows a desire to tinker with the current system in hopes of improving the deteriorating economy There will be a point, though, when the tinkering will no longer be of any benefit and even the best advice will be of no value We have just gone through two-and-a-half years of tinkering with... do is to strictly limit the power of government Money and Banking: Gold versus Fiat 255 to meddle in our economy and our personal affairs, and stay out of the internal affairs of other nations Conclusion It’s no coincidence that during the period following the establishment of the Federal Reserve and the elimination of the gold standard, a huge growth in the size of the federal government and its debt... recipients of the borrowed funds But this is not exactly what happens when a country pays off its debt The debt, in nominal terms, always goes up, and since it is still accepted by mainstream economists that just borrowing endlessly is not the road to permanent prosperity, real debt must be reduced Depreciating the value of the dollar does that If the dollar loses 10 percent of its value, the national debt of . today, there is a fair amount of trading by central banks, the dumping of hundreds of tonnes of gold, loaning of gold for the sole purpose that this indi- cator of gold does not discredit the. more 2 36 Pillars of Prosperity easily obtained with fiat money than through hard work and inge- nuity. The perceived benefits soon become of greater concern for society than the preservation of liberty real prosperity requires. James Madison warned of “The pestilent effects of paper money,” as the Founders had vivid memories of the destructiveness of the Continental dol- lar. George Mason of