Ron Paul Statement on International Economic Turmoil
September 16, 1998
(J. Bradley Jansen was Ron Paul’s legislative staffer for these issues at this time)
Opening Statement by Rep. Ron Paul
House Banking and Financial Services Committee
Hearing on International Economic Turmoil
16 September 1998
A WORLDWIDE FINANCIAL CRISIS
We are now experiencing a worldwide financial crisis. It may yet prove to be the worst in all of history. There have been a lot of wringing of hands as to the cause, but the source of the problem is not a mystery. It is a currency induced crisis.
Although tax, spending, regulatory policies and special interest cronyism compounds the problems, all nations of the world operate with a fiat monetary system. We have been operating with one for 27 years. It has allowed the financial bubble to develop. Easy credit and artificially low interest rates starts a chain reaction that, by its very nature, guarantees a future correction. Depending on the particulars of fiscal and monetary policy and political perceptions, the boom part of the cycle lasts for unpredictable lengths of time.
The later bad consequences of inflating a currency are certain, no matter how beneficial the earlier ones seem. The dollar has played a major roll in the worldwide financial bubble since the dollar is the reserve currency of the world. It is readily accepted and used to further inflate most other world currencies.
Noted free market economists Ludwig Von Mises astutely observed in 1940:
No political party and no government has ever tried to make a conscious deflationary effort. The unpopularity of deflation is evidenced by the fact that inflationists constantly talk of the evils of deflation in order to give their demands for inflation and credit expansion the appearance of justification.
Since we hear no talk of sound money and we can be assured no government will deliberately deflate, we should remain vigilant against the politically popular policy of inflation, the deliberate debasement of the currency.
Beneficiaries of easy credit demand the policy of currency inflation continue. Creating money and credit out of thin air gives the illusion of the perfect counterfeiter, appearing legal and helpful to many. The power to inflate a currency guarantees a lender of last resort for risky borrowing, domestic and international. It accommodates deficit spending, permitting spending on extravagant welfare programs and unwarranted international militarism, something for everyone.
The welfare poor like it. The welfare rich like it. The foreign welfare recipients like it. It seems everyone likes it until the artificial nature of the financial bubble becomes apparent as it is now.
Fiat money and its low interest rates cause mal-investment, over capacity, rising prices in one industry or another, excessive debt and over speculation worldwide. We have had all of this. The current system has generated a nearly $30 trillion derivatives market. This is a modern day phenomenon, having allowed a greater speculative binge than anything known in financial history. But the current prices signals an end of an era and it does not bode well for anyone.
The near anarchy in Russia, the food riots in Indonesia, and the growing recession in Japan are signs of conditions spreading across the globe. Unfortunately, there is no sign that correct policy will soon be instituted, anyplace.
Capitalism erroneously is being blamed. No mention is made that no country today is truly capitalist in following a sound monetary policy.
A lot of lip service is given to free trade but, with only casual observation, one realizes that which is being promoted as free trade is internationalism and managed trade through organizations and programs such as NAFTA, the World Trade Organization, the IMF, the World Bank, foreign aid, subsidized exports, and a U.N. directed foreign policy. Economic sanctions by those professing free trade are commonplace and growing.
Today’s protectionists rely on these programs in an effort to outwit their competitors along with demanding currency devaluations in a futile effort to enhance exports.
Markets inevitably devalue currencies that have been inflated by the monetary authorities. The degree depends on the amount of previous monetary inflation and political perceptions but, on the short run, countries frequently accelerate the devaluation in a competitive fashion in an effort to gain a competitive edge against their trading partners. This is why China, despite the denials, will likely accept the policy of official devaluation.
But our concerns here in the Congress should be for the dollar. We should not be so arrogant as to dictate policies to others since we have no authority to do so, whether it be Japan, Indonesia, Mexico, or Russia. We should resist this no matter how tempting it might seem. And we certainly should not use dollars to prop up other currencies or economies whether it be Mexico or anyone else.
Bailouts compound the problems and encourages others to mismanage their economies while expecting a bailout for themselves from Uncle Sam. But most importantly, it undermines the value of the dollar.
Since returning to Congress in January of 1997, I have repeatedly warned that our monetary policy is seriously flawed and will eventually lead to a dollar crisis. This, in spite of the fact that the dollar has been riding high in American bonds, and up until recently our stock markets have been a haven for the ravaged world financial markets.
The Fed succeeded, but it nearly destroyed the economies of the world in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market, triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom.
But it was too late; by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed.
Great Britain fared even worse, and rather than absorb the full consequences of her previous folly, she abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a worldwide series of bank failures. The world economies plunged into the Great Depression of the 1930s.
With a logic reminiscent of a generation earlier, statists argued the gold standard was largely to blame for the credit debacle which led to the Great Depression. If the gold standard had not existed, they argued, Britain’s abandonment of gold payments in 1931 would not have caused the failure of banks all over the world. The irony was that since 1913, we had not been on a gold standard, but on what may be termed a mixed gold standard; yet it is gold that took the blame.
Further quoting from this economist from 1966:
But the opposition to the gold standard in any form, from a growing number of welfare state advocates, was prompted by a much subtler insight: the realization that the gold standard is incompatible with chronic deficit spending, the hallmark of the welfare state. Stripped of its academic jargon, the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes. A substantial part of the confiscation is effected by taxation. But the welfare statists were quick to recognize that if they wished to retain political power, the amount of taxation had to be limited and they had to resort to programs of massive deficit spending, i.e., they had to borrow money, by issuing government bonds, to finance welfare expenditures on a large scale.
Under a gold standard, the amount of credit that an economy can support is determined by the economy’s tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government’s promise to pay out of future tax revenues, and cannot be easily absorbed by the financial markets. A large volume of new government bonds can be sold to the public only at progressively higher interest rates. Thus, government deficit spending under a gold standard is severely limited.
The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which, through a complex series of steps, the banks accept in place of tangible assets and treat them as if they were an actual deposit as the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is there are no more claims outstanding than real assets.
In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case for gold. If everyone decided, for example, to convert all his bank assets to silver or copper or any other good, and thereafter declined to accept checks for payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods.
The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.
This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the hidden confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.
The economist who wrote this in 1966 was Alan Greenspan. He was right then. He is wrong now. Deliberate debasement of a currency cannot assure perpetual wealth, only hardship, the type of hardship we are now witnessing in East Asia and spreading around the world, moving now into Central and South America. And we here in the United States follow the same policy, and we are vulnerable no matter how beneficial and how it appears that we are doing today.
Congress has an explicit constitutional responsibility in the area of money and finance, and we must assume this responsibility. Secretive plans by a central bank to manipulate money and credit with the pretense of helping us is unacceptable, and before the trust in the dollar is lost we should work diligently to restore soundness to our monetary system. Without trust, the current system cannot last, and there is every reason to believe that the disintegration of trust throughout the world can and will spread to this country.
It is an obligation on our part, Members of Congress, to look into this matter, study it and at least be prepared for the problems that we will have to confront. We cannot continue with the system that we have. That is what the markets are telling us today. The worldwide financial crisis is not a figment of anybody’s imagination, it is real, and we are reading about it every day and it threatens the life savings of every single American.
The value of the currency is crucial to protecting the assets of all retirees. This issue, I believe, is one of the most serious issues that we as Members of Congress have the responsibility of looking into and confronting and doing something about it. But as long as we accept the notion that the central planner of this country, the Federal Reserve, remains totally secret, without true supervision by the Congress, we are derelict in our duty.
It is up to us to do something. And as the crisis worsens, I believe it will become more apparent that our responsibility to look into this is quite evident.