Pillars of Prosperity phần 4 ppsx

reserves of members banks, securities, credit, interest on deposits, and open market operations; (C) transactions made under the direction of the Federal Open Market Committee including transactions of the Federal Reserve System Open Market Account; and (D) those portions of oral, written, telegraphic, or tele- phonic discussions and communications among or between Members, of the Board of Governors, and offi- cers and employees of the Federal Reserve System which deal with topics listed in subparagraphs (A) (B) and (C) of this paragraph. As the law now stands, the GAO is forbidden to look into those functions of the Federal Reserve which are “crucial to our system of government and our nation’s economy.” The reasons stated by the Senate committee for auditing the Fed are sound ones, but the present law explicitly forbids any investigation of the functions of the Fed which are so important in our economy. Auditing the expenditures of the Fed is, of course, an important function. It would be nice to know how they spend the billion dollars per year that are not returned to the Treasury. I have seen their marble palace uptown and heard about their caches of cash out in Virginia, and as important as these things are, it is far more important that the Congress and the American people be provided with the results of an investigation of the essential operations of the Fed. This is especially so since the passage last year of the Monetary Control Act, which empowered the Fed to purchase the paper obli- gations of foreign governments and use them as collateral for Fed- eral Reserve notes. This extraordinary provision of the law was not debated in the House nor the Senate, nor was testimony taken on it. Yet it is just one example of the sort of power that the Federal Reserve has, and which remains beyond the reach of the investi- gatory arm of the Congress. In stating a reason for excluding these “crucial functions” from the purview of the GAO audit, the Senate Committee on Govern- mental Affairs wrote: “. . . the Federal Reserve Board must be able to independently conduct the nation’s monetary policy. . . .” 130 Pillars of Prosperity The independence of the Fed has long been used as a device to shield the Fed from congressional investigation. It is time that we recognized that the independence of the Fed is a legal fiction. One can trace the policies of the Federal Reserve merely by tracing the histories of Presidential elections. I will use the most recent campaign as an example, but one could just as easily select the earlier campaigns of Ford, or Nixon, or Johnson for illustrations of the fact that the Fed takes its cues from the White House. Last May, when the Presidential campaign was beginning in earnest, and it was becoming increasingly clear that Ronald Rea- gan would be the nominee of the Republican Party, the Federal Reserve Board began a six-month expansion of the money supply that was almost unprecedented in our history. During the last six months of the year, M1B increased $25.8 billion, or 13.4 percent. Actually the increase prior to the election was greater: The Fed took the money supply up almost $29 billion before scaling back in December, after the Presidential election was over. If one excludes the decrease in December, M1B grew at a 16.4-percent rate in the five months prior to the election. Why? Simply because restraint in the growth of the money supply during a Presidential campaign might lead to the defeat of the incumbent. The Fed knows that it can give the economy a tempo- rary “high” by jacking up the money supply, and it does so, even though the long-run consequences of such an opportunistic policy will be severe. But it is not only the long-run consequences that will be severe. The ups and downs in interest rates in 1980 followed the ups and downs in the Fed’s manipulation of the money supply. Easy money causes high interest rates, and no better illustration of this can be found than the prime rate peaking at 21.5 percent last December, and now falling off as the Fed ceases to expand the growth in the money supply. Yet it is decisions such as these, decisions which drive interest rates to record levels that are fatal to many businesses, decisions that increase prices at record rates in double-digit inflation, and decisions which will soon affect the unemployment rate by driving it up, that are not permitted to be included in the GAO audit. I think it is time that the Congress and the American people found out exactly what the Fed is up to. Is there any insider dealing Money and Banking: Gold versus Fiat 131 based on the decisions the Fed makes in its secret meetings? What is the relationship between the Fed and foreign governments and international banks? The sooner we find out the better off we will be. The system deserves no more blind faith and support from the American people.  High Interest Rates Congressional Record—U.S. House of Representatives February 25, 1982 Mr. Speaker, everyone decries the high interest rates that have stifled the economy. Many are perplexed that although prices are rising less rapidly than a year ago, interest rates have not had a corresponding drop. For decades now interest rates have generally followed the rate of price inflation. As prices rose during boom periods, interest rates also rose. As the recession set in, as a reac- tion to monetary policy, interest rates dropped. Many economic projections were in error because it was assumed that this relationship would persist. However, the economists who understand the nature of money anticipated the dilemma we now face. Interest, the cost of using another’s capital for a period of time, is not set by computers, or measurements of some mysterious M. It is determined by the sub- jective interpretations of all borrowers and lenders. When money has no precise definition, as is the case with the dollar today, anticipated future value is predictably going to be less. Without convertibility to something of real value like gold, the inflation premium will dominate in setting interest rates. Increasing the supply of money and credit may lower the rates temporarily, but will only serve to fuel the fires of inflation and raise interest rates even further. Lowering interest rates by credit 132 Pillars of Prosperity allocation will only lead to a controlled and a further collapse of the economy. Only with money of real value, where there is no inflation premium, will we solve this problem, Until we have a gold standard, we can expect interest rates to go even higher.  At the Brink Congressional Record—U.S. House of Representatives September 22, 1982 Mr. Speaker, the International Monetary Fund (IMF) recently finished its annual meeting in Toronto, Canada. The IMF was orig- inally designed to smooth out the balance-of-payments problems among its members, but today it serves essentially as a social wel- fare agency lending to nations whose economies have been crip- pled by socialist and fascist central planning. As should be expected, the United States contributes more funds than any other nation. In Toronto the international banking crisis could not be ignored, yet attempts to downplay it were made. The collapse of the Mexican peso and the threat of an Argentinean default dramatize the urgency of the situation and are omens of things to come. Mexico owes $81 billion and Argentina $39 billion, but this is only a small fraction of the total debt owed to Western governments and Western banks. Eastern bloc Communist nations and Third World nations owe over $850 billion, and reasonable people do not expect that this sum will be repaid. The race going on now is to finance all this debt through governments—principally the United States—and bail out the international banking system. The default which many pretend can be avoided is inevitable; the only question that remains is who the Money and Banking: Gold versus Fiat 133 victims are to be. The question is, shall it be the bankers or the innocent uninformed American citizens? The elite attending the international conference minimized the crisis only by admitting that yes, indeed, a problem did exist, but it is manageable. We cannot manage nor ever pay our own debt let alone the world’s debt, yet we continue to play the game and pretend a calamitous banking crisis does not really exist and that we will work our way out of it. That is impossible. The big default will come. Mexico has been insolvent for years but it was only recently that a panic occurred and the peso collapsed. It took a lot of years, a lot of borrowing, a lot of money creation by the Mexican central bank, to set the stage that allowed the crisis to occur. Mexico’s banking problems make the dollar look strong—compared to the peso—but compared to its former purchasing power the dollar is weak and hanging precariously on the brink of collapse. The dollar collapse which now stares us in the face brings shudders to those knowledgeable and honest about currency mat- ters. The dollar is the most vital currency of the world, and its fail- ure will wreak havoc on Western civilization. We can no longer ignore the threat. It is estimated that the contingent liabilities of the U.S. government are now over $11 trillion. Fulfilling this commitment is not possible. The Social Security system alone exists only by robbing young Peter to pay elderly Paul. It is insolvent and we ought to admit it. The national debt is now over $1.1 trillion, our annual interest payment on this debt is more than $115 billion, and both are growing rapidly even under an administration which has been declared the most fiscally conservative of the 20th century. The reason for this inconsistency—whether it is deception, inept man- agement, or the impossibility of controlling the runaway system— is economically unimportant. The fact that the floodgates of spend- ing, taxing, and inflating are open and that debt repudiation has begun must be accepted before plans can be laid for reforming our banking institutions and preserving a free society. In the old days, an event such as a dollar devaluation made big news. A jump of gold prices from $35 to $38 required surprise weekend announcements that only the insiders knew about. Today the price of gold—the barometer of monetary distrust as it has been for 5,000 years—can increase by one-third in a few weeks 134 Pillars of Prosperity with no specific announcement and with the authorities pretend- ing that this has little to do with devaluation and lost trust in the dollar. Fear is building, debt repudiation is occurring daily through dollar depreciation, and nominal dollar debt is expanding rapidly. As all this occurs, inflation and patching the system together at the expense of the innocent proceed. The mountain of debt can be repudiated by default; that is, declared bankruptcies and subsequent liquidation of debt, but every effort conceivable will be made to prevent this from occurring on a massive scale. If this did occur it would be an old-fash- ioned 1929 deflation and everyone knows the politicians and the bankers will not let this happen, which is understandable, yet the alternative method of debt liquidation offers little benefit or reas- surance. The other method of defaulting on the debt is a 1923-style Ger- man inflation. Pay the debt with rapidly depreciating newly created dollars. When the dollar is worthless, or approaching worth- lessness, real debt disappears and the holder of debt instruments have their assets liquidated even though someone may still owe them many dollars. As new money appears out of thin air, real assets of the savers and the debt denominated dollars evaporate into thin air. Both forms of debt liquidation are terribly dangerous. Economic law demands the debt be paid, the pyramiding of debt cannot last forever—the drinking binge always comes to an end. In the end the patient must sober up or face an alcoholic’s death. It is similar with an economy, and we must either give up depending on new money creation—inflation—in our efforts to achieve a false sense of well being, or face the consequences. It appears to me that we are determined to follow the course of history, failing to learn from it, and commit the errors that have brought many nations to their knees. That error is the policy of currency destruction through the inflationary process. The task of limiting government size and its expenditures far outweighs the superficial expression of sympathy for a balanced budget here in Washington. Many do not have courage for it. Those Americans who care and are still struggling to make some sense out of our political and economic system must give backbone to the public officials who have the authority to legislate wisely and constitu- tionally and stop the monetary catastrophe that is occurring. Money and Banking: Gold versus Fiat 135 In 1980, radical changes were made in the Federal Reserve Act—the Monetary Control Act of 1980—allowing a massive increase in the power of the Federal Reserve System. Among those powers was the authority of the Fed to use the debt of foreign nations as collateral for the printing of Federal Reserve notes. This is of the greatest significance in light of the $850 billion Third World and Communist nations’ debt to the West. To begin with, the foreign bonds that the Fed purchases are purchased with paper money backed by our own debt—bonds and Treasury bills. Then we turn around and use the newly purchased foreign bonds as collateral to print up more Federal Reserve notes. This system of money creation is unbelievable to rational human beings. It cannot but lead to a disastrous end for the American dollar. Under current law the recently purchased Mexican pesos could be used to back the printing of more Federal Reserve notes. The fact that the debt structure is so large and the banks holding the debt so influential causes me to predict that government will do a lot more inflating to bail out the private holders of foreign debt through this mechanism. We sent money to Poland when they were unable to meet their interest payments to the large banks; we did it with Mexico; and there is no reason we should not expect it to be done for Brazil, Argentina, Zaire, or whomever. The banks will get their payments, the socialist dictators will get our dollars, and the American middle class will get the bill. The bill will not be paid by raising taxes further, for there is a limit to how high taxes can be pushed, but it will be paid through inflation and dollar depreciation. As so often occurs with economic problems originating in mis- managed centrally planned economies built on paper money, the seeds of economic isolationism have been planted. The decade of the 1930s certainly was a period when isolationism, nationalism, and militarism followed on the heels of depression, inflation, deflation, and disruption to the normally smooth functioning of a market economy. Today, we hear strong demands daily to take away the American consumers’ right to purchase foreign goods, claiming this will somehow miraculously rectify the ills created by government intervention and inflation. Nothing could be further from the truth. It will only make the economy worse, international relationships tense, and all at the expense of the individual’s right 136 Pillars of Prosperity to negotiate unmolested in the purchase of a particular product. The scapegoat is not Japanese efficiency and competitiveness; they serve us economically in providing for our needs. The unfairness of course is the fact that American taxpayers are forced to subsidize our competitors. Not only do we subsidize countries who need a bailout and others who just want a grant through the international banking system—all causing more inflation since we create money to fund these international development banks—we help our rich allies like Germany and Japan by providing large sums for their defense. We literally supply all Japan’s defense, allowing the Japanese to have lower taxes on their car and steel companies and other subsidies. Our free gifts to them should all be stopped. It is suicidal to continue the process. It is no longer 1945, it is 1982, and a new generation of Americans are now demanding a new relationship with our allies and our enemies. We all want a strong defense, and we want to live in peace. Free trade with potential enemies when they pay for the goods they buy cannot make war more certain than it would be otherwise. Trade barriers create ill will, new enemies, and arouse feelings of nationalism and militarism. Economic isolationism, a consequence of inflation and central planning, is to be feared and rejected as a viable policy for any freedom-loving nation. The American people, whenever they have had the chance, have spoken out for peace and free trade, balanced budgets, and sound money. And they are today as well. Yet our policies do not reflect this. On August 16, the Chinese communiqué was signed with the Chinese Communist dictators and our administration. On August 30, an Export-Import Bank loan of $68.5 million was authorized by the President because it was “in our national interest” to help build a steel plant for them. What for? So they can sell cheap steel to the United States? Just what we need. American steel plants are closing down, unemployment is sky high, and we subsidize Communist steel plants. It is absurd. Instead of helping the steel industry by stopping inflation and lowering taxes, we make inflation worse by more credit creation to help our competition and in this case our political enemies. The wisdom of this policy I fail to see. I venture to guess most Americans fail to see the wisdom of self-sacrifice and economic suicide as well. Money and Banking: Gold versus Fiat 137 The current policies of inflation, taxation, central planning, protectionism, and economic isolationism are certainly bad in that Americans and the people of the world are going to suffer from the inevitable lowering of everyone’s standard of living. But a much greater threat hangs over our head. The loss of personal liberty in an age of rampant inflation, money destruction, and economic tur- moil is well known. Liberty, based on a belief that it is a gift of the Creator, requires our constant and utmost vigilance. This re- sponsibility should motivate us in all that we do, and the threat of any loss of liberty must concern us all. The material benefits of a free society are obvious, and their loss that comes with a rise in sta- tism cannot be ignored, but the concern for the rights of each citi- zen must become the principal motivating force in our political actions. Closely paralleling the loss of liberty and the economic stagna- tion that is also a consequence of inflation and central planning is the great danger that attempts at compensating for all previous errors of government intervention will be made with more inflation and more government programs. If this continues and economic isolationism and international resentment develop, nations are driven to producing massive armaments—and not necessarily defensive armaments—out of fear and confusion as well as economic justifications. History shows that great danger of war rises out of the very conditions we are experiencing today. 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. This need not be; war and famine are not inevitable. Freedom and sound money bring peace and prosperity. But if freedom is lost and honest money relegated to the underground economy, war and famine will follow even for the United States. Although the United States has been exempt from famine for most of its history, if we pursue foolish policies based on the immoral use of government force, we will reap the economic whirlwind of hunger and poverty and suffer the rattle of machine guns, the blast of bombs, and the cry of human suffering. 138 Pillars of Prosperity If we accept the notion that government should not exert unjust force on any person, that no one should be made a slave to another, and that the fraud of paper money must be outlawed, this tragedy will be averted. A bold step is required, for a timid response with more of the same, more inflation and more government intervention, will prove disastrous. 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.  The Folly of Current Monetary Policy Congressional Record—U.S. House of Representatives December 1, 1982 Mr. Speaker, the stock market is soaring and so is the money supply. In the last three months, checking account and cash money (M1) rose at a rate of 17.6 percent. The Federal Reserve has assured the market that its restrictive money policy of the past three years is a thing of the past. No tears should be shed over dropping the ex- periment with monetarism, but no joy should be expressed over the return to interest rate manipulation by massive monetary inflation. It is true the economy will feel better for a short while with more inflation, but so does the alcoholic as he returns to drinking after a short period of abstinence. This is not to say that the cure for our economic malaise is prolonged agony with monetarism, but it is important for all of us to realize that these are not the only two options available to us. We will never achieve a sound monetary system by jumping back and forth between concentrating on the money supply one year, and manipulating interest rates the next. Money and Banking: Gold versus Fiat 139 [...]... cause of our problem, and that has to do with the inflation of the monetary system or the depreciation of the currency Mr GREENSPAN Dr Paul, the concept of price increase is conceptually identical, but the inverse of the depreciation of the value of the currency The best way to get a judgment of the value of the currency as such, if one could literally do it, is to separate the two components of long-term... role of government that the English and the British had given us, and we here in the United States decided that the role of government ought to be there for the preservation of liberty The role of government ought not to be to redistribute wealth, it ought not to be the counterfeiter of the world, to create money out of thin air It is illegal for you or I to counterfeit money Why 1 64 Pillars of Prosperity. .. no definition of the money, the dollars, no definition of the dollar, we have introduced the notion of all kinds of hedges and all kinds of speculation, and some serve financial and economic interests to do hedging, but because there 160 Pillars of Prosperity is no soundness to the currency there is a greater need all the time to hedge and to try to protect against sudden changes Some of that would... out of thin air and manipulate interest rates, it also works closely with the 148 Pillars of Prosperity banks through the fractional reserve banking system that allows the money supply to expand This is the source of a lot of mischief and a lot of problems, and if we in the Congress could ever get around to understanding this issue, we might be able to do something about the lowering standard of living... interest rates, which is the cost of borrowing, which is the price as well as the supply of money, this is an ominous power because we use the money in every single transaction It is 50 percent of every transaction Whether it is the purchase of a good or whether it is the selling of our labor, it is denominated in terms of what we call the dollar, which does not have much of a definition anymore, and yet... today in medicine, rationing of health care That is what managed care is all about Patients suffer from this because they have less choice, and they do not have as much decision making 156 Pillars of Prosperity on what care they are going to get This is a consequence of government manipulation of money and credit Those who want to perpetuate this system do not want us to think of the real cause, and that... period of time they bought $23 billion worth of our debt We do know that Secretary Rubin talks to them and that maybe there is an agreement that they help you out; they buy some of these Treasury bills so you do not have to buy quite so many Mr GREENSPAN There is no such agreement, Dr Paul Dr PAUL You read about that though Mr GREENSPAN Sometimes what you read is not true 146 Pillars of Prosperity. .. talking about the depreciation of a currency One other thing that I would like to suggest, and it might be of interest to my colleagues, is that one of the characteristics of a currency of a country that depreciates its currency systematically is that the victims are not always equal Some suffer more than others Some benefit from inflation of the currency and the debasement of the currency So indeed, I... that that is a measure of inflation There are lots of different measures of inflation I would argue that commodities, per se, steel, copper, aluminum, hides, whatever, used to be a very good indicator of overall inflation in the economy when we were heavily industrialized Now they represent a very small part of the economy and services are far more relevant to the purchasing power of the currency than... million ounces of gold worth over $ 14, 000,000,000 at the fixed price of $35 per ounce One would have thought that this gold flight from the Treasury would have caused a few policy changes, but the only two of importance until 1968 were the establishment of the Exchange Stabilization Fund in 1961 in a futile attempt to bolster the dollar in international currency markets, and the creation of the London . however for such a conference is the Bret- ton Woods Conference held July 1–22, 1 944 , in the hills of New 140 Pillars of Prosperity Hampshire. I am convinced a new international monetary conference,. currency than at any time, so that broader 144 Pillars of Prosperity measures of price, in my judgment, are more relevant to deter- mining what the true rate of inflation is. Dr. PAUL. Can the inflated. inverse of the depreciation of the value of the currency. The best way to get a judgment of the value of the currency as such, if one could literally do it, is to separate the two components of long-term

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