The Dangers of Fiat Money: 'End the Fed,' by Ron Paul

How appropriate that this book by Ron Paul, End the Fed" (Grand Central Publishing: 2009), should come out the week that the price of gold reached $1020 per ounce and the dollar almost reached post World War II lows against other major currencies. These results, to Paul, just underscore his premise that a fiat money will, in the end, destroy itself, and on the way precipitate greater and greater crisis in the financial system, both domestically and internationally.

Early on, Paul gives us a chart that tells the whole story. It is a chart that presents the Purchasing Power of the U. S. Dollar from the year that the Federal Reserve System was established, 1913, to the present time. With the value of the dollar being indexed at $1.00 in January 1913 Paul writes: “We might say that the government and its banking cartel have together stolen $0.95 of every dollar as they have pursued a relentlessly inflationary policy.” That is, a dollar in September 2009 is worth less than $0.05 of what the purchasing power of the dollar was almost 100 years ago.

The one constant in this decline is…the Federal Reserve.

To Paul, the government and the banking industry are all of a package and have been sold as such since the beginning of discussions about the creation of a central bank in the United States. Historically, three reasons have been given for this relationship. First, banks must possess some kind of monopoly power, for financial intermediation cannot exist in a perfectly competitive environment. Thus, entry into the industry must be controlled by someone and that someone always turns out to be the government. But, having monopoly power gives the banks competitive advantages that allow them to earn extraordinary returns on invested capital.

Second, bankers always go too far and so they need to be regulated to protect themselves from their own actions. Thus, there need to be restrictions on capital, reserve requirements, lending standards and so forth.

Third, the supply of money within the banking system needs to be “elastic” so that banks can expand or contract credit in order to meet the needs of the business or farming community. This requirement can take one of two forms. In a farming community, farmers need funds in the spring season in order to plant crops and so banks must be able to extend loans to them in order to support the health of the local economy. In the fall after crops have been sold and farmers are flush with cash, the loans can be repaid and credit extension is reversed. Originally, this was one of the functions of the Fed’s discount window. Banks could borrow from the discount window in the spring to support the expansion of credit and then repay the borrowings in the fall as the farmers reduced their debt.

A second need to expand credit is the Fed’s role as the “lender of last resort.” Under normal circumstances customers of banks are routinely putting money into banks and taking money out of banks and these inflows and outflows usually offset one another. The problem comes when most customers want to withdraw their funds from a bank or the banking system. In its role as the “lender of last resort” the Fed opens up the discount window and supplies sufficient funds to a bank or to the banking system so as to allow banks to meet the removal of funds from the system. This is a primitive description of a “liquidity crisis.”

These basic reasons are the justification for the modern money and banking system and, to Paul, represent the underlying problems of a fiat money system. The first argument results in the “banking cartel” that he speaks of and accounts for the ability of these organizations to be very profitable. The second argument explains why the banking system and the government are so intertwined. It is in the interest of the banking system to protect its monopoly position and it is in the interest of the government to have a strong banking system. The two branches of the third argument help to account for the underlying existence of inflation in a fiat money system and the role the Fed plays in “saving” banks from failing. It is an easy step to go from providing an “elastic” currency to support seasonal swings in economic activity to providing an “expanding” money stock to support the economic growth of the economy as a whole. It is also easy to see how saving the banking system by opening the discount window can evolve into buying all sorts of “securities” to provide market support and into bailing out institutions by taking over their assets and putting them on the Fed’s balance sheet.

I have concentrated on these components of Paul’s argument because they are the foundation of most of what he presents in the book. The crucial issue to the author is that a system of fiat money supported by a central bank that can produce money out of thin air is going to eventually self-destruct. And, Paul argues, that is exactly what has happened in the United States and we are in the final stages of this self-destruction.

And who is the strongest proponent of this kind of a system? Well the banking industry is because they are protected, can earn enormous profits, and will get bailed out should things go wrong. Government also benefits because having a central bank that can create money out of nothing allows the government to basically spend at will because the central bank will ultimately underwrite all the spending that is not supported by the debt of the government. By government, Paul means Republicans, and Democrats, and bureaucrats. Affiliation doesn’t matter.

And, once you become part of this system you become a captive of the system. Paul presents two chapters that contain interactions with Alan Greenspan and Ben Bernanke. What he is trying to show is that once you get into a position of power you seem to lose all connection with reality in terms of how the world really works. However, it seems that being a part of the system just adds to your intelligence: “If Greenspan was cocky about the genius of central bankers, Bernanke is even more so.”

In closing, Paul gives several arguments as to why the system of fiat money should be abolished. First, there is the moral argument; a fiat money system destroys relationships, trust, and contracts. Second, there is no provision in the U.S. Constitution for a paper money; hence, a fiat money is unconstitutional. Third, a fiat money is not consistent with free market capitalism because it is really nothing more than backdoor economic planning. And, fourth, a fiat money system is contrary to the existence of liberty.

The answer to the dilemma: a gold system. But, that’s another story. There is a lot in this book I haven’t covered: history, polemics, biases, people, and so forth and the book is only 210 pages long. Read it!

Comments

[Smarty_Pants]

"For the benefit of those who want stable prices, the implication is that, under a gold standard, global GDP would have to fall from 3% plus to 0.5%." - chap08

I assume you meant to say global DGP growth would have to fall, but it's not true. The entire developed world ran on a gold standard for nearly 100 years in the 19th century. Did our nation's GDP growth stagnate that entire time? No. It grew faster than at any time in our history during that period, with paper money fully convertible to gold on demand.

"What makes you think that your income would remain constant if deflation was 2.5%? Think about it. You're suggesting that prices fall by 2.5% pa but wages remain the same nominal amount. Do you realize what that means for businesses? It means that pretty soon, they are loss making. So no, for business to continue, your wages have to fall by the same amount, or greater than prices." - chap08

Don't make the mistake of treating aggregate economic levels with case-by-case events.

Consider Ford Motor Co. Henry Ford started the company in 1902. In 1907 Ford sold the first 6 cylinder Model K at $2,800. In 1908 Ford introduced the Model T. In 1909 Ford produced about 18,000 Model Ts. In 1911 nearly 70,000 were built. Over 170,000 in 1912. 202,000 in 1913, 308,000 in 1914, 501,000 in 1915 and over 1 million by 1920.

This rapid growth in sales led to labor problems. The workers couldn't keep up, turnover increased, training costs increased, production slowed due to turnover and lack of training. In short the cost of building a car fell slowly during this period.

Quoting from Wikipedia Ford solved this problem BY DOUBLING WAGES and reducing the work week!! Oh, the Horror!!!!!

"In January 1914, Ford solved the employee turnover problem by doubling pay to $5 a day, cutting shifts from nine hours to an eight hour day for a 5 day work week (which also increased sales; a line worker could buy a T with less than four months' pay), and instituting hiring practices that identified the best workers, including disabled people considered unemployable by other firms. Employee turnover plunged, productivity soared, and with it, the cost per vehicle plummeted. Ford cut prices (of the cars sold) again and again." - Wikipedia

en.wikipedia.org/wiki/...

I'm sure you can find many similar stories behind IBM, Sears, Hewlett Packard, GE, and most big name corporate businesses today. For the businessman who can figure out how to increase worker productivity, raising pay isn't a problem as long as there is demand for the product.

Suppose I build widgets at a cost of $8 ($4 materials, $3 labor, $1 overhead) and sell them for $10. If there is a large demand for widgets and I figure out how to increase productivity (more widgets per worker) then my cost might drop to $6.50 per widget and my profit increases from $2 to $3.50 per widget sold at $10.

If I lower the price to $9.50, I can afford to pay my labor 33% more than before (from $3 per widget to $4 per widget) and my total profit will still increase due to the larger volume of sales.

Now the flip side of that coin is that another widget producer might not be so efficient and can't afford to sell at $9.50. They might go out of business (when was the last time you saw an auto manufactured by Western Auto company?) because they couldn't compete with my business.

But with my increased production I can hire some of those workers myself. Others might start widget repair shops or go into some other line of work in another growing business.

The unspoken benefit is that the remaining widget workers are making bigger wages and can now afford to buy more items and increase overall demand in the economy. That's extra demand in industries which the workers who were let go can find jobs in.

In aggregate, the GDP has increased and widget prices have gone down (more people can afford widgets now). While the number of people working in the widget building business might decrease, the money earned by workers remaining will probably increase.

Such is the nature of free markets. Purchasing demand sets the limit on how much can be profitably produced. After that, it's a competition to see who can supply the demand at the lowest cost and still profit. "Excess" workers will find jobs in other growing markets as demand increases with rising standards of income.

To say that fewer widget builders are working is a bad thing is the equivalent of saying we'd all be better off if we were still subsistence farming, because you're essentially saying that finding more efficient ways to meet demand is bad because a small number of workers have to find new jobs without considering that a very large number of workers are better off.

(If theoretical widgets are difficult to grasp, think cell phones, plasma TVs, playstations, or any other relatively recent widespread innovative product on the market today.)

"Once you enter a deflationary spiral like this, there is no way to fix it under a gold standard." - chap08

Again, don't confuse falling prices with 'deflation' as most modern keynesian economists do.

"The term "deflation" was used with an alternative meaning by the classical economists, to refer to a decrease in the money supply and credit; some economists, including many Austrian-school economists, still use the word in this sense." - Wikipedia

Recall that Milton Friedman argued that "inflation is always and everywhere a monetary phenomenon." The flip side of that coin is that deflation is also a monetary phenomenon.

Prices are simply the measure of the supply of money vs. the goods and services competing for that money. More money in circulation means higher prices for the same goods and services. Less money means lower prices. If the money supply is fixed (as on a gold standard) then prices over time will only shift due to the tastes of the purchasers and not how much money is "worth" at the moment.

"Fiat has the flexibility to fix either inflation or deflation." - chap08

I would argue that fiat is the root cause of inflation and deflation. It is interesting to see where all the fiat "fixes" in the past 30 years has led us ... to the biggest financial crises in 80 years. Perhaps the "fix" is worse than the presumed disease.

"You quote some figures and say that the value of money has dropped by 56% over 30 years. So what! Big deal! Who cares? That's 2.7% pa. Meanwhile, GDP, standards of living, stocks, bonds etc. etc. have all gained much more than that. If you're so hung up about the value of your money, just buy some gold." - chap08

Well, I care for one. Based on some of the responses to this article, others care as well. As for buying gold, I got mine at an average price of $805. How about you? Has the purchasing power of your savings increased by 30% in the past year?

[PORTAL Finance]

If I run up my credit card debt past the point of being able to make payments, I am bankrupt. Why is the U.S. government permitted to rack up unlimited debt? I don't care what system is used; put the U.S. government on a budget.

[Charlie Price]

Roy, your comments below are not about gold standards as such. They are about deflation and bail outs.

Taking bail outs first, I largely agree with you. I believe that we had to save the core of the banking system, however, several big mistakes were made leading up to and during the bail out. More mistakes are being made now with our failure to reform the banking (and insurance!!) industries. But this has nothing to do with a gold standard. We needed to save the banking industry in 1907 and we needed to save it again in 2008. Sad but true.

As for deflation, without going thru the whole debate, just consider:
1. If we move to a deflationary environment from an inflationary environment, then we go thru a period where fixed interest rates on existing loans are too high. This would impact private individuals, businesses and government for up to 30 years. This is a particular problem now because of the size of our debts. Now is the worst time in history to go to deflation because of our massive debts. It would consign a generation or more to living in unemployment.
2. Not only would deflation increase real interest rates, it increases the real value of the debt that has to be repaid. As I said above, wages would have to come down in nominal terms, but the level of debt remains the same i.e. it increases in real terms. Anyone with a debt would have to dedicate a greater proportion of their income to debt repayment. Again, this drags down the economy until debts are repaid.
3. Deflation is not the equal and opposite of inflation because of human behavior. See my comment above for one manifestation of this.
4. Even under a gold standard, governments and central banks set short term lending rates. If you have inflation, then this tool works well. If you have deflation then the short term rate moves to zero and stops working. You have to use policies like QE instead. These are more difficult to use and less predictable in their outcome, as we may be finding out.
5. There are arguments made by central banks (not just the Fed) that 2% inflation is the ideal. I think the Fed discuss this on their web site. The detail of the argument has changed but the outcome is the same. I won't go in to the argument because I don't know the latest on it, but you can look it up if you want to.

On Oct 05 12:32 PM roy piper wrote:

> Just my 2 cents on one of your comments, which I think are good questions.
> In a 100% gold back dollar, prices might be stable or they might
> decline slowly over time. If the true GDP grows quicker than the
> money supply, prices will drop slowly as more goods and services
> compete for the pie of money. This is not a bad thing at all. When
> is the last time anyone complained of the continual 20% annual drop
> in prices of the computer chip the last 30 years? Yet I don't see
> Intel cutting jobs much the last few decades, nor lowering salaries.
> Deflation is a bugaboo that is always pointed to by statist politicians
> and economists who use it as an excuse to print more money, which
> somehow always wind up in the hands of their special interests and
> not those who need it, the people. In 2009 we have a total of (at
> most) -2.0% deflation. Yet I never see the same economists freak
> out when inflation is PLUS 2%. Or even plus 4%. Yet when prices decline
> even in the slightest, we print as much new money in last 12 months
> as we did the first 233 years of the country!
>
> This contraction is a completely sane, warranted and GOOD correction
> from government funded excesses in the economy. We should let the
> companies that made foolish decisions go under and let those who
> made correct decisions take over the assets and run them accordingly.
> Instead, we are printing money (essentially diluting the wealth of
> everyone who still has it) and handing it to the wealth destroyers.
> No smart person or nation would do this, but we are.
>
> Instead of focusing on the causes of the problem, we are exacerbating
> it.

[roy piper]

Just my 2 cents on one of your comments, which I think are good questions. In a 100% gold back dollar, prices might be stable or they might decline slowly over time. If the true GDP grows quicker than the money supply, prices will drop slowly as more goods and services compete for the pie of money. This is not a bad thing at all. When is the last time anyone complained of the continual 20% annual drop in prices of the computer chip the last 30 years? Yet I don't see Intel cutting jobs much the last few decades, nor lowering salaries. Deflation is a bugaboo that is always pointed to by statist politicians and economists who use it as an excuse to print more money, which somehow always wind up in the hands of their special interests and not those who need it, the people. In 2009 we have a total of (at most) -2.0% deflation. Yet I never see the same economists freak out when inflation is PLUS 2%. Or even plus 4%. Yet when prices decline even in the slightest, we print as much new money in last 12 months as we did the first 233 years of the country!

This contraction is a completely sane, warranted and GOOD correction from government funded excesses in the economy. We should let the companies that made foolish decisions go under and let those who made correct decisions take over the assets and run them accordingly. Instead, we are printing money (essentially diluting the wealth of everyone who still has it) and handing it to the wealth destroyers. No smart person or nation would do this, but we are.

Instead of focusing on the causes of the problem, we are exacerbating it.

[Charlie Price]

Smarty_Pants

You make some good points. You are one of the few who argue for a gold standard on the basis of facts and reason rather than emotion and gut feel. So let me try and respond to you briefly.

1. I don't operate under the assumption that stable prices are the best option. That's what most people who argue for a gold standard do! I was simply showing what one implication of stable prices would be. For the benefit of those who want stable prices, the implication is that, under a gold standard, global GDP would have to fall from 3% plus to 0.5%.
2. What makes you think that your income would remain constant if deflation was 2.5%? Think about it. You're suggesting that prices fall by 2.5% pa but wages remain the same nominal amount. Do you realize what that means for businesses? It means that pretty soon, they are loss making. So no, for business to continue, your wages have to fall by the same amount, or greater than prices.
3. Even though constantly falling wages is what "should" happen, history shows that it doesn't. This is due to human behavior. People don't like falling wages and businesses find them hard to implement. So what happens instead is that some businesses start firing workers and other businesses fail. Increasing unemployment results in less demand and you enter a spiral of deflation. This is what happened in the Great Depression.
4. Once you enter a deflationary spiral like this, there is no way to fix it under a gold standard. Fiat has the flexibility to fix either inflation or deflation. Gold standards can only fix inflation (OK they can fix very mild deflation but it takes a hell of a long time). That is what history shows and that is why a gold standard will always fail. People claim that history shows the superiority of gold standards. That is not true. Where are your gold standards today?
5. You quote some figures and say that the value of money has dropped by 56% over 30 years. So what! Big deal! Who cares? That's 2.7% pa. Meanwhile, GDP, standards of living, stocks, bonds etc. etc. have all gained much more than that. If you're so hung up about the value of your money, just buy some gold. Others know that this is not the most important thing. Not by a long way.

On Oct 04 10:15 PM Smarty_Pants wrote:

> "Looked at globally, the growth in physical gold is about 0.5% pa.
> This means that, other things being equal, real global GDP would
> have to come down from the current 3% plus, to 0.5% in order to achieve
> price stability under a gold standard." - chap08
>
> Why do you operate under the assumption that stable prices are the
> best option?
>
> If my income remains constant and prices on everything decline by
> 2.5%, am I not better off? Can I not buy 2.5% more "stuff" etc.

[roy piper]

As for the one buffoon who thinks I flip burgers for a living, I will give you my background. After graduating college in 1990 I worked for a series of money management firms, including the largest in the world, The Capital Group. In 1999 I went 100% cash, where I have been much of the last decade, until a few years ago when i went substantially into gold, with decent success. The last firm I worked for was AIG, which I left in 2004, just in time, as I saw what was coming down the pike. In 2005 I wrote this article below (on a wine website of all things) predicting the real estate collapse and the resulting recession/depression. And it was before I really understood gold and fiat currencies!! The date of this writing pre-dates Peter Schiff by 2 years, and the date of the post is clearly visible for all to see. I decided to switch careers out of finance and into making wine in 2004, and while it seemed silly to all my friends at AIG at the time, I am now doing well and they are unemployed.

Below is the original post on the website itself....enjoy.

PS- if any of my critics can point to their own writings that predate mine, I will gladly reconsider my viewpoints.

dat.erobertparker.com/...

[roy piper]

The final act necessary to really end the fiat system is far more profound and difficult that just going back to gold....it would be the elimination of the fractional reserve banking system. Money backed only fractionally by gold is still a mostly fiat currency. Right now, it is estimated that the American dollar is probably backed only by 2% actual gold held in the vaults, if that. If we went back to gold and everyone tried to convert, 2% would get their gold and 98% would be left holding nothing.

It is critical to understand that the amount of gold mined from the ground only increases by about 2% a year. When you have a fractional reserve banking system that allows banks to create 9 dollars out of thin air for every dollar in the vault (with that dollar in the vault also created out of thin air by The Fed) a gold backed currency is not really politically doable.....yet. Those who hate gold as money would be even more frightened by ending fractional reserve banking, as the predicted collapse of our debt-run economy would be unthinkable for them.

[roy piper]

I find it amusing to hear the meanderings of those who say inflation of the currency has had no effect. If their argument is true that the purchasing power remains the same, then theoretically, they should be in favor (or at least not afraid) of The Fed printing 1,000,000 for each American and handing it to them tomorrow. Why not!!?? According to them, it would have no negative effects and the power of our currency to buy goods and services would be the same. But all people sense that somehow it would not be good for people or the economy.

Fiat currency exists for ONLY one reason, to allow those in power to inflate the amount of base money for their pet projects, usually wars, or to buy the votes of the ignorant masses by re-allocating money from those who earned it to those who did not on projects the free market and people in a free society chose not to pursue.

History is filled to the rafters with the failure of fiat currency. It is likely that every single fiat currency eventually fails. The fact that no fiat currency exists anywhere on the planet more than a hundred plus years old, while commerce has existed thousands of years without fiat currency, is all the proof one needs to see fiat currency is NOT needed, or even workable. The fact that gold (and sometimes silver) has been in use for thousands of years with great success, is all the evidence one needs to see which will win in the end.

[roy piper]

There are 3,800 fiat currencies one can collect around the world that have lost 100% of their money value due to inflation. Gold has never gone to zero. Ever. Our Federal Reserve has lost 93% of the purchasing power of the dollar since it took control in 1913. It amazes me that we allow a money management institution that has a lifetime return of -93% over a century to run the entire economy.

[Smarty_Pants]

Can't help but to point out the absurdity of fiat money and fractional reserve banking.

In 1981 total money circulating was $0.5 Trillion.

In January of 2008 the annual cost of interest on the US debt was approaching $0.5 Trillion. Our interest payments on the national debt are the same as the entire money supply of 30 years ago.

2008 US GDP was $14.3 Trillion, US debt was approaching $11 Trillion. If we took all the money collected for everything produced in one year we could pay off the debt and maybe have enough left over to fund the breadlines necessary to feed us all for that year. Everything else we would have to do for free.

This is where the 'solution' of printing money leads. The poor house.

As for NickelMan's burger flipper. 80 years ago he didn't have a national debt of $11 Trillion to pay off. His share of today's debt would be approximately $37,000 per person in his household. That's nearly 4 years of total annual income per person.

Is he really as well off today as his analog from 80 years ago?
Even at a 1% rate, he owes nearly two weeks of income on national debt interest annually. Guess he's got to go without his beer, food, and ammunition those weeks, eh?

[Dion134]

Smarty pants- you're wasting your time. You put it so simple for the Keynesian's , but I fear their stale minds can not accept that most of what they've learned is false. They will argue for all the symptoms that have caused our financial problems of the day and ignore the CAUSE.
Either that or a team of fractional reserve bankers have invaded the site.

[Smarty_Pants]

"The fact is that printing money is a last resort solution in a box of many tools but never the less a solution when nothing else works." - Tesa

Define "works" please. How well did it 'work' in Zimbabwe? They were printing $Z like crazy and eventually threw in the towel because it 'worked' so well.

They got to the point where they were printing $Z 100 Trillion notes, (worth about 1/3 of a US dollar). That got so cumbersome that they decided to 'revalue' the $Z by removing 12 zeroes from each denomination ($Z 1 Trillion = $Z 1 - still only worth 1/3 US cent).

edition.cnn.com/2009/W...

Eventually they abandoned the currency all together and allowed their people to use foreign currency instead.

news.bbc.co.uk/2/hi/78...

Here's a sample of how well printing money 'worked':

"A 40-year-old Zimbabwean primary school teacher from the capital Harare, told the BBC news website earlier this week it cost nearly US$2 a day to travel to work, but inflation had reduced the average teacher's wage to the equivalent of US$1 a month."

Take the bus to work, stay on the job two months, break even.

Good plan.

[Smarty_Pants]

"Looked at globally, the growth in physical gold is about 0.5% pa. This means that, other things being equal, real global GDP would have to come down from the current 3% plus, to 0.5% in order to achieve price stability under a gold standard." - chap08

Why do you operate under the assumption that stable prices are the best option?

If my income remains constant and prices on everything decline by 2.5%, am I not better off? Can I not buy 2.5% more "stuff" or save an extra 2.5% of my income without getting a raise or a second job? Don't my savings from prior years buy 2.5% more than they did last year, even if they don't earn interest? Isn't that a good thing for me?

One of the BENEFITS of a gold standard is that you must invest and/or work to add money to the circulating supply rather than type numbers on a computer or print colored numbers on paper. The cost of increasing the supply of gold is a significant barrier to doing so. People can generally be certain that the supply of money will remain relatively constant and can therefore make better predictions regarding capital investments for businesses.

Looking at the data, US GDP from 1981 to 2009 increased from $3 Trillion to $13 Trillion, while the money supply during that period increased from $0.5 Trillion to $5 Trillion. Production of "stuff" increased by a factor of 4.4 while the money supply increased by a factor of 10.

Using chap08's price stability methodology, the 'value' of our money has dropped by about 56% over the last 30 years (4.4x as much stuff with 10x as much money).

Even a cursory glance will tell you that you can't buy as much 'stuff' with the same income. The ratio of changes in GDP to money supply is 2.3 over this time span. If your income didn't increase by at least a factor of 2.3 in the past 30 years you are losing ground economically, even accounting for the increase in productivity. Take the growth in the taxes you pay into account and you're even farther behind.

90% of US money in circulation (as of 2006) was created since 1981 ($4.5 Trillion of $5 Trillion). The FED printed that money, either physically or electronically. They produced nothing of intrinsic value in exchange for printing it, nor for the interest they collected when they loaned it out. These days the effort to add $1 Trillion to the money supply probably requires less effort than I put into typing this comment.

+ $1,000,000,000,000 (there, another Trillion of new money, whew!)

The question is who got to use that new money first, before its appearance bid up prices on everything in the economy? Those are the parties which 'stole' the value of your savings and income, despite what the FED's defenders might believe.

[pier0188]

What I find amazing is that the article writer has any credibility at all spreading the FUD that he does. He's supposed to be some sort of uber-economist, yet he lacks the basic truth-telling reasoning of a rational human being. I'm not sure what agenda he is pushing, but it's one that lacks any real world application, nor appreciation for what really happens in the world.

If this is the type of person heading up the charge against the Fed, and for Ron Paul, I weep for the future of this country.

[Tesa]

Getting ride of federal reserve is yet another form of deregulation that nutters have lobbied for. We have seen the result of many deregulation and this is yet another one. Getting rid of federal Reserve as a regulator is the last thing that USA needs.

If you are curious about depression, you can elect Ron Paul and experience it all over again. Just make sure he is in charge while the banking system is collapsing. Unfortunately you failed to see him in action eating his words so he can sell his theology in a book. It doesn't appear that he understand economics and why these institutions became necessary as regulators.

The fact is that printing money is a last resort solution in a box of many tools but never the less a solution when nothing else works. Federal reserve is a regulator of the last resort and it plays an important role and Americans need more regulation rather than less, specially now.

[pier0188]

What 3000 years shows us is that we were an agrarian economy with little to no progress, low quality of life, and disintermediated economy and world. If that's what your advocating, good luck to you.

3000 years shows us that people valued a shiny rock over rationality. Gold has just as much fiat value as a paper dollar, it's only worth as much as somebody's willing to pay for it and has little to no intrinsic value. However, it does lock an economy into a narrow path that eventually results in it ripping itself apart as the key variable, human nature, takes hold.

On Oct 04 02:34 PM roy piper wrote:

> There are two possibilities. One....that your currency is really
> worth SOMETHING, as in gold. Or.....two...that you currency is backed
> by nothing, fiat. There is no third option. Given this choice, history
> going back 3000 years show that the former is the inevitable survivor.
> To believe otherwise just shows the power of fantasy over experience.

[pier0188]

And what type of person would just put $1MM under the mattress and not invest it in anything? What type of person wouldn't be working one day since that period, earning wages that keep up with inflation in the long-run?

That person is a moron. Sorry, but if you think that's justification for your position, you might as well join the mattress investment crowd and lose your money also.

Looking at time as a static position is stupid, but it's one that people of your position advocate constantly. It ignores time, humanity, and progress. All of which gold-standard people love to ignore.

On Oct 04 05:10 PM roy piper wrote:

> Chap, I feel you are wrong on every single count. The way to see
> this is too look at this mind experiment. If, in 1932, you had 1
> million dollars and went to sleep until today under a gold standard,
> you would have the same purchasing power now as then. But under the
> inflationary money supply we have had, you would have lost 93% of
> your purchasing power. What you spend it on now would only get you
> 70,000 worth of goods and services in today's dollars. The remaining
> 930,000 worth has been transferred to other people via inflation.
> If I had 1,000,000 in gold at that time, I would have over $20,000,000
> in the value of gold now, due to the declining dollar, and inflation
> would not have existed for me.
>
> If anyone here wants to learn more about how this all works, read
> the all-time classic "Economics In One Lesson" by Henry Hazlett.
> This book, which can be read on a lazy weekend, was one of the best
> selling books of the early 1960's, the last time in America where
> money was a centerpoint of public discourse. It can change your life.
> Seriously!

[roy piper]

Chap, I feel you are wrong on every single count. The way to see this is too look at this mind experiment. If, in 1932, you had 1 million dollars and went to sleep until today under a gold standard, you would have the same purchasing power now as then. But under the inflationary money supply we have had, you would have lost 93% of your purchasing power. What you spend it on now would only get you 70,000 worth of goods and services in today's dollars. The remaining 930,000 worth has been transferred to other people via inflation. If I had 1,000,000 in gold at that time, I would have over $20,000,000 in the value of gold now, due to the declining dollar, and inflation would not have existed for me.

If anyone here wants to learn more about how this all works, read the all-time classic "Economics In One Lesson" by Henry Hazlett. This book, which can be read on a lazy weekend, was one of the best selling books of the early 1960's, the last time in America where money was a centerpoint of public discourse. It can change your life. Seriously!

[Charlie Price]

Roy, I think that some of the "misconceptions" may be yours. You say that "If you have $100 and the government doubles the money supply, the value of your money drops to $50 in purchasing power once the newly printed money is in full circulation. This is simply a 50% tax and wealth redistribution disguised as a bailout." This isn't true.

You are missing a number of things here but let's mention 2 of them. Firstly, any change in purchasing power depends on changes in output in the economy. In your example above, in simple terms, if output doubles then your $ retains the same purchasing power. This is why central banks are continually expanding the money supply and one reason why, despite this, countries can still experience negative CPI. Secondly, don't assume that the money supply remains unchanged under a gold standard. It doesn't. But, rather than being controlled by a central bank, it would be determined by other factors, such as the amount of metal dug out of the ground and events in countries like China and Russia. Looked at globally, the growth in physical gold is about 0.5% pa. This means that, other things being equal, real global GDP would have to come down from the current 3% plus, to 0.5% in order to achieve price stability under a gold standard.

This may partly explain your view that inflation favors "rich bankers and unions". Inflation actually transfers wealth from owners of paper assets to owners of physical assets, while deflation does the opposite. In the 70s, for example, this meant that homeowners benefited. Speaking of the 70s, I am also old enough to remember the inflation. It was a bitch, but it wasn't anywhere near as bad as the deflation of the 30s (which I was only old enough to be told about). The 30s are remembered for mass unemployment, homelessness and starvation. The 70s are remembered for bad haircuts and disco. Also, note that the inflation was fixed thru a fiat currency, but the deflation couldn't be fixed under a gold standard.

On Oct 04 12:32 PM roy piper wrote:

> The misconceptions about gold here are stunning.
>
> First, people don't hoard gold because it is gold. Hoarding went
> the way of the mid-19th century, and the reason it was hoarded was
> because there were no places to store it.
>
> Second, the reason paper is so awful is because it can be manipulated
> and inflated by central governments. If you have $100 and the government
> doubles the money supply, the value of your money drops to $50 in
> purchasing power once the newly printed money is in full circulation.
> This is simply a 50% tax and wealth redistribution disguised as a
> bailout.
>
> Third, it does not matter how much money there is in circulation,
> it is always enough, therefore saying there is not enough gold is
> incorrect. If gold became the currency, wages and prices would contract
> back to gold levels remembered by your grandfather, but the purchasing
> power and standard of living would be the same.
>
> Fourth, has inflation hurt people? Yes!! Do you think you won;t be
> hurt when the government has printed $1T of cash and handed it to
> bankrupt auto companies and banks that were voted out of existence
> by consumers and there free choices? Where will that money come
> from. You! The money will be inflationary, as all mass printing will
> be. Your worth will be diluted by the inflation tax and handed to
> rich bankers and unions. Also, inflation causes "economic miscalculation"
> for business owners (I will let you look that up.) Anyone here old
> enough to remember the inflation of 1977-1979? I am. It sucked.

>
> I am not saying we will go back to gold anytime soon. But that does
> not mean it is not the honest path. It is.

[Smarty_Pants]

"its pointless to argue with fools. if someone cannot understand the simple economic practicality of having a gold standard backing your currency ... then you might as well argue about the sky being blue" - rick flair (WOooooo!)

The point is not to argue, but to present truth, and facts to back that truth, so those who are reading both and are not certain which to believe can judge between the two claims.

The battle is won a single mind at a time. Don't worry about the 'fools', you'll never change their minds. It's the fence-sitters that don't post you should worry about.

-=-=-=-=-=-=-=-=-=-=-=...
'Wise men speak because they have something to say. Fools speak because they have to say something.' - Plato

Answer a fool according to his folly, lest he be wise in his own conceit. - Prov. 26:5