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The Problem With Modern Monetary Theory

The Problem With Modern Monetary Theory

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Towards a New Gold Standard

This article was originally published on the Daily Paul.

Last week I wrote an article titled, "On Returning to the Gold Standard," which was primarily a critique of a video interview of Simon Constable at the Street.com on the possibility of the nation returning to the 19th century gold standard. I received a surprising amount of positive feedback on the article, as well as a note from Simon Constable himself, thanking me for the commentary.

However, after a little further research on the subject, I realize now with much regret that my article, critical as it was, was mis-titled. It therefore conveyed -- or rather amplified -- the wrong impression that we should be going backwards in time. My mistake was in accepting Simon's assumption that Ron Paul wants to "return" to the gold standard of the 19th century. Nothing could be further from the truth, as this interview with Dr. Paul in the Columbia Tribune (June 15, 2007) makes abundantly clear:

Question: You support returning the country's currency back to the gold standard. Is that correct?

Ron Paul: Not exactly. I'm for supporting the Constitution, and the Constitution still says only gold and silver can be legal tender. … The reasons I don't like to say "go back" is because there were shortcomings in the original gold standard. What I reject, and the founders totally rejected, was a paper standard - creating money out of thin air. Spending money you don't have. Printing it up. Causing inflation. Causing bubbles. Causing recessions. And wiping out the middle class. The middle class is getting poorer as the wealthy class is getting wealthier.

In his article last week, Simon wrote "[Paul] proposes returning to a system of money abandoned more than three decades ago," which is incorrect. Thirty-six years ago, we abandoned the fatally flawed pseudo-gold / fixed exchange rate system known as Bretton-Woods. Dr. Paul is well aware of the shortcomings of that system, as well as the flaws in the gold standard as practiced in the 19th century. Rather than "go back" to that outdated system, it is more accurate to say that Dr. Paul would like to move forward, towards a new gold standard.

Dr. Paul elaborates on the Federal Reserve and the flaws of the old gold standard in this interview with Lee Rogers (June 24, 2007):

Once again, I have transcribed the relevant portion of the interview for easy reference. The transcribed portion takes place within the first five minutes of Part I. To view the remaining three parts of this four-part interview, please visit Lee's site, RogueGovernment.com

Lee Rogers: I first wanted to talk about the Federal Reserve System. I know that you recently proposed legislation to abolish the Federal Reserve System. Do you believe that the monetary policy being implemented by the Federal Reserve is dishonest, and do you think it is lacking in appropriate transparency?

Ron Paul: Oh, obviously. I, as a member of the [Congressional] Banking Committee, and as the ranking member on the Monetary Subcommittee -- I couldn't possibly attend [a Federal] Open Market Committee (FOMC) meeting where they decide what the interest rate should be and how much money they're going to create next week and that sort of thing. I'm not allowed to know that. As a matter of fact, they don't even keep minutes of any importance. They have minutes, but they are just what they want the public to hear.

But a lot of the things that go on behind the scenes are very, very important. They control literally the money of the world, because the dollar is the world's reserve currency. But it's done very secretly, and for those who know what is going on there, it can be very, very beneficial information. But there are a lot of other reasons I don't like the Fed.

The Fed creates money, and that is inflation. When you create new money, the rest of the money goes down in value. Prices go up and it is very, very detrimental and it hurts one class of people more so than the other. It causes the economic bubbles that we experience, and then the collapses. We had the Nasdaq bubble collapse not so long ago, and now we're in the middle of a housing bubble collapse. Of course, since the [creation of the] Federal Reserve, we've had a lot of inflation and a lot of collapses. They inflate for wars - then you have the inflation, followed by a recession. And we've had that ongoing for a long time. The depression was really a consequence of Federal Reserve Policy.

The worst part about the Fed is that it allows government to grow. When government grows, they do things they shouldn't be doing like fighting wars, and controlling people here at home and having all kinds of domestic programs that don't work but that just steal and cause disruption.

So if you want to strive for personal liberty, you want government to be small. But the Federal Reserve permits members of Congress and the politicians to expand government without being responsible. They can only just tax and only borrow so much, but they have an unlimited ability to print money in order to expand the size of government.

Lee Rogers: Absolutely. Now, how do you think we should restore our monetary system to something more honest? Do you believe we should go back to a gold & silver standard as was proposed by the founding Fathers of this country? Or do you think we should just go to printing US notes instead of them being printed by a private Federal Reserve? What do you think we should do in order to restore an honest monetary system?

Ron Paul: Well, we should just go to the Constitution and look for our guidance. It says only gold and silver can be legal tender. When they debated this at the Constitutional Convention, they debated paper. They had [already] had the runaway fiat currency experience of the Continental dollar, and they didn't want that to happen [again], so they said there will be no "emitting bills of credit" -- which is paper money. So we'd have to go back to gold and silver coins.

But I don't like the notion that we have to return to exactly what we had in the 19th century, because there were some shortcomings. We had bi-metalism, so the government went and fixed the ratio of gold to silver. And markets don't [like that]. Governments can't set a market price. So you should either turn it over completely to the marketplace and let private money evolve, and use gold and silver, or if the government was to be involved, they should issue a currency and define it as a weight of gold or a weight of silver, but not fix the ratio. That to me would be a better standard than we had in the 19th Century.

Nystrom's Comment: I'd just like to amplify that Dr. Paul, an elected Congressional official, one who sits on the Congressional Banking Committee, is not allowed access of any kind to the super secret Federal Open Market Committee (FOMC) Meetings. When it comes to those Fed meetings, Dr. Paul is as far out in the cold as we are, reading those lame official statements when they come out on the news wire. And this is someone who sits on the committee that ostensibly has oversight on the Fed.

The Fed will be holding another one of these meetings on June 27-28, and it is certain to be accompanied by the requisite media circus. Sultry news anchors will pant breathlessly for days: "Will They raise rates or hold the line??? What does the market think and how will it affect your portfolio?! Stay tuned!"

With this article, I hope that I have clarified that Ron Paul does not wish to go back to a flawed gold standard. Next time, I'll have more information on what a new gold-backed system might look like, but for now, put to rest the idea that we'll all be carrying around pocketfuls of heavy gold coins! With our increased understanding and advanced computer & network technology, there is no reason to think that a 100% pure gold standard is infeasible. More on that next time - sign up here to be notified.

The Sinister Relationship Between the Federal Reserve and the IRS. You're Caught in the Middle!

GreenspanBack when I still used to watch TV - back when Greenspan was still Fed Chairman - CNBC used to focus on the size of his briefcase going into the meeting as an "indicator" as to which way interest rates would go. Why the public needs to speculate on such important decisions in our Republic remains a mystery to me. This kind of tittytainment is one of the main reasons television has become so ridiculous to millions of Citizens who now independently seek out our news on the net. Tittytainment is certainly not conducive to explaining the sinister relationship between the Federal Reserve and the IRS, so thank God for YouTube! Let's take a look at the first 30 seconds of this compilation of a conversation between Aaron Russo and Ron Paul:

Aaron Russo: So the Federal Reserve is actually an illegal entity functioning within the government.

Ron Paul: It is illegal. And what we have given to this so-called agency is the authority to counterfeit money.

Aaron Russo: Do you have any points of view about the Federal Reserve and how the Federal Reserve operates?

Ron Paul: They just enter something on a computer. "Oh, you need $20 billion today? Well, here's $20 billion." But they got that out of thin air. It came out of thin air. It goes to the Treasury, and the Treasury then pays the bills.

We have already seen how this process is inflationary. However, the relationship to the IRS is a little less clear, so let's tease it out: Congress formerly had the power to coin money, but it delegated that power to the Federal Reserve in 1913. When The Fed creates that $20 billion out of thin air, it doesn't give the money to the Treasury - it loans it to the Treasury. There is a huge difference.

In exchange for the loan, the Treasury gives the Fed collateral: $20 billion worth of Treasury bonds (T-bonds). But as we all know, T-bonds are not simply static collateral, T-bonds also pay interest to the holder. In this case, the holder is the Federal Reserve.

But where does the Treasury get the extra money required to pay the interest back to the Fed? The Fed didn't create the interest - it only created enough money for the face value of the bond. If the T-bonds pay 5% interest, the Treasury needs to come up with an additional $1 billion each year to pay the interest back to the Fed! Where do they get it?

You guessed it, friends! It comes from you - the generous American Taxpayer. The IRS - also founded in 1913 - was part of a package deal. It is required in order to raise the money to pay back the interest on the money the Treasury "borrowed" from the Federal Reserve.

You didn't know that? Now you know why Henry Ford said, "It is well enough that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning." And you also now know why Dr. Ron Paul is so vehemently opposed to both the Fed and the IRS.

Closing Note

The wide range of positive feedback that the first article in this series was encouraging, and the note from Simon Constable was surprising. Simon asked me where I was based. While I live in Boston, I'm actually based at my kitchen table, though from time to time (such as last week) I do venture out into the Peanut Gallery. I mention this only as a way of conveying to you, dear reader, just how fluid and new the times are that we are living in today.

When a guy reporting from his kitchen table can access and share this range of information with tens of thousands of readers using the same platform as multimillion-dollar news outlets, real change can (and I dare say will) happen. In addition to being a presidential campaign, Ron Paul's candidacy is also an educational one, and each day more and more people are getting informed about issues they hadn't even heard about last week! Information that was previously almost secret is now working its way out into the daylight, and a huge younger generation is on the rise.

Things are far from static, friends! Hold on to your hats - we're in for a wild ride in the months and years ahead.

Reporting Live from the Kitchen Table,


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