Let the Dollar Prove Itself

mattman · 11-01-2009, 07:37 PM

This is an interesting article by congressman Ron Paul worth reading for any currency trader.

Editor's note: Ron Paul is an 11-term Republican U.S. representative from Texas who made a bid for the GOP presidential nomination in 2008. His book, "End the Fed," was recently published by Grand Central Publishing.

Washington, D.C. (CNN) -- A growing number of Americans are becoming aware of the Federal Reserve System, what it is, how it has precipitated our financial crisis, and how it continues to pursue policies that delay economic recovery and weaken the dollar.

The Fed's actions, combined with the federal government's bailout bills and stimulus packages, have struck a nerve in the American people.

Recent polls have shown that more than 75 percent of Americans support efforts to audit the Fed, something which my bill, HR 1207, the Federal Reserve Transparency Act, aims to do. HR 1207 has the support of 304 members of Congress, and the Senate version of the bill, S. 604, is supported by 31 U.S. senators.

Fed Chairman Ben Bernanke has embarked on an ambitious program of monetary expansion, more than doubling the monetary base to almost $1.9 trillion and doubling the size of its balance sheet to over $2 trillion, placing the American economy in a precarious position.

If all this excess money begins to be loaned out, the Fed risks creating a hyperinflationary crisis similar to 1920s Germany. If the Fed contracts this money, it risks harming the banks it desperately wants to see bailed out.

It is imperative that the American people know what the Fed is up to, how much money it loans to banks and what types of agreements it enters into with foreign banks and governments. Just about all of this information is exempt from audit or oversight. The Fed's actions directly affect the value of the dollar, which is coming under increasing pressure from our foreign creditors. If we do not wish to see a complete collapse of the dollar, the Fed needs to be subject to a strict audit of its actions, if not an outright abolition of its charter.

While I would like nothing more than to see the Federal Reserve abolished, it is not absolutely necessary to do so with direct legislation.

The Fed's influence comes about because of its monopolization of the creation of money. If we could abolish the government monopoly on the creation of money, the Federal Reserve would be forced to clean up its act or go out of business. Economists know that monopolies lead to reduced output and higher prices, a suboptimal allocation of resources. This applies as well to the market for circulating currency as it does to markets for any other good.

In the previous Congress I introduced legislation that would eliminate the three major barriers to competition in currency and break the Fed's stranglehold on money.

The first barrier: Legal tender laws, which Congress does not have the Constitutional authority to enact. Historically, legal tender laws have been used by governments to force their citizens to accept debased and devalued currency.

Gresham's Law describes this phenomenon, which can be summed up in one phrase: Bad money drives out good money. In the absence of legal tender laws, Gresham's Law no longer holds. If people are free to reject debased currency, and instead demand sound money, sound money will gradually return to use in society.

The second barrier: laws that prohibit the operation of private mints. Certain sections of U.S. code classified as anti-counterfeiting statutes were in fact intended to shut down private mints that had been operating in California. There is no reason to ban private companies from minting gold and silver coins to compete with the dollar.

All currencies are based on trust, trust that the issuing authority will not debase the currency. If it becomes known that the issuer of a particular currency is minting underweight coins, people will stop accepting that currency and that company will go out of business. If someone else attempts to counterfeit that currency and pass those coins, there are sufficient counterfeiting laws on the books to prosecute those counterfeiters.

Merchants and individuals are free to choose which currencies they accept, and in the absence of legal tender laws I believe that alternative currencies will gain more traction.

Stores today can accept whatever currency they like. In Washington, DC a few years ago, some stores began accepting euros from international tourists. Harrod's in London accepts pounds, euros, and dollars. There is no legal requirement in the United States for a store to accept dollars for non-debt transactions.

If you walk into a 7-11 to buy a soda, the clerk doesn't have to accept your dollars, he could demand euros, silver, or copper. But because legal tender laws backing the dollar have caused the dollar to drive other currencies out of circulation, it is easier for stores to accept dollars.

However, most stores also accept credit cards, personal checks, and debit cards, none of which are legal tender. Some stores are moving to credit card-only transactions to minimize costs, which they are allowed to do.

Under a system of competing currencies, it would be to the advantage of stores to accept as many currencies as they could, in order to attract a wide range of customers. Stores that only accepted one currency would see their customer base shrink. The use of credit cards could simplify things just as it does today when Americans travel to Europe. They pay in euros with their credit card, and their card company bills in dollars. The market will find a solution to any problems that might arise.

The final barrier to competing currencies: Laws that assess capital gains and sales taxes on gold and silver coins. Under federal law, coins are considered collectibles, and are liable for capital gains taxes. These taxes actually tax monetary debasement. The purchasing power of gold may remain relatively constant, but as the nominal dollar value increases because of a weak dollar, the federal government considers this an increase in wealth and assesses taxes.

Thus, the more the dollar is debased, the more capital gains taxes must be paid on holdings of gold and other precious metals. For individuals who may wish to use gold and silver in everyday transactions, this can quickly become a complicated and costly burden.

The long-term strength of the dollar will only be weakened by maintaining the Fed's monopoly on our monetary system. Our foreign creditors are already moving to dethrone the dollar as the world's currency.

The prospect of American citizens also turning away from the dollar toward alternate currencies should provide an impetus to the U.S. government to regain control of the dollar and halt its downward spiral. Restoring soundness to the dollar will remove the government's ability and incentive to inflate the currency, and provide stability to the financial system. With a sound currency, everyone is better off, not just those who control the monetary system.

The opinions expressed in this commentary are solely those of Rep. Ron Paul.

talolard · 11-02-2009, 12:25 AM

Thats a very interesting article. while I'm o economist it kind of sounds like he is calling for economic anarchy. Do i understand him correctly?

Simit Patel · 11-02-2009, 05:38 AM

Quote:

Originally Posted by talolard

Thats a very interesting article. while I'm o economist it kind of sounds like he is calling for economic anarchy. Do i understand him correctly?

paul is a libertarian, which is very into limited government. the line between limited government and anarchy, of course, can get blurry.

i agree with paul regarding the US dollar. change in monetary policy is one of the primary ways IMHO to restore the value of the dollar while also helping to rehabilitate the US economy.

and of course, i hope folks are holding on to their informedpoints -- some day we may have to float that currency, at which point it may appreciate against other currencies!

jheiman66 · 11-02-2009, 07:38 AM

I have watched Ron Paul for several years now and he catches my attention with what sounds like a good idea until you really hear the rest of the story. While I think he does have some good points, I do not like the fact that he wraps himself in the American flag, and pounds his chest as a libertarian, when at the end of the day he is just another POLITICIAN.

It absolutely amazes me that he screams for regulation and oversight of the fed, but he insist on turning a blind eye to the rest of the banking system.

I have recently started some courses in economics and while I well admit that alot of what is going on in the fed and treasury is over my head, I have been trying to figure it out. I plan on doing some serious research and I will post it on my blog when I am done.

As far as Rep. Paul is concerned, some of his ideas sound and may be good ideas, but they are incomplete. Monetary policy is a very delicate balancing act, and there are alot of factors involved. The fed is the lender of last resort, this year I think we reached the last resort.

I do believe congress needs to take a closer look at the feds power, Alan Greenspan who was hailed as a hero, and given the highest honers a citizen can receive the presidential medal of freedom from George W. Bush, has know admitted he made some serious mistakes. By the way he prides his self as a libertarian republican, who believes in no oversight or regulation of the banking system. He has gone so far as to say there should be no laws against fraud, the market will take care of it. Which is true, the market took care of it, it collapsed, leaving the fed as the lender of last resorts. Greenspan admitted he was wrong. This should say something about the libertarian party.

As I said, I will spend some research time on this subject this week, I will compare Rep. Paul's ideas to what is happening, and what has happend in the feds history. I will try and post it by friday.

The way it looks to me, Summers, Geithner, and Bernanke are holding the worlds economy in their hands, and it would be beneficial to understand what they are doing, I have been watching the congressional hearings on c-span, but they are so politically motivated it is hard to get to the bottom of things, I have never been so disappointed in are congress as I am now. Instead of uniting for the common good they are more partisian than ever, this makes it hard to get to the truth.

Sorry about the rant, I will post more later when I can back what im saying with facts.

I guess that's what I would say to Ron Paul, "facts are a stubborn thing", and I dont think he is giving all the facts.

Simit Patel · 11-02-2009, 08:23 AM

greenspan used to be a libertarian, and at one point made basically the same exact argument paul makes. here is greenspan's essay, gold and economic freedom, where he rails against central banking policies.

but once he got the appointment of being the federal reserve chairman, his behavior did not reflect the ideas of his 1966 essay, and he expanded the money supply in the very way he warned against.

mattman · 11-02-2009, 09:44 PM

Hi Jiheiman66,

I didn't post this with intentions of promoting any political candidate or philosophy. I apologize if if it is perceived that way. With all political intentions aside, the congressman does have two valid points in the article that may have future implications of the dollar.

The first one is where he states "Fed Chairman Ben Bernanke has embarked on an ambitious program of monetary expansion, more than doubling the monetary base to almost $1.9 trillion and doubling the size of its balance sheet to over $2 trillion,".

History has provides important lessons that can be learned from previous countries who operated on a fiat currency who increased the money supply on such levels. All of the countries experienced high levels of inflation or the collapse of their currency. For other Americans such as myself who may have savings in U.S. dollars this is something to be concerned about. For this reason I view trading such commodities as gold and silver not so much as looking for speculative gains but rather wealth and asset preservation, as the value of gold has remained fairly constant over the course of many centuries, it is in fact the dollar that may be declining not gold going up.

The second point is as followed; If all this excess money begins to be loaned out, the Fed risks creating a hyperinflationary crisis similar to 1920s Germany. If the Fed contracts this money, it risks harming the banks it desperately wants to see bailed out.

This is something people trading currencies or metals should pay close attention to. It may provide insight about the future fate of the usd. If the money begins to be loaned out, it's important to determine a method to hedge against inflationary risk in order to preserve wealth that you have worked hard so create.

forexer · 11-03-2009, 04:31 AM

Quote:

Originally Posted by mattman

Hi Jiheiman66,

I didn't post this with intentions of promoting any political candidate or philosophy. I apologize if if it is perceived that way. With all political intentions aside, the congressman does have two valid points in the article that may have future implications of the dollar.

The first one is where he states "Fed Chairman Ben Bernanke has embarked on an ambitious program of monetary expansion, more than doubling the monetary base to almost $1.9 trillion and doubling the size of its balance sheet to over $2 trillion,".

History has provides important lessons that can be learned from previous countries who operated on a fiat currency who increased the money supply on such levels. All of the countries experienced high levels of inflation or the collapse of their currency. For other Americans such as myself who may have savings in U.S. dollars this is something to be concerned about. For this reason I view trading such commodities as gold and silver not so much as looking for speculative gains but rather wealth and asset preservation, as the value of gold has remained fairly constant over the course of many centuries, it is in fact the dollar that may be declining not gold going up.

The second point is as followed; If all this excess money begins to be loaned out, the Fed risks creating a hyperinflationary crisis similar to 1920s Germany. If the Fed contracts this money, it risks harming the banks it desperately wants to see bailed out.

This is something people trading currencies or metals should pay close attention to. It may provide insight about the future fate of the usd. If the money begins to be loaned out, it's important to determine a method to hedge against inflationary risk in order to preserve wealth that you have worked hard so create.

Hey Matt,

I'm sure if the banks can issue those mortgages, they can issue these loans. The "fresh" money will find its way into the hands of people who will then cause inflation when they consume. I like Peter Shiff's thinking. He says: There is already inflation, rising prices are just the tangible effect of inflation.

Forexer

11-01-2009, 07:37 PM	#1 (permalink)
mattman Badges About Assets Join Date: Nov 2008 Location: South Korea Posts: 210 InformedPoints: 0	Let the Dollar Prove Itself This is an interesting article by congressman Ron Paul worth reading for any currency trader. Editor's note: Ron Paul is an 11-term Republican U.S. representative from Texas who made a bid for the GOP presidential nomination in 2008. His book, "End the Fed," was recently published by Grand Central Publishing. Washington, D.C. (CNN) -- A growing number of Americans are becoming aware of the Federal Reserve System, what it is, how it has precipitated our financial crisis, and how it continues to pursue policies that delay economic recovery and weaken the dollar. The Fed's actions, combined with the federal government's bailout bills and stimulus packages, have struck a nerve in the American people. Recent polls have shown that more than 75 percent of Americans support efforts to audit the Fed, something which my bill, HR 1207, the Federal Reserve Transparency Act, aims to do. HR 1207 has the support of 304 members of Congress, and the Senate version of the bill, S. 604, is supported by 31 U.S. senators. Fed Chairman Ben Bernanke has embarked on an ambitious program of monetary expansion, more than doubling the monetary base to almost $1.9 trillion and doubling the size of its balance sheet to over $2 trillion, placing the American economy in a precarious position. If all this excess money begins to be loaned out, the Fed risks creating a hyperinflationary crisis similar to 1920s Germany. If the Fed contracts this money, it risks harming the banks it desperately wants to see bailed out. It is imperative that the American people know what the Fed is up to, how much money it loans to banks and what types of agreements it enters into with foreign banks and governments. Just about all of this information is exempt from audit or oversight. The Fed's actions directly affect the value of the dollar, which is coming under increasing pressure from our foreign creditors. If we do not wish to see a complete collapse of the dollar, the Fed needs to be subject to a strict audit of its actions, if not an outright abolition of its charter. While I would like nothing more than to see the Federal Reserve abolished, it is not absolutely necessary to do so with direct legislation. The Fed's influence comes about because of its monopolization of the creation of money. If we could abolish the government monopoly on the creation of money, the Federal Reserve would be forced to clean up its act or go out of business. Economists know that monopolies lead to reduced output and higher prices, a suboptimal allocation of resources. This applies as well to the market for circulating currency as it does to markets for any other good. In the previous Congress I introduced legislation that would eliminate the three major barriers to competition in currency and break the Fed's stranglehold on money. The first barrier: Legal tender laws, which Congress does not have the Constitutional authority to enact. Historically, legal tender laws have been used by governments to force their citizens to accept debased and devalued currency. Gresham's Law describes this phenomenon, which can be summed up in one phrase: Bad money drives out good money. In the absence of legal tender laws, Gresham's Law no longer holds. If people are free to reject debased currency, and instead demand sound money, sound money will gradually return to use in society. The second barrier: laws that prohibit the operation of private mints. Certain sections of U.S. code classified as anti-counterfeiting statutes were in fact intended to shut down private mints that had been operating in California. There is no reason to ban private companies from minting gold and silver coins to compete with the dollar. All currencies are based on trust, trust that the issuing authority will not debase the currency. If it becomes known that the issuer of a particular currency is minting underweight coins, people will stop accepting that currency and that company will go out of business. If someone else attempts to counterfeit that currency and pass those coins, there are sufficient counterfeiting laws on the books to prosecute those counterfeiters. Merchants and individuals are free to choose which currencies they accept, and in the absence of legal tender laws I believe that alternative currencies will gain more traction. Stores today can accept whatever currency they like. In Washington, DC a few years ago, some stores began accepting euros from international tourists. Harrod's in London accepts pounds, euros, and dollars. There is no legal requirement in the United States for a store to accept dollars for non-debt transactions. If you walk into a 7-11 to buy a soda, the clerk doesn't have to accept your dollars, he could demand euros, silver, or copper. But because legal tender laws backing the dollar have caused the dollar to drive other currencies out of circulation, it is easier for stores to accept dollars. However, most stores also accept credit cards, personal checks, and debit cards, none of which are legal tender. Some stores are moving to credit card-only transactions to minimize costs, which they are allowed to do. Under a system of competing currencies, it would be to the advantage of stores to accept as many currencies as they could, in order to attract a wide range of customers. Stores that only accepted one currency would see their customer base shrink. The use of credit cards could simplify things just as it does today when Americans travel to Europe. They pay in euros with their credit card, and their card company bills in dollars. The market will find a solution to any problems that might arise. The final barrier to competing currencies: Laws that assess capital gains and sales taxes on gold and silver coins. Under federal law, coins are considered collectibles, and are liable for capital gains taxes. These taxes actually tax monetary debasement. The purchasing power of gold may remain relatively constant, but as the nominal dollar value increases because of a weak dollar, the federal government considers this an increase in wealth and assesses taxes. Thus, the more the dollar is debased, the more capital gains taxes must be paid on holdings of gold and other precious metals. For individuals who may wish to use gold and silver in everyday transactions, this can quickly become a complicated and costly burden. The long-term strength of the dollar will only be weakened by maintaining the Fed's monopoly on our monetary system. Our foreign creditors are already moving to dethrone the dollar as the world's currency. The prospect of American citizens also turning away from the dollar toward alternate currencies should provide an impetus to the U.S. government to regain control of the dollar and halt its downward spiral. Restoring soundness to the dollar will remove the government's ability and incentive to inflate the currency, and provide stability to the financial system. With a sound currency, everyone is better off, not just those who control the monetary system. The opinions expressed in this commentary are solely those of Rep. Ron Paul. Share This \| Last edited by Simit Patel; 11-02-2009 at 05:35 AM.

11-02-2009, 08:23 AM	#5 (permalink)
Simit Patel InformedTrades Founder Badges About Assets Total Awards: 6 Join Date: Mar 2008 Posts: 1,606 InformedPoints: 55,756.42 Funds	greenspan used to be a libertarian, and at one point made basically the same exact argument paul makes. here is greenspan's essay, gold and economic freedom, where he rails against central banking policies. but once he got the appointment of being the federal reserve chairman, his behavior did not reflect the ideas of his 1966 essay, and he expanded the money supply in the very way he warned against. __________________ My Links: Proud to be a Permabear, Crisis Investing Video Series, Investing in a Centrally Planned Economy, The Investor 2.0 Quest

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11-02-2009, 12:25 AM	#2 (permalink)
talolard Badges About Assets Total Awards: 4 Join Date: Oct 2008 Location: Tel Aviv Posts: 552 InformedPoints: 1,110.59 Funds	Thats a very interesting article. while I'm o economist it kind of sounds like he is calling for economic anarchy. Do i understand him correctly?

11-02-2009, 07:38 AM	#4 (permalink)
jheiman66 Badges About Assets Join Date: Feb 2009 Location: colorado Posts: 27 InformedPoints: 0	I have watched Ron Paul for several years now and he catches my attention with what sounds like a good idea until you really hear the rest of the story. While I think he does have some good points, I do not like the fact that he wraps himself in the American flag, and pounds his chest as a libertarian, when at the end of the day he is just another POLITICIAN. It absolutely amazes me that he screams for regulation and oversight of the fed, but he insist on turning a blind eye to the rest of the banking system. I have recently started some courses in economics and while I well admit that alot of what is going on in the fed and treasury is over my head, I have been trying to figure it out. I plan on doing some serious research and I will post it on my blog when I am done. As far as Rep. Paul is concerned, some of his ideas sound and may be good ideas, but they are incomplete. Monetary policy is a very delicate balancing act, and there are alot of factors involved. The fed is the lender of last resort, this year I think we reached the last resort. I do believe congress needs to take a closer look at the feds power, Alan Greenspan who was hailed as a hero, and given the highest honers a citizen can receive the presidential medal of freedom from George W. Bush, has know admitted he made some serious mistakes. By the way he prides his self as a libertarian republican, who believes in no oversight or regulation of the banking system. He has gone so far as to say there should be no laws against fraud, the market will take care of it. Which is true, the market took care of it, it collapsed, leaving the fed as the lender of last resorts. Greenspan admitted he was wrong. This should say something about the libertarian party. As I said, I will spend some research time on this subject this week, I will compare Rep. Paul's ideas to what is happening, and what has happend in the feds history. I will try and post it by friday. The way it looks to me, Summers, Geithner, and Bernanke are holding the worlds economy in their hands, and it would be beneficial to understand what they are doing, I have been watching the congressional hearings on c-span, but they are so politically motivated it is hard to get to the bottom of things, I have never been so disappointed in are congress as I am now. Instead of uniting for the common good they are more partisian than ever, this makes it hard to get to the truth. Sorry about the rant, I will post more later when I can back what im saying with facts. I guess that's what I would say to Ron Paul, "facts are a stubborn thing", and I dont think he is giving all the facts.

11-02-2009, 09:44 PM	#6 (permalink)
mattman Badges About Assets Join Date: Nov 2008 Location: South Korea Posts: 210 InformedPoints: 0	Hi Jiheiman66, I didn't post this with intentions of promoting any political candidate or philosophy. I apologize if if it is perceived that way. With all political intentions aside, the congressman does have two valid points in the article that may have future implications of the dollar. The first one is where he states "Fed Chairman Ben Bernanke has embarked on an ambitious program of monetary expansion, more than doubling the monetary base to almost $1.9 trillion and doubling the size of its balance sheet to over $2 trillion,". History has provides important lessons that can be learned from previous countries who operated on a fiat currency who increased the money supply on such levels. All of the countries experienced high levels of inflation or the collapse of their currency. For other Americans such as myself who may have savings in U.S. dollars this is something to be concerned about. For this reason I view trading such commodities as gold and silver not so much as looking for speculative gains but rather wealth and asset preservation, as the value of gold has remained fairly constant over the course of many centuries, it is in fact the dollar that may be declining not gold going up. The second point is as followed; If all this excess money begins to be loaned out, the Fed risks creating a hyperinflationary crisis similar to 1920s Germany. If the Fed contracts this money, it risks harming the banks it desperately wants to see bailed out. This is something people trading currencies or metals should pay close attention to. It may provide insight about the future fate of the usd. If the money begins to be loaned out, it's important to determine a method to hedge against inflationary risk in order to preserve wealth that you have worked hard so create.