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Ron Paul: Flawed Federal Reserve Policy Puts Paper Before Gold

A hundred years ago it was called “dollar diplomacy.” After World War II, and especially after the fall of the Soviet Union in 1989, that policy evolved into “dollar hegemony.” But after all these many years of great success, our dollar dominance is coming to an end.

It has been said, rightly, that he who holds the gold makes the rules. In earlier times it was readily accepted that fair and honest trade required an exchange for something of real value.

First it was simply barter of goods. Then it was discovered that gold held a universal attraction, and was a convenient substitute for more cumbersome barter transactions. Not only did gold facilitate exchange of goods and services, it served as a store of value for those who wanted to save for a rainy day.

Though money developed naturally in the marketplace, as governments grew in power they assumed monopoly control over money. Sometimes governments succeeded in guaranteeing the quality and purity of gold, but in time governments learned to outspend their revenues. New or higher taxes always incurred the disapproval of the people, so it wasn’t long before Kings and Caesars learned how to inflate their currencies by reducing the amount of gold in each coin – always hoping their subjects wouldn’t discover the fraud. But the people always did, and they strenuously objected.

This helped pressure leaders to seek more gold by conquering other nations. The people became accustomed to living beyond their means, and enjoyed the circuses and bread. Financing extravagances by conquering foreign lands seemed a logical alternative to working harder and producing more. Besides, conquering nations not only brought home gold, they brought home slaves as well. Taxing the people in conquered territories also provided an incentive to build empires. This system of government worked well for a while, but the moral decline of the people led to an unwillingness to produce for themselves. There was a limit to the number of countries that could be sacked for their wealth, and this always brought empires to an end. When gold no longer could be obtained, their military might crumbled. In those days those who held the gold truly wrote the rules and lived well.

That general rule has held fast throughout the ages. When gold was used, and the rules protected honest commerce, productive nations thrived. Whenever wealthy nations – those with powerful armies and gold – strived only for empire and easy fortunes to support welfare at home, those nations failed.

Today the principles are the same, but the process is quite different. Gold no longer is the currency of the realm; paper is. The truth now is: “He who prints the money makes the rules” – at least for the time being. Although gold is not used, the goals are the same: compel foreign countries to produce and subsidize the country with military superiority and control over the monetary printing presses.

Since printing paper money is nothing short of counterfeiting, the issuer of the international currency must always be the country with the military might to guarantee control over the system. This magnificent scheme seems the perfect system for obtaining perpetual wealth for the country that issues the de facto world currency. The one problem, however, is that such a system destroys the character of the counterfeiting nation’s people – just as was the case when gold was the currency and it was obtained by conquering other nations. And this destroys the incentive to save and produce, while encouraging debt and runaway welfare.

The pressure at home to inflate the currency comes from the corporate welfare recipients, as well as those who demand handouts as compensation for their needs and perceived injuries by others. In both cases personal responsibility for one’s actions is rejected.

When paper money is rejected, or when gold runs out, wealth and political stability are lost. The country then must go from living beyond its means to living beneath its means, until the economic and political systems adjust to the new rules – rules no longer written by those who ran the now defunct printing press.

“Dollar Diplomacy,” a policy instituted by William Howard Taft and his Secretary of State Philander C. Knox, was designed to enhance U.S. commercial investments in Latin America and the Far East. McKinley concocted a war against Spain in 1898, and (Teddy) Roosevelt’s corollary to the Monroe Doctrine preceded Taft’s aggressive approach to using the U.S. dollar and diplomatic influence to secure U.S. investments abroad. This earned the popular title of “Dollar Diplomacy.” The significance of Roosevelt’s change was that our intervention now could be justified by the mere “appearance” that a country of interest to us was politically or fiscally vulnerable to European control. Not only did we claim a right, but even an official U.S. government “obligation” to protect our commercial interests from Europeans.

This new policy came on the heels of the “gunboat” diplomacy of the late 19th century, and it meant we could buy influence before resorting to the threat of force. By the time the “dollar diplomacy” of William Howard Taft was clearly articulated, the seeds of American empire were planted. And they were destined to grow in the fertile political soil of a country that lost its love and respect for the republic bequeathed to us by the authors of the Constitution. And indeed they did. It wasn’t too long before dollar “diplomacy” became dollar “hegemony” in the second half of the 20th century.

This transition only could have occurred with a dramatic change in monetary policy and the nature of the dollar itself.

Congress created the Federal Reserve System in 1913. Between then and 1971 the principle of sound money was systematically undermined. Between 1913 and 1971, the Federal Reserve found it much easier to expand the money supply at will for financing war or manipulating the economy with little resistance from Congress – while benefiting the special interests that influence government.

Dollar dominance got a huge boost after World War II. We were spared the destruction that so many other nations suffered, and our coffers were filled with the world’s gold. But the world chose not to return to the discipline of the gold standard, and the politicians applauded. Printing money to pay the bills was a lot more popular than taxing or restraining unnecessary spending. In spite of the short-term benefits, imbalances were institutionalized for decades to come.

The 1944 Bretton Woods agreement solidified the dollar as the preeminent world reserve currency, replacing the British pound. Due to our political and military muscle, and because we had a huge amount of physical gold, the world readily accepted our dollar (defined as 1/35th of an ounce of gold) as the world’s reserve currency. The dollar was said to be “as good as gold,” and convertible to all foreign central banks at that rate. For American citizens, however, it remained illegal to own. This was a gold-exchange standard that from inception was doomed to fail.

The U.S. did exactly what many predicted she would do. She printed more dollars for which there was no gold backing. But the world was content to accept those dollars for more than 25 years with little question – until the French and others in the late 1960s demanded we fulfill our promise to pay one ounce of gold for each $35 they delivered to the U.S. Treasury. This resulted in a huge gold drain that brought an end to a very poorly devised pseudo-gold standard.

It all ended on August 15, 1971, when Nixon closed the gold window and refused to pay out any of our remaining 280 million ounces of gold. In essence, we declared our insolvency and everyone recognized some other monetary system had to be devised in order to bring stability to the markets.

Amazingly, a new system was devised which allowed the U.S. to operate the printing presses for the world reserve currency with no restraints placed on it – not even a pretense of gold convertibility, none whatsoever! Though the new policy was even more deeply flawed, it nevertheless opened the door for dollar hegemony to spread.

Realizing the world was embarking on something new and mind boggling, elite money managers, with especially strong support from U.S. authorities, struck an agreement with OPEC to price oil in U.S. dollars exclusively for all worldwide transactions. This gave the dollar a special place among world currencies and in essence “backed” the dollar with oil. In return, the U.S. promised to protect the various oil-rich kingdoms in the Persian Gulf against threat of invasion or domestic coup. This arrangement helped ignite the radical Islamic movement among those who resented our influence in the region. The arrangement gave the dollar artificial strength, with tremendous financial benefits for the United States. It allowed us to export our monetary inflation by buying oil and other goods at a great discount as dollar influence flourished.

This post-Bretton Woods system was much more fragile than the system that existed between 1945 and 1971. Though the dollar/oil arrangement was helpful, it was not nearly as stable as the pseudo gold standard under Bretton Woods. It certainly was less stable than the gold standard of the late 19th century.

During the 1970s the dollar nearly collapsed, as oil prices surged and gold skyrocketed to $800 an ounce. By 1979 interest rates of 21% were required to rescue the system. The pressure on the dollar in the 1970s, in spite of the benefits accrued to it, reflected reckless budget deficits and monetary inflation during the 1960s. The markets were not fooled by LBJ’s claim that we could afford both “guns and butter.”

Once again the dollar was rescued, and this ushered in the age of true dollar hegemony lasting from the early 1980s to the present. With tremendous cooperation coming from the central banks and international commercial banks, the dollar was accepted as if it were gold.

Fed Chair Alan Greenspan, on several occasions before the House Banking Committee, answered my challenges to him about his previously held favorable views on gold by claiming that he and other central bankers had gotten paper money – i.e. the dollar system – to respond as if it were gold. Each time I strongly disagreed, and pointed out that if they had achieved such a feat they would have defied centuries of economic history regarding the need for money to be something of real value. He smugly and confidently concurred with this.

In recent years central banks and various financial institutions, all with vested interests in maintaining a workable fiat dollar standard, were not secretive about selling and loaning large amounts of gold to the market even while decreasing gold prices raised serious questions about the wisdom of such a policy. They never admitted to gold price fixing, but the evidence is abundant that they believed if the gold price fell it would convey a sense of confidence to the market, confidence that they indeed had achieved amazing success in turning paper into gold.

Increasing gold prices historically are viewed as an indicator of distrust in paper currency. This recent effort was not a whole lot different than the U.S. Treasury selling gold at $35 an ounce in the 1960s, in an attempt to convince the world the dollar was sound and as good as gold. Even during the Depression, one of Roosevelt’s first acts was to remove free market gold pricing as an indication of a flawed monetary system by making it illegal for American citizens to own gold. Economic law eventually limited that effort, as it did in the early 1970s when our Treasury and the IMF tried to fix the price of gold by dumping tons into the market to dampen the enthusiasm of those seeking a safe haven for a falling dollar after gold ownership was re-legalized.

Once again the effort between 1980 and 2000 to fool the market as to the true value of the dollar proved unsuccessful. In the past 5 years the dollar has been devalued in terms of gold by more than 50%. You just can’t fool all the people all the time, even with the power of the mighty printing press and money creating system of the Federal Reserve.

Even with all the shortcomings of the fiat monetary system, dollar influence thrived. The results seemed beneficial, but gross distortions built into the system remained. And true to form, Washington politicians are only too anxious to solve the problems cropping up with window dressing, while failing to understand and deal with the underlying flawed policy. Protectionism, fixing exchange rates, punitive tariffs, politically motivated sanctions, corporate subsidies, international trade management, price controls, interest rate and wage controls, super-nationalist sentiments, threats of force, and even war are resorted to-all to solve the problems artificially created by deeply flawed monetary and economic systems.

Regards,

United States Congressman Ron Paul of Texas
for The Daily Reckoning

16 Comments

  1. Mark says:

    Great article no currency. Is there any other candidate in the race that could write such a beautiful article?? Ron Paul is definetly making waves and I hope he succeeds.

  2. NickT says:

    I really hope Ron Paul succeeds for America – he’s the last chance for freedom and liberty!

  3. Kurt from USA says:

    “Is there any other candidate in the race that could write such a beautiful article”

    There is no other candidate in the race that can tell the truth as Ron Paul can!

    Want to see some monkey business in the US.

    Google this:

    videoplay?docid=-6802228062297352475&q=Greg+Palast

    watch it and educate yourself!

    Please pass it along!

  4. TECHY2468 says:

    i think we the people deserve our leaders.

    all over the world people are happy that there is temendous growth happening….little do they know that 1) it cannot continue like this forever 2) every growth is followed by a contraction…….which is more painful than a slow growth

  5. goldenequity says:

    Who IS Ron Paul? They still need to know!!
    NOBODY explains Ron Paul
    BETTER than Ron Paul himself!

    Here is an interactive audio archive of
    Ron Paul speeches and interviews as a resource in chronological
    order.

    http://www.ronpaulaudio.com

  6. MM says:

    Is he arguing we should go back to gold standard, or just be better econmists and not manipulate the money supply for bad reasons (although manipulation is okay for good reasons)?

  7. Andrew Young says:

    I’ve been watching Ron Paul for years, as he seems to be the only representative who is following the path of our Constitution. ALL our Representatives take the Oath to uphold the Constitution, but only Ron Paul seems to know what it means. He is a breath of fresh air, and America desperately need him as our only true leader…
    God Bless Ron Paul…

    God Bless America…

  8. Petkov says:

    All you posters are total joke. So is your Ron Paul. He talks great but so what? What exactly is he going to do if he is elected to change this “problem”? Declare a new gold standard? Star printing dollars with gold in them? Lemme see, Kennedy tried that and quickly met with a bullet. Shut down Federal Reserve board? He will be thrown out of office.
    He cannot stop “the war on terror” because wars and wars alone are what keeps USA’s economy going.
    If he tries to do ANYTHING to change the system, the system will collapse and USA will enter into a depression so deep 1930s will be nothing compared to it.
    Come on, try to open your eyes and see it’s ALL talk and nothing more.

    You wanna talk to me about this:
    petkov23@yahoo.com

  9. Kim B. says:

    Love your articles, I’m in Perth and I’ve got my Crash Alert Flash hoisted high as well, but everyone mocks me and thinks I’m crazy, which means I am really onto Something.

    Anyway, I’m have been taking a bit of interest in the United States Presidential Candidates race because I believe the selection of the next President of the United States will determine whether they are going to have either a Recession or Depression, which we will most likely contract when the US stops buying Chinese Goods, and Chinese stop buying as much of our resources along with the imminent crash of the US Dollar.

    Anyway, there is one Candidate that is a quantum leap away from all the other candidates, and his name is Ron Paul.

    He is a little known Senator from Texas who has served 10 terms in the congress, he is really a Libertarian but is running as a Republican, because it is too difficult to get Presidential nomination unless he has $100 million dollars if he isn’t a member of either of the two major parties.

    This guys has been consistently been against the Iraq War, he want’s to get rid of the IRS in America, because it’s unconstitutional, and because there is no law in America stating that individuals have to pay income tax. I’m pretty sure he has also talked about getting rid of the Federal Reserve also because it facilitates the transfer of wealth from the Poor to the Rich by creating booms and busts. He is against unbalanced budgets and deficits, he is against printing more money to fix your financial problems, etc, etc, etc.

    After three GPO debates, he is also winning in all of the Internet Polls, but he is being side-lined by the major Media Companies who are even participating in censoring Ron Paul supporters, this is already happening on Myspace è http://www.youtube.com/watch?v=ehhj-0JsKmA

    Polls

    http://freecentury.com/2007/06/05/

    http://www.vote.com/vResults/index.phtml?voteID=60509969&cat=4075633

    http://topicify.com/cnnrepublican/index.php?result=true

    http://www.msnbc.msn.com/id/18963731/

    http://www.cnn.com/ELECTION/2008/debates/scorecard/gop.debate/results.html

    Probably the best way to get informed about this guy is on his website and Youtube.

    This video best sums up Ron Pauls position on most issues http://www.youtube.com/watch?v=1ptU2GzwOMs

    http://www.ronpaul2008.com/

    http://www.youtube.com/profile?user=VoteRonPaul08

    This probably the best example of how opposite Ron Paul is to the other republican candidates when Rudy Giuliani hit up Ron Paul on why America was attacked on 9/11, Ron Paul subsequently advised Rudy Giuliani to go read the 9/11 Attack reports etc to get informed that the CIA has concluded that American Policy and Military Presence in the Middle East for 10 years, prior to 9/11 contributed to the 9/11 attacks è http://www.youtube.com/watch?v=rF3NtEWj6ws

    Ron Paul on Aaron Russos’ America Freedom To Fascism(Which is happening in Australia as well) è http://www.youtube.com/watch?v=QBOIZmuP1P8

    Better get onto this one quick boys, because this is going to be huge, and I’m fascinated by what the potential economic/financial repercussions would be if Ron Paul became President and did actually get rid of the IRS, Federal Reserve etc.

    Kim

  10. Karen says:

    I had to read this slowly to digest the history and build up. Ron Paul is truly a scholar and a statesman. Yes, we may not know exactly the prescription to cure this madness, but to know what the problem is, is to know how to begin moving forward in the right direction to change a failed policy. This will be hard work. Chile? It might provide a good model of how to begin and implement gold policies.

  11. Ron Holland says:

    Read How Ron Paul Became President

    A fictional case study about how a future terrorist attack against the US and the Bush administration response elects Ron Paul as President.

    Learn what could happen when the United States is hit by another terrorist attack by Islamic extremists that creates an extreme response by Washington in The Final Presidential Executive Order at http://www.swissconfederationinstitute.org/swisspreserve14.htm

    This is from a new free online book, “The Swiss Preserve Solution” & the excess reaction results in the election of Ron Paul as President, not in 2008 but in 2012.

  12. Disputo says:

    All I see here is a bunch of whining about a supposed problem but not one word about what he would do instead. *yawn* Not a whit different than any other third-rate politician.

  13. GoldIsBad says:

    Gold is a fraud…

    I’m sorry by my bad English.

    A set of questions for “gold believers”.
    – who are the main owners of gold today?
    – when gold become parity with money, will not be revalue
    artificially?
    – How could be taxed the great fortunes in future if the money is gold and could be hidden in any place?
    – when the money couldn’t be created, it not be more expensive (higher interest rates)?
    – If Inflation reduces the savings, is tt not reduces the debt too?
    – if fiat money inflation reduces the debts and make interests , will not be more easy to invest in something?

    In my humble opinion.
    – Adopt again gold standard is an act that transfers almost everything wealth to actual private gold owners “magically”.
    – Investment and people economic emancipation will became near to impossible because a credit will require very high interests but inflaction will be near 0, making investments without money too much difficult.
    – Gold is a metal with little real usefull uses, then paper money by little gold is near the same transaction. Nothing for almost nothing, real minus than nothing because the actual gold owners are richest people and make gold became money will generate an artificial demand and will raise a lot its values. If the rich became richer without making real wealth then the rest of people became more poor.
    – Gold is easy to hide and protect, making taxes ineffective and the wealth of gold owners (mainly, the richest) untouchable.

    My opinion is that return to gold is a fraud. Actual money and its emission is too, but US need a new system.
    Probably, a new central bank that make the money ONLY WITH PARITY TO REAL PRODUCTION.

  14. Vic Bailey says:

    If people were as instrested in their country as they are in Paris and Britney and the other trailer trash in Hollywood this would be a lot better place to live, but most of American people are stupid in believing that the government wouldn’t do us in. Well, they let the big bankers give us the depression and they’re going to do it again, and the politicians don’t give a damn. Becaust the big bankers and the lobbiest run this country, Of The People, By The People. It now is Of The government, BUY the government.

  15. Doc Rings says:

    Here’s comes the recession, just as Ron Paul and others have predicted due to the Fed’s irresponsible price fixing of credit, letting the disparity grows until the whole market just collapses into a depression.

    At least someone was talking about it, just that no one in Washington was listening to the wisdom.

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