The Current Online

by Rick Wirt

Our livelihood, liberty, and national identity may be in jeopardy if we don’t act soon. This is the warning of two-time presidential candidate U.S. Rep. Ron Paul (TX-14) in his latest book, “End the Fed.” Paul cites the inflationary actions of the Federal Reserve Bank as the source for our present economic recession and predicts things are going to get much worse.

The Federal Reserve, Paul says, has led an ignorant Congress to “behave like college students on spring break who are using their parents’ credit cards with no limit.” This seemingly unlimited line of credit augments government by allowing Congress to engage in costly wars, produce expensive government programs, and bail out their friends on Wall Street.

The Fed, as it is known in business circles, drastically inflates the money supply through the vehicle of fractional reserve banking, which requires banks to hold only a small percentage of their customer’s  deposits as they loan out the remainder. It may also alter the money supply through its open market operations, buying and selling treasury securities, and with the discount rate it charges banks for borrowing money from it.

Since the Fed was created in 1913, the purchasing power of the dollar has dropped by 95 percent. “When the Fed lowers interest rates below their natural level on a market, it has the effect of expanding investment beyond a sustainable level,” Paul wrote. “The lower interest rates are creating no new capital; they are merely distorting the signals borrowers use to assess risk,” he said. Through these actions, Paul argues, the Fed enhances the business cycle, producing and prolonging recessions in the economy.

As the Fed creates new money out of thin air, the value of the dollar depreciates, which is essentially a tax favoring the elite at the expense of average citizens because the money they hold loses some of its purchasing power. Paul said, “The early users of the money are the beneficiaries; the government, the banks, and the large corporations.”

Paul argues that the only way for a society to be free is for it to have money of intrinsic value. This is impossible with an economy based on central banking. Central banking and the control of money that it lends to government are absolutely necessary for an authoritarian government to operate, and are absolutely unnecessary for a free democratic society. The fifth plank of the Communist manifesto articulates the economic system of the United States very well: “Centralization of credit in the banks of the state, by means of a national bank with state capital and an exclusive monopoly.” Freedom and central banking are incompatible.

Our own Thomas Jefferson actively opposed central banking in the United States, he wrote, “The Central Bank is an institution of the most deadly hostility existing against the principles and form of our Constitution… if the American people allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all their property until their children will wake up homeless on the continent their fathers conquered.”

The Federal Reserve Bank is a semi-independent agency that is, in fact, owned and partially operated by private national banks. One major issue that Paul cites in the management of The Fed’s enormous power is that its most important actions are secretive and are unknown even to the members of Congress who are supposed to keep it in check. Currently, Paul is trying to pass a bill in the House of Representatives called The Federal Reserve Transparency Act, which would allow Congress to audit the Fed. The bill has 307 co-sponsors, including Emanuel Cleaver (MO-5).

Paul calls for massive reform to our economic system. He wants to eliminate the Fed from the picture and replace our fiat dollar (paper money) with a commodity currency that is backed by gold. Paul sees his ambition to be a conservative one, as the constitution specifically outlines gold and silver to be the only legal tender and is silent on central banking. Although, some may reasonably dispute this interpretation of the Constitution. In his book he references Article 4 section 10 to support his supposition that only gold and silver can be used as legal tender, but this section of the constitution addresses limitations of the power of states, not the federal government.

With a commodity currency,like gold, inflation would be severely limited, since gold cannot be printed as paper can. Therefore, our federal government would also be limited in the money it can spend on useless wars and government programs. Consumers may see the benefits of a healthy economy without the looming threat of an economic meltdown caused by fictitious investment and the resulting bubbles in the market. Banks would be limited in their lending practices because they could not use customer deposits to loan money. Large corporations would be responsible for their mistakes, without the possibility of government bailout through central banking powers.

It is evident that both the citizens and government officials of the U.S. are addicted to credit as the national debt climbs past a record high $12 trillion. If Paul’s plan for gold backed currency is to become a reality, the U.S. will have to go cold turkey on credit because banks would no longer be able to create money to lend through the fractional reserve system. Ending fractional reserve banking would turn our economic system upside down and the initial results would likely be devastating to business in America, but if Paul is right, the alternative of making no changes would be far more destructive.