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Saturday, January 31, 2009

Ron Paul on the transition to sound money

One year ago, Ron Paul was little more than a running joke for the national media; the kooky old uncle of the Republican Party, shrieking about "fiat money" and perpetually prophesying economic collapse.

Today, he's not so readily dismissed. As the governments of the world embark on massive new spending programs and additional money creation (what Keynesian macroeconomists call monetary and fiscal "stimulus"), many people are losing their trust in paper currencies. Though the US dollar has been strikingly resilient through the financial crisis and US Treasuries were among the best performing assets of 2008, there are strong signs that the era of the dollar as the reserve currency of the world are numbered: the treasury market is showing classic signs of a bubble, leaders and commentators around the world are heralding changes in the international monetary regime, and China won't be able to pay for its $585 billion stimulus package while remaining a net purchaser of US government debt. In his speech at Davos on Wednesday, Russia's Prime Minister Putin remarked:

The entire economic growth system, where one regional centre prints money without respite and consumes material wealth, while another regional centre manufactures inexpensive goods and saves money printed by other governments, has suffered a major setback.

Excessive dependence on a single reserve currency is dangerous for the global economy. Consequently, it would be sensible to encourage the objective process of creating several strong reserve currencies in the future.

This following clip is amazing because of how different the world in which we live is from the one we lived in 12 months ago. Ron Paul appears on Fox Business and the host skips over any questions as to why a commodity-backed currency might be preferable to the existing system to ask detailed questions on how the US could transition to a sound monetary system:

Paul's favoured method of monetary reform draws heavily on the writing of the Nobel Prize laureate and Austrian economist Friedrich Hayek. He would eliminate legal tender laws, reform banking regulation, lift taxes on precious metals like gold and silver, and encourage private institutions to compete with each other and with existing currencies to supply the best money for consumers. Here's a portion of a speech Hayek made after the publication of his 1976 book Denationalisation of Money:

I am more convinced than ever that if we ever again are going to have a decent money, it will not come from government: it will be issued by private enterprise, because providing the public with good money which it can trust and use can not only be an extremely profitable business; it imposes on the issuer a discipline to which the government has never been and cannot be subject. It is a business which competing enterprise can maintain only if it gives the public as good a money as anybody else...

The gold standard is the only method we have yet found to place a discipline on government, and government will behave reasonably only if it is forced to do so.

I am afraid I am convinced that the hope of ever again placing on government this discipline is gone. The public at large have learned to understand, and I am afraid a whole generation of economists have been teaching, that government has the power in the short run by increasing the quantity of money rapidly to relieve all kinds of economic evils, especially to reduce unemployment. Unfortunately this is true so far as the short run is concerned. The fact is, that such expansions of the quantity of money which seems to have a short run beneficial effect, become in the long run the cause of a much greater unemployment. But what politician can possibly care about long run effects if in the short run he buys support?

My conviction is that the hope of returning to the kind of gold standard system which has worked fairly well over a long period is absolutely vain.

Read the rest.

Posted by Kalim Kassam on January 31, 2009 | Permalink


"encourage private institutions to compete with each other and with existing currencies to supply the best money for consumers."

BIG ITEM HERE. Allow competition in currencies and let the market decide.

Posted by: Joe | 2009-01-31 9:07:28 PM

And from the horse's mouth...

The best way to destroy the capitalist system is to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.
~John Maynard Keynes~

RP has been right all along.

Posted by: JC | 2009-01-31 11:18:09 PM

"History records that the money changers have used every form of abuse, intrigue, deceit, and violent means possible to

maintain their control over governments by controlling money and its issuance."

~James Madison~

Posted by: JC | 2009-01-31 11:26:52 PM

It is well enough that 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.
Henry Ford

Posted by: JC | 2009-01-31 11:44:19 PM

Of course, lost in the article was the fact that Western Standard was one of the ones calling Dr. Paul a kook.

Have some crow, eh?

Posted by: Tannim | 2009-02-01 6:40:32 PM

I'm suspicious of the gold standard and of private currencies, because if "the people" aren't on-the-ball enough to understand the foundations of the economy now, then adding MORE variables and MORE avenues for fluctuation will simply cause more chaos. I try to think about unintended consequences pragmatically, and that means forecasting how the enemies of liberty would take advantage of any policy. In the case of private currencies, the MOMENT the first private currency issuer fails, taking the net worth of those who hold it's currency, the uproar would be enormous. It's simply not a sustainable policy, given the political climate for long-term foreseeable future. The gold standard is better, but still politically unsustainable because the price of gold (or other precious metals) is variable, and theoretically open to "manipulation" by "evil capitalists". At the first sniff of economic crisis, the enemies of liberty would blame the monetary policy and so the system would crumble. So, if the "best" solutions are politically impossible, what policy should a pragmatic conservative/libertarian actually persue, with some confidence that the policy MIGHT actually pass through the legislative process, and with some confidence that the policy would survive even when it becomes inconvenient for later governments? My suggestion is a constitutional amendment to carve in stone the interest rate charged by the government. This would create one single constant in the economic system that business and individual citizens could count on at all times. Regardless of the status of any other economic variable at any given point in time, every participant in the economy would be able to count on the cost of borrowing currency from the government. The power to use the interest rate to meddle in the economy would be constitutionally removed from the politicians. With a constant baseline, consumers would be better equipped to judge the comparable value of private lenders' own interest rates, which would improve competition. If I allowed this economic fantasy to run wild, I can even imagine laying off most employees of the Bank of Canada/the US Federal Reserve, since without the power to change interest rates they would have much less work to do. It would have to be a constitutional amendment, because inevitable economic conditions would fluctuate to the point where this locked-in interest rate would become inconvenient, and the government would be tempted to give in to pressure from special interests to shift it in their favour. If the interest rate was locked-in constitutionally, the government would no longer be able to favour one segment of the economy over any other by altering the interest rate.

Posted by: anonymous | 2009-02-05 9:21:25 AM

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