Ron Paul – The Revolution: A Manifesto – Page 140 through Page 145

Page 140: For most of America’s history the dollar has been backed by a certain weight of gold. In 1933 the U.S. government took the country off of the gold standard. The government confiscated the gold of private households and made any contracts that required payment in gold illegal. From that point on the dollar could no longer be redeemed by private citizens for anything other than more paper dollars. However, in 1933, provisions were made for foreign central banks to continue redeeming their dollars in gold. This activity was finally terminated by Richard Nixon in 1971. Other governments saw that the U.S. government was printing too much money and the dollar was losing value. They started to trade in their dollars for gold. Nixon closed the gold window to stop a run on the U.S. treasury.

Quote (James Madison): “The loss which America has sustained since the peace, from the pestilent effects of paper money on the necessary confidence between man and man, on the necessary confidence in the public councils, on the industry and morals of the people, and on the character of republican government, constitutes an enormous debt against the States chargeable with this unadvised measure.”

Page 141: When the Federal Reserve chairman announces that he is going to lower the interest rate, he is referring to the federal funds rate. This is the interest rate that banks charge each other to borrow money. Banks tend to borrow money from each other when they don’t have enough money on hand to satisfy depositors who come in and make withdrawals. When more banks need money and there are fewer banks lending money, the federal funds rate goes up. To keep the federal funds rate from going up, the Federal Reserve buys bonds from the banks that need more money. This acts as an injection of money so that banks can satisfy customers who want to make withdrawals. In order to buy bonds from banks, the Federal Reserve creates new money and gives it to the banks in exchange for bonds. Sometimes banks don’t just want more money to cover withdrawals, they want more money to make new loans. The Federal Reserve buys bonds with newly created money in that situation as well.

Page 142: In order to loan the new money, banks lower their interests rates and lending standards to attract new borrowers. Creating and loaning out new money in this way creates serious problems. It puts more dollars into circulation which lowers the value of the dollar, making people who save in dollars poorer. Bubbles also begin to appear in the economy which must eventually pop and create economic recessions and depressions. In general, the people who receive the new money first are those who are wealthy and politically well-connected.

Quote: “When the money supply is increased, prices rise – with each dollar now worth less than before, it can purchase fewer goods than it could in the past.”

Page 143: The first recipients of the new money get to spend it before prices have risen in general. They enjoy a windfall. However, as the new money makes its way through the economy it starts to raise prices across the board. Many in the lower and middle classes will not see their wages rise in proportion to the rise of prices in general. Those in the lower and middle classes will see their standard of living decline as a result. In general it is government contractors, big banks, and the politically well connected who get the money first. They enjoy a windfall at the expense of the middle and lower classes. Another large recipient of a lot of new government money is the health care industry. This helps to explain why health care costs continue to go up at such a rapid rate. The redistributive effects of money creation were first discovered by the French economist Richard Cantillon.

Quote: “The average person is silently robbed through this invisible means and usually doesn’t understand what exactly is happening to him. And almost no one in the political establishment has an incentive to tell him.”

Page 144: When the government redistributes wealth by creating new money, this is actually a tax. It is a particularly unjust tax because it is hidden from plain view. People feel themselves getting poorer but they don’t know why. It is important to note that Americans throughout history have railed against the effects of paper money. People such as president Andrew Jackson and Senator Daniel Webster were extremely adamant when they spoke about the ill effects of unbacked paper money. The Consumer Price Index (CPI) is a poor indicator of how price changes affect real Americans. It doesn’t include food or energy prices. Economist Ludwig von Mises taught that governments always try to get people to focus on prices instead of growth in the money supply when thinking about inflation.

Quote (Daniel Webster): “Of all the contrivances for cheating the laboring classes of mankind, none has been found more effectual than that which deludes them with paper money.”

Page 145: Inflation is an increase in the money supply. Rising prices are the effect of inflation. When viewed this way, there is an easy solution for ending inflation: demand that the Federal Reserve cease creating new money. When the Federal Reserve creates new money it causes interests rates to go down. New, artificially lower, interest rates encourage people to borrow and make investments that they would not have made otherwise. These new investments create a sense of increasing prosperity. Businesses expand, new projects are undertaken, and in general people feel richer. However, as the new money makes its way through the economy prices begin to rise. To cover rising costs, new loans are demanded. Interest rates begin to rise. Projects that seemed profitable at lower interests rates are no longer profitable.

Quote: “When the Fed artificially lowers rates, it misrepresents economic conditions and misleads people into making unsound investments.”

 

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