September 24th, 1998
The SPEAKER pro tempore (Mr. BASS). Under a previous order of the House, the gentleman from Texas (Mr. PAUL) is recognized for 5 minutes.
Mr. PAUL. Mr. Speaker, Mr. Speaker, I would like to call the attention of fellow colleagues to the issue of three things that have happened in the last couple of days.
Today it was recorded in our newspapers and it was a consequence of a meeting held last night having to do with a company that went bankrupt, Long-Term Capital Management. I believe this has a lot of significance and is something that we in the Congress should not ignore.
This is a hedge fund. Their capitalization is less than $100 billion, but, through the derivatives markets, they were able to buy and speculate in over $1 trillion worth of securities, part of the financial bubble that I have expressed concern about over the past several months.
But last night an emergency meeting was called by the Federal Reserve Bank of New York. It was not called by the banks and the security firms that were standing to lose the money, but the Federal Reserve Bank of New York called an emergency meeting late last night. Some of the members of this meeting, the attendees, came back from Europe just to attend this meeting because it was of such a serious nature. They put together a package of $3.5 billion to bail out this company.
Yesterday also Greenspan announced that he would lower interest rates. I do not think this was an accident or not coincidental. It was coincidental that at this very same time they were meeting this crisis, Greenspan had to announce that, yes indeed, he would inflate our currency, he would expand the money supply, he would increase the credit, he would lower interest rates. At least that is what the markets interpreted his statement to mean. And the stock market responded favorably by going up 257 points.
On September 18th, the New York Times, and this is the third time that that has come about in the last several weeks, the New York Times editorialized about why we needed a worldwide Federal Reserve system to bail out the countries involved in this financial crisis.
Yesterday, on the very same day, there was another op-ed piece in the New York Times by Jeffrey Garten, calling again for a worldwide central bank, that is, a worldwide Federal Reserve system to bail out the ailing economies of the world.
The argument might go, yes, indeed, the financial condition of the world is rather severe and we should do something. But the financial condition of the world is in trouble because we have allowed our Federal Reserve System, in deep secrecy, to create credit out of thin air and contribute to the bubble that exists. Where else could the credit come from for a company like Long-Term Capital Management? Where could they get this credit, other than having it created and encouraged by a monetary system engineered by our own Federal Reserve System?
We will have to do something about what is happening in the world today, but the danger that I see is that the movement is toward this worldwide Federal Reserve System or worldwide central bank. It is more of the same problem. If we have a fiat monetary system, not only in the United States but throughout the world, which has created the financial bubble, what makes anybody think that creating more credit out of thin air will solve these problems? It will make the problems much worse.
We need to have a revamping of the monetary system, but certainly it cannot be saved, it cannot be improved, by more paper money out of thin air, and that is what the Federal Reserve System is doing.
I would like to remind my colleagues that when the Federal Reserve talks about lowering interest rates, like Mr. Greenspan announced yesterday, or alluded to, this means that the Federal Reserve will create new credit. Where do they get new credit and new money? They get it out of thin air. This, of course, will lower interest rates in the short run and this will give a boost to a few people in trouble and it will bail out certain individuals.
When we create credit to bail out other currencies or other economies, yes, this tends to help. But the burden eventually falls on the American taxpayer, and it will fall on the value of the dollar. Already we have seen some signs that the dollar is not quite as strong as it should be if we are the haven of last resort as foreign capital comes into the United States. The dollar in relationship to the Swiss frank has been down 10 percent in the last two months. In a basket of currencies, 15 currencies by J.P. Morgan, it is down 5 percent in one month.
So when we go this next step of saying, yes, we must bail out the system by creating new dollars, it means that we are attacking the value of the money. When we do this, we steal the value of the money from the people who already hold dollars.
If we have an international Federal Reserve System that is permitted to do this without legislation and out of the realms of the legislative bodies around the world, it means that they can steal the value of the strong currencies. So literally an international central bank could undermine the value of the dollar without permission by the U.S. Congress, without an appropriation, but the penalty will fall on the American people by having a devalued dollar.
This is a very dangerous way to go, but the movement is on. As I mentioned, it has already been written up in the New York Times. George Soros not too long ago, last week, came before the Committee on Banking and Financial Services making the same argument. What does he happen to be? A hedge fund operator, the same business as Long-Term Capital Management, coming to us and saying, “Oh, what you better do is protect the system.”
Well, I do not think the American people can afford it. We do have a financial bubble, but financial bubbles are caused by the creation of new credit from central banks. Under a sound monetary system you have a commodity standard of money where politicians lose total control. Politicians do not have control and they do not instill trust into the paper money system.
But we go one step further. The Congress has reneged on its responsibility and has not maintained the responsibility of maintaining value in the dollar. It has turned it over to a very secretive body, the Federal Reserve System, that has no responsibility to the U.S. Congress. So I argue for the case of watching out for the dollar and argue for sound money, and not to allow this to progress any further.
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September 10th, 1998
The SPEAKER pro tempore. Under a previous order of the House, the gentleman from Texas (Mr. PAUL) is recognized for 5 minutes.
Mr. PAUL. Mr. Speaker, the largest of all bubbles is now bursting. This is a worldwide phenomenon starting originally in Japan 9 years ago, spreading to East Asia last year, and now significantly affecting U.S. markets.
All financial bubbles are currency driven. When central banks generously create credit out of thin air speculation, debt, and malinvestment result. Early on the stimulative effect is welcomed and applauded as the boom part of the cycle progresses. But illusions of wealth brought about by artificial wealth creation end when the predictable correction arrives. Then we see the panic and disappointment as wealth is wiped off the books.
These events only occur when governments and central banks are given arbitrary authority to create money and credit out of thin air. Paper money systems are notoriously unstable; and the longer they last, the more vulnerable they are to sudden and sharp downturns.
All countries of the world have participated in this massive inflationary bubble with the dollar leading the way. Being a political and economic powerhouse, U.S. policy and the dollar has had a major influence throughout the world and, in many ways, has been the engine of inflation driving world financial markets for years.
But economic law dictates that adjustments will be made for all the bad investment decisions based on erroneous information about interest rates, the money supply, and savings.
The current system eventually promotes overcapacity and debt that cannot be sustained. The result is a slump, a recession, or even a depression. When the government makes an effort to prevent a swift, sharp correction, the agony of liquidation is prolonged and deepened. This is what is happening in Japan and other Asian countries today. We made the same mistake in the 1930s.
A crisis brought on by monetary inflation cannot be aborted by more monetary inflation or the IMF bailouts favored by the American taxpayer. It may at times delay the inevitable, but eventually, the market will demand liquidation of the malinvestment, excessive debt, and correction of speculative high prices as we have seen in the financial markets.
All this could have been prevented by a sound monetary system, one without a central bank that has monopoly power over money and credit and pursues central economic planning. My concern is profound. The retirement and savings of millions of Americans are jeopardized. Economic growth could be reversed sharply and quickly as it already has in the Asian countries. Budget numbers will need to be sharply revised.
The Federal Reserve hints at lower interest rates which means more easy credit. This may be construed as a positive for the market, but it only perpetuates a flawed monetary system.
Protecting the dollar is our job here in the Congress, and we are not paying much attention. Although turmoil elsewhere in the world has given a recent boost to the dollar, signs are appearing that the dollar, unbacked by anything of real value, is vulnerable. Setting a standard for the dollar with real value behind it can restore trust to the system and will become crucial in solving our problems, soon to become more apparent.
The sooner we understand the nature of the problem and start serious discussions on how to restore soundness to our money the sooner we can secure the savings, investments, and retirements of all Americans.
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September 9th, 1998
The SPEAKER pro tempore (Mr. EVERETT). Under the Speaker’s announced policy of January 7, 1997, the gentleman from Texas (Mr. PAUL) is recognized for 60 minutes as the designee of the majority leader.
Mr. PAUL. Mr. Speaker, we are now experiencing a worldwide financial crisis. It may yet prove to be the worst in all of history.
There have been a lot of wringing of hands as to the cause, but the source of the problem is not a mystery. It is a currency induced crisis.
Although tax, spending, regulatory policies and special interest cronyism compounds the problems, all nations of the world operate with a fiat monetary system. We have been operating with one for 27 years. It has allowed the financial bubble to develop.
Easy credit and artificially low interest rates starts a chain reaction that, by its very nature, guarantees a future correction. Depending on the particulars of fiscal and monetary policy and political perceptions, the boom part of the cycle lasts for unpredictable lengths of time.
The later bad consequences of inflating a currency are certain, no matter how beneficial the earlier ones seem. The dollar has played a major roll in the worldwide financial bubble since the dollar is the reserve currency of the world. It is readily accepted and used to further inflate most other world currencies.
Noted free market economists Ludwig Von Mises astutely observed in 1940:
No political party and no government has ever tried to make a conscious deflationary effort. The unpopularity of deflation is evidenced by the fact that inflationists constantly talk of the evils of deflation in order to give their demands for inflation and credit expansion the appearance of justification.
Since we hear no talk of sound money and we can be assured no government will deliberately deflate, we should remain vigilant against the politically popular policy of inflation, the deliberate debasement of the currency.
Beneficiaries of easy credit demand the policy of currency inflation continue. Creating money and credit out of thin air gives the illusion of the perfect counterfeiter, appearing legal and helpful to many. The power to inflate a currency guarantees a lender of last resort for risky borrowing, domestic and international. It accommodates deficit spending, permitting spending on extravagant welfare programs and unwarranted international militarism, something for everyone.
The welfare poor like it. The welfare rich like it. The foreign welfare recipients like it. It seems everyone likes it until the artificial nature of the financial bubble becomes apparent as it is now.
Fiat money and its low interest rates cause mal-investment, over capacity, rising prices in one industry or another, excessive debt and over speculation worldwide. We have had all of this. The current system has generated a nearly $30 trillion derivatives market. This is a modern day phenomenon, having allowed a greater speculative binge than anything known in financial history. But the current prices signals an end of an era and it does not bode well for anyone.
The near anarchy in Russia, the food riots in Indonesia, and the growing recession in Japan are signs of conditions spreading across the globe. Unfortunately, there is no sign that correct policy will soon be instituted, anyplace.
Capitalism erroneously is being blamed. No mention is made that no country today is truly capitalist in following a sound monetary policy.
A lot of lip service is given to free trade but, with only casual observation, one realizes that which is being promoted as free trade is internationalism and managed trade through organizations and programs such as NAFTA, the World Trade Organization, the IMF, the World Bank, foreign aid, subsidized exports, and a U.N. directed foreign policy. Economic sanctions by those professing free trade are commonplace and growing.
Today’s protectionists rely on these programs in an effort to outwit their competitors along with demanding currency devaluations in a futile effort to enhance exports.
Markets inevitably devalue currencies that have been inflated by the monetary authorities. The degree depends on the amount of previous monetary inflation and political perceptions but, on the short run, countries frequently accelerate the devaluation in a competitive fashion in an effort to gain a competitive edge against their trading partners. This is why China, despite the denials, will likely accept the policy of official devaluation.
But our concerns here in the Congress should be for the dollar. We should not be so arrogant as to dictate policies to others since we have no authority to do so, whether it be Japan, Indonesia, Mexico, or Russia. We should resist this no matter how tempting it might seem. And we certainly should not use dollars to prop up other currencies or economies whether it be Mexico or anyone else.
Bailouts compound the problems and encourages others to mismanage their economies while expecting a bailout for themselves from Uncle Sam. But most importantly, it undermines the value of the dollar.
Since returning to Congress in January of 1997, I have repeatedly warned that our monetary policy is seriously flawed and will eventually lead to a dollar crisis. This, in spite of the fact that the dollar has been riding high in American bonds, and up until recently our stock markets have been a haven for the ravaged world financial markets.
Foreign Central Banks for years have been willing holders of our dollars, helping to finance our profligate ways, diminishing price inflation here at home, by buying up more dollars than our own central bank. But conditions are changing. In spite of many reasons for capital to flow into dollars assets in the last few years, foreign central banks have dumped $85 billion of their U.S. bond holdings. Considering our large negative trade balance, it is not a surprise to see this happening. And as this dumping of U.S. dollars accelerates, more pressure will be put on the dollar.
What can we expect from our illustrious central planners, the Federal Reserve? Just as difficult as it is for an addict to gradually cut back on drugs, economic planners refuse to accept the cutting back of credit creation the markets have become addicted to. Long life may be dependent on sound medical advice and drug abstinence, but feeling good on the short run drives the addict.
Likewise, an economy feels good by perpetuating for as long as possible the easy credit that brought us the good times in the first place while the long life of the currency, the economy, and the political system causes little concern. Because there is little interest for the long term in Russia and East Asia, chaos and political strife has prevailed. This we cannot afford in the United States.
Today, essentially all politicians, economists, and investors are strongly urging the Fed to do what they do best, inflate the currency, arguing that a liquidity crisis must be avoided at all costs. All that is required, they say, are low interest rates. But this can only be achieved by creating new money even faster, and M3 is already growing at a 9 percent annualized rate. This is inflation and the source of the problem. It appears the Fed is ready to accommodate.
Central planning, Soviet style, is a known failure. But we have not yet given up on our type of central planning through a powerful and secretive central bank that dictates interest rates and amounts of credit available to the system. Fine tuning and economic management has been left to the Fed. It is at its pinnacle of power under, ironically, a once gold standard, free market proponent, Alan Greenspan who leads it.
Let there be no doubt about it. The good times came with the generous credit creation and low interest rates. And Greenspan will yield to the politicians’ pressure to continue the process. Turning off the money spigot and allowing the markets to work will never be seriously considered.
But eventually, the markets will rule. Credit creation may lower rates for a time, but when confidence is undermined, an inflation premium will emerge and rates will rise regardless. Lack of demand for loans in Indonesia and elsewhere in East Asia has not lowered rates. In a country with a collapsing currency, rates can and will rise especially if inflating the money supply is the tool of choice in an effort to stimulate the economy.
Inflating the money supply presents a great danger to the future of the dollar and the economy and our political system.
The worldwide financial bubble is like nothing ever witnessed before and it is collapsing. The Y2K problem will compound our problems, not to mention the instability of the U.S. presidency.
It is time to consider the fundamentals underlying our financial and economic system. The welfare state is unsustainable as are our worldwide commitments to bail out everyone and to intervene in every fight, even those that have been ongoing for hundreds if not thousands of years.
A limited government, designed to protect liberty and provide for a national defense is one that could be easily managed with minimal taxes, but it would also require that we follow the advice of the founders who explicitly admonished us not to “emit bills of credit,” that is paper money, and to use only silver and gold as legal tender.
We need to lay plans for our future because we are rapidly approaching a time of crisis and chaos. We surely do not want to leave the solution to FEMA and presidential executive orders.
Let me quote from a famous economist who was writing in 1966 about the Great Depression:
The Fed succeeded, but it nearly destroyed the economies of the world in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market, triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom.
But it was too late; by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed.
Great Britain fared even worse, and rather than absorb the full consequences of her previous folly, she abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a worldwide series of bank failures. The world economies plunged into the Great Depression of the 1930s.
With a logic reminiscent of a generation earlier, statists argued the gold standard was largely to blame for the credit debacle which led to the Great Depression. If the gold standard had not existed, they argued, Britain’s abandonment of gold payments in 1931 would not have caused the failure of banks all over the world. The irony was that since 1913, we had not been on a gold standard, but on what may be termed a mixed gold standard; yet it is gold that took the blame.
Further quoting from this economist from 1966:
But the opposition to the gold standard in any form, from a growing number of welfare state advocates, was prompted by a much subtler insight: the realization that the gold standard is incompatible with chronic deficit spending, the hallmark of the welfare state. Stripped of its academic jargon, the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes. A substantial part of the confiscation is effected by taxation. But the welfare statists were quick to recognize that if they wished to retain political power, the amount of taxation had to be limited and they had to resort to programs of massive deficit spending, i.e., they had to borrow money, by issuing government bonds, to finance welfare expenditures on a large scale.
Under a gold standard, the amount of credit that an economy can support is determined by the economy’s tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government’s promise to pay out of future tax revenues, and cannot be easily absorbed by the financial markets. A large volume of new government bonds can be sold to the public only at progressively higher interest rates. Thus, government deficit spending under a gold standard is severely limited.
The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which, through a complex series of steps, the banks accept in place of tangible assets and treat them as if they were an actual deposit as the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is there are no more claims outstanding than real assets.
In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case for gold. If everyone decided, for example, to convert all his bank assets to silver or copper or any other good, and thereafter declined to accept checks for payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods.
The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.
This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the hidden confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.
The economist who wrote this in 1966 was Alan Greenspan. He was right then. He is wrong now. Deliberate debasement of a currency cannot assure perpetual wealth, only hardship, the type of hardship we are now witnessing in East Asia and spreading around the world, moving now into Central and South America. And we here in the United States follow the same policy, and we are vulnerable no matter how beneficial and how it appears that we are doing today.
Congress has an explicit constitutional responsibility in the area of money and finance, and we must assume this responsibility. Secretive plans by a central bank to manipulate money and credit with the pretense of helping us is unacceptable, and before the trust in the dollar is lost we should work diligently to restore soundness to our monetary system. Without trust, the current system cannot last, and there is every reason to believe that the disintegration of trust throughout the world can and will spread to this country.
It is an obligation on our part, Members of Congress, to look into this matter, study it and at least be prepared for the problems that we will have to confront. We cannot continue with the system that we have. That is what the markets are telling us today. The worldwide financial crisis is not a figment of anybody’s imagination, it is real, and we are reading about it every day and it threatens the life savings of every single American.
The value of the currency is crucial to protecting the assets of all retirees. This issue, I believe, is one of the most serious issues that we as Members of Congress have the responsibility of looking into and confronting and doing something about it. But as long as we accept the notion that the central planner of this country, the Federal Reserve, remains totally secret, without true supervision by the Congress, we are derelict in our duty.
It is up to us to do something. And as the crisis worsens, I believe it will become more apparent that our responsibility to look into this is quite evident.
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