The debate over whether we will have inflation or deflation has been answered: First deflation, then inflation - and both may be on a massive scale.

Debt-based money is being destroyed by credit contraction led defaults. On the real accounting books, not the ones used to produce government statements for public consumption, the amount of dollars being destroyed currently exceeds the amounts of new fiat dollars coming into the system.   Basket cases for the last few years, the US dollar, and to an even greater extent the Japanese Yen, are zooming up against all other fiat currencies, oil and gold.

In an environment of both de-leveraging and deflation, rather than launching a new wave of money creation to free up frozen credit markets, the FED and its co-conspirators are currently buying up distressed companies and properties with their new bailout bill credits.

The endgame looks like this: After they have acquired full ownership and title from the weak hands of leveraged debtors who built their portfolios on margin and cheap credit, the serious new money creation will commence.

Those who will have just completed scooping up ownership and control for pennies on the dollar, will turn around and pay off their own new debts they took on in the process with inflated or even hyper-inflated dollars. It's good to be king.

One monkey wrench in the system could be the Arab dictators we have been propping up and the communist Chinese central bank made rich from all the manufacturing companies we helped create under its control. Together, this team, if they are not totally in league with the criminals who set this mess up in the first place, might decided to create a new monetary system sans the USD. 

There is no honor among thieves.

Could a world reserve currency like a gold backed Dinar be in the works?

Judge for yourself.

For those of us who are convinced that the unprecedented, recent and anticipated increases in the money supply threaten to destroy the dollar, our freedom, and our prosperity, the big question is: how do we transition from our present system of Federal Reserve fiat money to sound money as defined by the Constitution without severe economic dislocations?

Ron Paul answers this question by promoting the establishment of competing currencies in the video (embedded directly below), "Laptop Brigade: Ron Paul on Monetary Reform," which consists of clips from a couple of TV interviews with Ron Paul as well as an interesting clip of Ron Paul schooling Fed Chairman Bernanke about the evils of inflation during a congressional hearing.



Ron Paul has outlined such a transition to competing currencies in considerable detail in his "Statement on Competing Currencies" before the House of Representatives on February 13, 2008; however, to my knowledge his recommended steps and corresponding legislation to accomplish this haven't been gathered together before into one document.

Below I'll incorporate his complete speech into this blog, then insert into the body of the speech links (with explanatory comments) to the corresponding legislation that he introduced in separate pieces during 2007 and 2008.

Congressman Ron Paul

Statement on Competing Currencies

February 13, 2008

Madam Speaker, 

I rise to speak on the concept of competing currencies.  Currency, or money, is what allows civilization to flourish.  In the absence of money, barter is the name of the game; if the farmer needs shoes, he must trade his eggs and milk to the cobbler and hope that the cobbler needs eggs and milk.  Money makes the transaction process far easier.  Rather than having to search for someone with reciprocal wants, the farmer can exchange his milk and eggs for an agreed-upon medium of exchange with which he can then purchase shoes.

This medium of exchange should satisfy certain properties:  it should be durable, that is to say, it does not wear out easily; it should be portable, that is, easily carried; it should be divisible into units usable for every-day transactions; it should be recognizable and uniform, so that one unit of money has the same properties as every other unit; it should be scarce, in the economic sense, so that the extant supply does not satisfy the wants of everyone demanding it; it should be stable, so that the value of its purchasing power does not fluctuate wildly; and it should be reproducible, so that enough units of money can be created to satisfy the needs of exchange.

Over millennia of human history, gold and silver have been the two metals that have most often satisfied these conditions, survived the market process, and gained the trust of billions of people.  Gold and silver are difficult to counterfeit, a property which ensures they will always be accepted in commerce.  It is precisely for this reason that gold and silver are anathema to governments.  A supply of gold and silver that is limited in supply by nature cannot be inflated, and thus serves as a check on the growth of government.  Without the ability to inflate the currency, governments find themselves constrained in their actions, unable to carry on wars of aggression or to appease their overtaxed citizens with bread and circuses.

At this country's founding, there was no government controlled national currency.  While the Constitution established the Congressional power of minting coins, it was not until 1792 that the US Mint was formally established.  In the meantime, Americans made do with foreign silver and gold coins.  Even after the Mint's operations got underway, foreign coins continued to circulate within the United States, and did so for several decades.

On the desk in my office I have a sign that says: “Don't steal – the government hates competition.”  Indeed, any power a government arrogates to itself, it is loathe to give back to the people.  Just as we have gone from a constitutionally-instituted national defense consisting of a limited army and navy bolstered by militias and letters of marque and reprisal, we have moved from a system of competing currencies to a government-instituted banking cartel that monopolizes the issuance of currency.  In order to introduce a system of competing currencies, there are three steps that must be taken to produce a legal climate favorable to competition.

The first step consists of eliminating legal tender laws. Article I Section 10 of the Constitution forbids the States from making anything but gold and silver a legal tender in payment of debts.  States are not required to enact legal tender laws, but should they choose to, the only acceptable legal tender
is gold and silver, the two precious metals that individuals throughout history and across cultures have used as currency.  However, there is nothing in the Constitution that grants the Congress the power to enact legal tender laws.  We, the Congress, have the power to coin money, regulate the value thereof, and of foreign coin, but not to declare a legal tender.  Yet, there is a section of US Code, 31 USC 5103, that purports to establish US coins and currency, including Federal Reserve notes, as legal tender.

[Ron Paul introduced the Honest Money Act, H.R. 2756
(http://thomas.loc.gov/home/gpoxmlc110/h2756_ih.xml), on June 15, 2007;
this bill would repeal our nation's legal tender laws.]

Historically, legal tender laws have been used by governments to force their citizens to accept debased and devalued currency.  Gresham's Law describes this phenomenon, which can be summed up in one phrase:  bad money drives out good money.  An emperor, a king, or a dictator might mint coins with half an ounce of gold and force merchants, under pain of death, to accept them as though they contained one ounce of gold.  Each ounce of the king's gold could now be minted into two coins instead of one, so the king now had twice as much “money” to spend on building castles and raising armies.  As these legally overvalued coins circulated, the coins containing the full ounce of gold would be pulled out of circulation and hoarded.  We saw this same phenomenon happen in the mid-1960s when the US government began to mint subsidiary coinage out of copper and nickel rather than silver.  The copper and nickel coins were legally overvalued, the silver coins undervalued in relation, and silver coins vanished from circulation.

These actions also give rise to the most pernicious effects of inflation.  Most of the merchants and peasants who received this devalued currency felt the full effects of inflation, the rise in prices and the lowered standard of living, before they received any of the new currency.  By the time they received the new currency, prices had long since doubled, and the new currency they received would give them no benefit.

In the absence of legal tender laws, Gresham's Law no longer holds.  If people are free to reject debased currency, and instead demand sound money, sound money will gradually return to use in society.  Merchants would have been free to reject the king's coin and accept only coins containing full metal weight.

The second step to reestablishing competing currencies is to eliminate laws that prohibit the operation of private mints.  One private enterprise which attempted to popularize the use of precious metal coins was Liberty Services, the creators of the Liberty Dollar.  Evidently the government felt threatened, as Liberty Dollars had all their precious metal coins seized by the FBI and Secret Service this past November.  Of course, not all of these coins were owned by Liberty Services, as many were held in trust as backing for silver and gold certificates which Liberty Services issued.  None of this matters, of course, to the government, who hates to see any competition.

The sections of US Code which Liberty Services is accused of violating are erroneously considered to be anti-counterfeiting statutes, when in fact their purpose was to shut down private mints that had been operating in California.  California was awash in gold in the aftermath of the 1849 gold rush, yet had no US Mint to mint coinage.  There was not enough foreign coinage circulating in California either, so private mints stepped into the breech to provide their own coins.  As was to become the case in other industries during the Progressive era, the private mints were eventually accused of circulating debased (substandard) coinage, and in the interest of providing government-sanctioned regulation and a government guarantee of purity, the 1864 Coinage Act was passed, which banned private mints from producing their own coins for circulation as currency.

[Ron Paul introduced the "Free Competition in Currency Act of 2007, H.R. 4683 (http://thomas.loc.gov/home/gpoxmlc110/h4683_ih.xml), on December 13, 2007. This bill would repeal certain superfluous sections of the U.S. Code relating to uttering coins of gold, silver, or other metal, and making or possessing likeness of coins, which would eliminate the legal prohibitions against operating private mints.]

The final step to ensuring competing currencies is to eliminate capital gains and sales taxes on gold and silver coins.  Under current federal law, coins are considered collectibles, and are liable for capital gains taxes.  Short-term capital gains rates are at income tax levels, up to 35 percent, while long-term capital gains taxes are assessed at the collectibles rate of 28 percent.  Furthermore, these taxes actually tax monetary debasement.  As the dollar weakens, the nominal dollar value of gold increases.  The purchasing power of gold may remain relatively constant, but as the nominal dollar value increases, the federal government considers this an increase in wealth, and taxes accordingly.  Thus, the more the dollar is debased, the more capital gains taxes must be paid on holdings of gold and other precious metals.

Just as pernicious are the sales and use taxes which are assessed on gold and silver at the state level in many states.  Imagine having to pay sales tax at the bank every time you change a $10 bill for a roll of quarters to do laundry.  Inflation is a pernicious tax on the value of money, but even the official numbers, which are massaged downwards, are only on the order of 4% per year.  Sales taxes in many states can take away 8% or more on every single transaction in which consumers wish to convert their Federal Reserve Notes into gold or silver.

[Ron Paul introduced the "Tax-Free Gold Act of 2008," H.R. 5427 (http://thomas.loc.gov/home/gpoxmlc110/h5427_ih.xml), on February 13, 2008. This bill specifies that "no tax may be imposed on (or with respect to the sale, exchange, or other disposition of) any coin, medal, token, or gold, silver, platinum, palladium, or rhodium bullion, whether issued by a State, the United States, a foreign government, or any other person."]

In conclusion, Madam Speaker, allowing for competing currencies will allow market participants to choose a currency that suits their needs, rather than the needs of the government.  The prospect of American citizens turning away from the dollar towards alternate currencies will provide the necessary impetus to the US government to regain control of the dollar and halt its downward spiral.  Restoring soundness to the dollar will remove the government's ability and incentive to inflate the currency, and keep us from launching unconstitutional wars that burden our economy to excess.  With a sound currency, everyone is better off, not just those who control the monetary system.  I urge my colleagues to consider the redevelopment of a system of competing currencies.

[Ron Paul introduced the "Federal Reserve Board Abolition Act," H.R. 2755 (http://thomas.loc.gov/home/gpoxmlc110/h2755_ih.xml), on June 15, 2007. This bill would provide for the liquidation and abolishment of the Board of Governors of the Federal Reserve System and each Federal reserve bank during a one-year period beginning with passage of the bill. To minimize disruptions to our economy, introduction of this bill could be deferred until competing currencies would be established according to the three steps outlined above.]



 

Most of you are familiar with Ron Paul's dismissal of the recent aggressive actions of the federal government to fix our nation's financial crisis as an attempt to fix problems that were caused by  creating money out of thin air by creating still more money out of thin air. However, I'm guessing that very few of you are familiar with similar warnings about the danger of allowing the Federal Reserve to create money out of thin air from Robert Welch in the 1960s and 1970s. Here's an example of Robert Welch's warnings about fiat money in 1970:

We are now being steered, of course, directly and rapidly, into the use of fiat money. That is, money which officially and admittedly has no value, except some theoretical credit given it by the edict of government....

But fiat money has no such justification, even in theory. It has never worked, except to enable profligate governments to steal vast sums from their citizens....

The next and final step ... with regard to money is undoubtedly to absorb all the moneys of the world, including the American dollar, into one international currency....

But the unwavering goal of all the thought and action that you do devote to the fiscal problems of our times should be very clear. It is to have this country return to the use of money which depends for its purchasing power entirely on the intrinsic value of the money itself. Then, and then only, money becomes and remains a useful servant of man, rather than his master or the means of his enslavement.        -- Robert Welch, JBS Bulletin, April 1970 

In light of all the political turmoil over the recent bailout bill and the ongoing, unprecedented actions by the Treasury Department and Federal Reserve to socialize the financial sector of our economy, take a look at what Robert Welch recommended in 1974 as the most important steps towards preserving the freedom and prosperity of our nation.

Here's a nine-minute video of excerpts from two speeches delivered by Robert Welch on March 9, 1974. See for yourself just how similar Robert Welch's 1974 recommendations are to Ron Paul's 2008 positions.

The bottom line is that both Robert Welch and Ron Paul are ardent advocates of gold-backed money as the necessary foundation for our freedom and prosperity.

If you'd like to learn more about the connection between sound money and freedom, read The Creature from Jekyll Island: A Second Look at the Federal Reserve, and view online "Money, Banking and the Federal Reserve" (click on the video directly below).