Exclusive Conversation With Ron Paul: The Future Of The Federal Reserve

Currency and New Goods

Last one. To dispel the fallacy that when new goods enter the market, new currency needs to as well, consider the following situation:

Company A produces a widget. Company A decides to price this widget at $20. This prompts the Federal Reserve to produce a $20 bill. However, no one wants to buy this widget, so that $20 just gets added to the supply and all other goods that are actually traded increase in price by a portion of that $20 bill.

Furthermore, no one knows who "deserves" to get that $20 bill in the first place. Does it go to another individual that produces a product to trade for the widget? If so, that would defeat the purpose as the two parties can simply barter for it. Would it go out on a raffle? If so, there isn't a guarantee that it would be used to buy that widget. For those who actually want the widget, do you hold a raffle to see which one gets it with the stipulation that it gets spent on that widget? Again, defeats the purpose as all you have managed to do is provide a free widget to the winner of the raffle at the expense of everyone else as this person didn't produce anything to trade for it.

Currency is but a means to store the value of your item. While the object itself can fluctuate in price, once you trade it for that currency unit, the concept is that you've now frozen the value of that currency unit at the value at which you've sold your item. What you've produced doesn't naturally decline in value over time, so simply producing more currency each year defeats the purpose of the currency. If the individual holds onto what he produces and doesn't convert it into currency, it can either increase or decrease in value depending on what it is (perishable, non-perishable) or the prevailing supply/demand for that item, so saying that price inflation is acceptible because ALL goods and services sold decrease in value over time is fallacious.

When that product or service is sold, that value needs to remain constant with prices of other goods and services on the market left to fluctuate. Currency, like anything else, has a price that floats up and down in relation to the goods and services it can buy. If prices increase after you sell your product or service, then it should be wise to save money as prices can decline tomorrow. However, when we have a Fed simply printing up new money all the time, saving is no longer a viable option.

By eliminating the savings incentive, because consumers know that the value of their money will always decline, you lose the savings base necessary to save for future investments. This destroys the capital base and reduces the ability of an economy to produce new goods or servies. Nothing to save = nothing to invest into new products. This is why the fractional reserve system was created, as a stop-gap effort to incentivise new investments. However, as detailed in my previous post, this does little more than push the boom/bust cycle as there aren't any actual savings with which to buy

Justin Murray of IN @ Jun 26, 2009 16:51:22 PM

The Fed, Inflation and Price Disruption

Pricing is THE key to maintaining a healthy market. The fallacy the backers of the Fed cling to is that maintaining prices is important. This is false, so very false. Allowing pricing to float freely is critical to a healthy economy. The Fed undermines this by trying to keep "evil" deflation from ocurring.

Pricing dictates how much demand there is for a product relative to the supply. In a free market, when prices increase, it's because there is an increase in demand without a corresponding increase in supply. This signals entrepreneurs and businesses that there is a potential shortage in that area. Price deflation signals the opposite, the supply is increasing and/or demand is decreasing in that product. Deflation signals to the market to cut back production of that particular good or service.

The Fed and monetary inflation disrupts this mechanism. When prices increase, we now have to ask ourselves how much of that price increase, if any, is due to increasing demand in relation to the supply and how much of it is due to new currency entering the market. This ratio is impossible to determine as "official" numbers, like CPI, are flawed since they assume the demand and supply of all the goods in the basket is a constant. It is highly possible (as we've witnessed first hand with housing) that the price of a good or service can increase yet the demand is declining. But, since the price is increasing, this signals to people that they need to produce more of it despite the fact there are no new customers to take on the increasing supply.

So, because of inflation created by the Fed and fractional reserve banking, we get an excess of inventory built without customers, leading to an inevitable bust when the loans become due.

Interest rates follow the same logic. High interest rates indicate that people are not saving for future purchases so it would be unwise to invest in long term capital projects since people won't have the available income in the future to partake in the product. Low interest rates indicate that people are currently saving for future consumption, signaling for an increase in capital production to take advantage of those future purchases.

Again, the Fed destroys this mechanism by artificially holding down interst rates. Businesses are given the signal that there are many people witholding for future purchases and to borrow for business expansion, but when the future comes and those customers never materialize since no one actually saved anything, the business fails. Boom and bust.

Individuals and businesses may not understand the backing logic, but they do understand that you don't borrow when interest is high, don't sell when prices are low and to lend when interest is high. They also understand that you borrow when interest is low, sell when prices are high and don't lend when interst is low. This mechanism does a good job of eliminating economic wide disruption, leaving failures only to poor business models.

Justin Murray of IN @ Jun 26, 2009 16:34:51 PM

Hybrids Fail Fastest

"In 1968 Bretton-Woods inevitably began to crumble because gold had been artificially held to a value of $35/oz for several decades even though any idiot knew its commodity value had grown to many times that. DeGaulle simply said "Ok, here are my dollars, give me my gold at $35/oz" and the whole ridiculous house of cards came tumbling down, causing the stagflation of the 1970s. But this lunatic wants to peg the money supply to a commodity value again, so we can relive the 70s and 80s."

Mr. Whittingham, what you were seeing was a phenomenon where hybrid systems fail faster than pure centrally planned systems. The Federal Reserve was behaving as if it were a pure fiat monetary system yet continued to guarantee gold. Instead of removing currency from the market to reduce the market value of gold to the $35/ounce, the Federal Reserve continued to print new currency despite the lack of new gold entering the market.

The failure came from a central organization trying to hold printed currency to an exact level of gold on the planet. When gold was below the pegged $35/ounce level, foreign nations sold the US gold for dollars and traded the dollar for goods and services, making a profit. When gold traded above $35/ounce, foreign nations bought dollars with thier currency then turned around and traded it for gold, making a profit after that gold was sold elsewhere at the market rate.

The basic failing of this was there wasn't a 1:1 ratio of gold to dollars in circulation and individuals were not permitted to extract gold reserves for that currency, only foreign banks. A further problem was the Federal Reserve was willing to trade unbacked currency for backed US dollars, eliminating parity.

It would have been a simple fix to reject all non-backed currencies as a medium of trade (ie, someone in France would not be permitted to purchase US goods in Francs or otherwise trade Francs for Dollars), but that would have defeated the stated purpose of Bretton-Woods, the fleecing of gold reserves from America.

Furthermore, Bretton Woods also failed because the US, more specifically President Johnson and the Congress Critters, insisted on waging the Vietnam War and creating the "Great Society". They simply lacked the economic backing to pay for these and borrowed copiously from foreigners with currency the USA failed to back with gold bullion. Thus, when France called in its chips, Nixon found out that the US didn't have enough of the yellow stuff and unilaterally told the Frogs that we weren't going to honor it.

The general point is that the Bretton Woods system failed because American politicians wanted to spend above and beyond what it was capable of obtaining through taxation. We switched to a pure fiat system because the political class wanted to be able to borrow and spend beyond the tax base which amounted to the same result, fiscal failure.

A backed currency doesn't fail, what fails are leaders who think money is an unlimited resource.

Justin Murray of IN @ Jun 26, 2009 15:55:59 PM

FED creates the bubbles

I read one comment from an individual who thinks that the money supply must grow with the economy(the fed has created an environment of permanent inflation of the money supply regardless of whether the economy is growing or contracting by the way).The medium of exchange(money) just serves a numeraire function. Beyond a certain threshold, the supply of the money is irrelevant. Prices will adjust to the existing supply of money and in a freee maket in money the puchasing power of the (medium of exchange(money) will go up.It did this in the nineteenth century despite various National Banking sches and the existence of fractional reserve banking.Inlation is simply an increase in the supply of the money with the eventual effect of price increase.It is not natural.It is caused by our cartelized,centrally-planned banking system known as the Federal Rederal System.

JOSEPH H. PEEELER of FL @ Jun 26, 2009 14:12:52 PM

Whittingham, I think you don't understand money

"Aren't you people Republicans? Don't you believe in the creation of wealth? Yet you don't want the money supply to grow in proportion to the wealth that's created. What a bunch of utter loonies!"

And that comment is why. The growth of wealth is not necessarily measured in how many units of currency is circulating; it is measured by the ratio between that figure and THE PURCHASING POWER of the currency. So, if there are ten dollars circulating in 2000, and a dollar buys a soda, and in 2001 there are STILL only ten dollars circulating, but a dollar buys TWO sodas, wealth has been created and there has been no increase in the number of dollars circulating. The only problem that can be envisioned for a growing populace dealing with the same number of monetary units is the eventual inability to make change on a small purchase. Solving that problem by creating dollars using the system in place now is the equivalent of taking a percentage of everyone's purchasing power and investing it in new dollars, which are not then redistributed to the populace in a fair manner (such a task would be absurdly difficult) but rather is ____. Given to someone. That is what we want to find out, in exposing the FED.

I would hope you can understand that.

Kevin Nickoson of IN @ Jun 26, 2009 13:45:32 PM

Two Important Things about the Federal Reserve

1. All money issued through the Federal Reserve Bank

is created as a Debt of the receivers TO the Federal

Reserve.

2. The Federal Reserve Banks are a privately owned

Central Banking system.

Do you own math and due diligence to understand WHO

owns all which is Dollar Denominated.

Robert M. Stockmann of TX @ Jun 26, 2009 13:32:13 PM

Remember the core problem

remembering that the "FED" essentially is set up so they become an "entity" with in the United States yet remaining separate to us. That's why Ron Paul is working to expose this with facts! We could be lost in debate about the in between all day. If you don't understand what your debating fully then it becomes lost in translation with a non-moving forward outcomes. The fact of the matter is the "FED" is working against us as a people and there system of operation is, and has been, devastating to our country. Even if you don't agree with Ron Pauls alternative, not to mention it still would be better than what is being implemented right now, you can't deny the fact of the matter!

We as the people really need to educated our selves on the issues at hand. Especially if you wish to restore the core of our country.

Llisa Fraggos of MA @ Jun 26, 2009 13:27:06 PM

Jeff Wittington

"In 1968 Bretton-Woods inevitably began to crumble because gold had been artificially held to a value of $35/oz for several decades even though any idiot knew its commodity value had grown to many times that. DeGaulle simply said "Ok, here are my dollars, give me my gold at $35/oz" and the whole ridiculous house of cards came tumbling down, causing the stagflation of the 1970s."

Didn't Nixon's wage and price controls also have an effect on stagflation? Even if the artificial holding of gold value was the culprit, shouldn't they have simply allowed the price of gold to circulate naturally.

Gold has held its relative value for 5,000 years. Some house of cards. They must be titanium indestructible cards.

Alex of IN @ Jun 26, 2009 12:12:10 PM