Dr. Ron Paul has published a new book this year, entitled “Pillars of Prosperity: Free Markets, Honest Money, Private Property,” which contains an extensive compilation of his thoughts on economics and presents an excellent opportunity for a special book review. This the first installment of a longer review of the entire book, the full review of which will examine each individual part of the book and present a summary of the positions and arguments presented, which have been woefully underrepresented to most Americans.”Part 5 – Money and Banking: Gold versus Fiat” is discussed here.
This part of the book is by far the longest, taking up nearly half of the total content in almost 200 pages. As such, it would be improbable to do a completely thorough review of such a long section, so only a brief overview of some of the topics discussed will be presented. From the title it is clear that Ron Paul discusses his views on monetary policy, the banking system, and his preference of stable money backed by gold.
Many of the ills of big government are a direct result of our flawed monetary policy, according to Paul, which encourages government and people to spend more than they take in and live beyond their means. Since the politicians in Washington are not able to fund through tax revenue all of the welfare benefits and keep the American Empire spread throughout the world, and they can not borrow enough from overseas to make up the shortfall, inflating the money supply through the Federal Reserve’s printing press is relied upon. Thus, one of the main ways that Paul recommends reducing inflation, decreasing the size of the government, and preventing unnecessary wars is to decouple money and politics by deregulating the value and supply of money, and end the system of the Fed manipulating interest rates and inflating the currency.
Inflation is not a problem of the free market. Only the government can cause prices to rise by diluting the supply of money and printing more of it. When the government blames rich Arabs for rising fuel costs, or labor unions, or greedy businessmen, it is shifting the focus to symptoms. The real cause of the inflation, however, is with the government, as prices would generally fall in a free market economy. This problem, though, is not even recognized by the politicians. When weaknesses appear in the economy, both the right and left sides of the aisle, instead of addressing the problem of government intervention, request that the Federal Reserve keep inflating the money supply, at ever increasing rates. Combined with the fractional reserve banking system, which allows a bank to loan out far more money than it has on deposit, this system greatly debases the value of the dollar.
Paul cautions that this system can not last forever, although the United States has done a remarkable job so far of keeping the system of paper money going. This is more a result of collusion between central banks of the world and the military might of America, though, rather than a vote of confidence in fiat currencies themselves. For decades, the government has been able to export its inflation by selling Treasury bills to foreign governments. Through this method, the banking system creates even more dollars that keep up the perception of wealth, even though Americans are producing less and living far beyond their means.
But even in the event that foreign central banks slow down their purchases of US debt, the Federal Reserve is there to step in. The Fed will increase its own purchase of government debt in order to prop up the dollar. The central banks also devise agreements whereby they can prop up or drive down the value of certain currencies of foreign nations, or try to drive down the price of gold. Propping up the dollar by helping out the Federal Reserve and buying Treasury bills is high on their list of priorities, due to the dollar’s status as reserve currency of the world. Keeping the price of gold down, though, is even more important.
Concern for the price of gold and the manipulation of that price through the sale and leasing of gold concerns Paul. He states that the Fed and other central banks have dumped gold on the market in order to keep its market price artificially low. The banks do this because a high gold price is a vote of “no confidence” in the paper system, which would lead to more people recognizing the real weaknesses in fiat money. This is a realization that the central banks would rather people do not have, as they would lose their ability to control the wealth of countries.
It is this manipulation of the currency that seems to concern Paul most. Besides the fact that the Constitution gave Congress no authority to create a central bank to print paper money, Congress goes even further. It ignores its responsibility, stated in the Constitution, to maintain a sound money system. First of all, the Federal Reserve is not audited, and only provides information to Congress on its own terms, even discontinuing the publishing of important economic figures. The Government Accountability Office is forbidden to audit the Fed, due to its independence from politics. However, Paul states that this independence is nothing more than a legal fiction, and Congress should not be ignoring its responsibility to provide constitutional money and a free market. The Fed promotes the opposite of both of these.
Another extra-governmental agency that Paul criticizes is the International Monetary Fund, for its gold sales and the fact that it is an international welfare agency funded by American taxpayers. Because of its nature as a foreign aid vehicle providing money to Third World nations whose dictators steal the money and whose people will never be able to pay back the loans, Paul believes it should be under the control of Congress. Especially since the IMF has stores of gold that it could sell but instead requests money from the American government, its independence and usefulness are very questionable.
How did the dollar become the reserve currency of the world, giving the American government a license to print money, inflate the currency, provide welfare to individuals, foreign governments, and corporations, and maintain a worldwide empire? Paul sees the beginnings of the system appearing in the first part of the 20th century with dollar diplomacy. After World War II, when the dollar became the basis of the international gold exchange standard, it became the world’s preferred reserve currency. When the US defaulted on its gold payments in 1971, it managed to persuade Saudi Arabia and OPEC to price oil solely in dollars. This contributed to the furtherance of dollar hegemony, as there was a worldwide demand for dollars with which to purchase oil. Also, foreign producing countries, who wished to sell their products in rich American markets, received dollars for their goods, spreading the currency even further.
The overwhelming military might of the United States must also not be overlooked, according to the book. The system created an artificial demand for the dollar, which had been “as good as gold” until 1971, and then was backed with oil sales. But the real backing of the dollar is the military, which allows America to rule its empire without saving money or producing goods.
As mentioned above, this is only a very short overview of some of the issues that Paul discusses in this section of the book. Just a few other ones worthy of mention include a lengthy defense of the gold standard which presents his arguments against the most common positions of opponents of the system, the impossibility of monopolies in a free market, the uselessness of the CPI and PPI indicators in gauging the strength of the market, and how much money has been spent on welfare but which has resulted in more homeless than ever. Some of his interactions with Federal Reserve chairman Alan Greenspan are also transcribed, which clearly indicate the futility of asking government bureaucrats a question, as they will only be met with unresponsive answers on technical points of difference, rather than addressing the substance of the argument. The overall concern with stable money and free markets, and arguments against the fiat currency, fractional reserve banking system, though, permeates throughout all of Dr. Paul’s selections in this part of the book, and sets up the reader for the final sections.
A Review of Part V of Ron Paul's "Pillars of Prosperity"
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