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Must Be Stopped
By Rep. Ron
July 9, 2009
DC Our country currently finds itself in the
midst of the worst economic crisis since the 1930s and, as during all
economic crises, people search for the answer as to why this has happened.
Not only have large financial firms been affected, but also mainstays of
American industry such as GM and Chrysler, all the way down to the Mom & Pop
stores on Main Street. The easy way out is to blame the traditional
scapegoats: foreign governments, fraudulent businessmen, and greedy
speculators. But the real villain is far more sinister; the organization
entrusted with maintaining a stable dollar and touted as the guarantor of
economic stability the Federal Reserve.
In the United States, monetary policy has been the domain of the Federal
Reserve since its inception in 1913. Since that time we have had a number
of cyclical recessions, each one following a boom caused by the Federal
Reserve's loose monetary policy. The problem with the Federal Reserve is
that it interferes with market pricing functions. Interest rates are a
price just like any other and arise because of the fact that people prefer
to consume in the present rather than in the future. The extent to which
people defer present consumption is reflected in interest rates, which in a
free market are determined by the spontaneous interactions and decisions of
millions of people.
Fed intervention to set prices throws markets and interest rates out of
equilibrium. When the Federal Reserve pushes interest rates below what the
market rate would be, everyone wants to borrow money for long-term projects.
Shortages of loanable funds would occur, except that the Federal Reserve
has the ability to create bank balances out of thin air. The Fed can create
a bank ledger on paper, or on a computer, establish a balance of millions or
billions of dollars, and then spend these dollars out into the economy.
Loans become cheap, and the result of these lower interest rates is an
economic boom which eventually manifests itself as a bubble. Beginning in
2001, the Federal Reserve pushed interest rates to as low as one percent,
which after adjusting for inflation meant that the real interest rate was
negative, so businesses were actually making money by taking out loans.
This was the fuel for the housing bubble and the reason there are 19
million empty houses today.
of this awesome power to create money out of thin air, the Fed has jumped in
to stabilize ailing financial firms by pledging over $7 trillion through
various guarantee programs and credit facilities. This is equivalent to
over half of the entire nation's GDP. Over $1 trillion of this is already
in play, propping up banks and other institutions that should be allowed to
fail. All of this has taken place with no oversight by Congress. The Fed
was created by Congress, and it is unconscionable that we have allowed it to
act in such a way without our oversight. Currently the Federal Reserve's
credit facilities, open market operations, and agreements with foreign
governments and central banks are all exempt from any sort of audit or
oversight. Earlier this year I introduced the Federal Reserve Transparency
Act, HR 1207, that would remove all restrictions on Federal Reserve audits
and call for a full audit of the Federal Reserve System to be completed by
the end of 2010. At this writing, 245 of my fellow Congressmen have
cosponsored this bill and we hope to have hearings in the near future. In
the Senate, Republicans Jim DeMint, Mike Crapo and David Vitter have
cosponsored S. 604, companion legislation introduced by Bernie Sanders. I am
very encouraged by the tremendous growing momentum on Capitol Hill.
Founding Fathers never intended for a single entity such as the Federal
Reserve to have this much power. In fact, there is no authority in the
Constitution for the federal government to create a central bank, to enact
legal tender laws, or to print paper money. The Tenth Amendment is quite
clear that The powers not delegated to the United States by the
Constitution, nor prohibited by it to the States, are reserved to the States
respectively, or to the people. The states themselves are prohibited from
emitting bills of credit, i.e. paper money, arising from the Founders'
negative experiences with paper money during the Revolutionary War. Cheap,
un-backed, easily counterfeited paper money nearly lost the Revolution,
until the government returned to minting gold and silver coins.
Unfortunately, like too many other lessons learned by the Founders, the
painful experiences of paper money have been forgotten by those living in
the present. We even ignore the experiences of Germans in the 1920s,
Argentines in the 1980s, and Zimbabweans over the past decade. The Fed
doubled the monetary base last fall in a matter of months, and God help us
if any of this high-powered money begins to make its way through the
of the Fed is only the first step towards returning to where our Founders
intended this country to be. The Founders knew that paper money could ruin
a country, and drafted the Constitution in such a way that they thought
would ensure sound, commodity-backed currency. Unfortunately, the
Constitution was dispensed with long ago, and we find ourselves now
suffering under an unconstitutional regime of un-backed paper money. Until
we abolish the Federal Reserve and return to a stable currency that is not
able to be manipulated to create boom and bust cycles, we will continue down
the path of economic ruin.
Paul serves the fourteenth district of Texas and is honorary chairman of
Campaign for Liberty. His new book,
End the Fed
(Grand Central Publishing) will release on September 16th and is
available for pre-order on Amazon.
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