Congressman Ron Paul’s “Free Competition in Currency Act” Won’t Solve the Problem But Raises Vital Issues

While Congressman Ron Paul’s Free Competition in Currency Act is not a workable proposal, it points to a deeply serious problem with the Federal Reserve System that must be faced if the U.S. economy is to have a future.

Over the last 40 years the Federal Reserve, with the acquiescence of Congress and the executive branch, has become the primary regulator of the economy. The prevailing philosophy is called monetarism, and it’s based on the raising and lowering of interest rates.

This period has been marked by the successive creation and destruction of several gigantic investment bubbles. After the Federal Reserve brought on the recession of 1979-83 by raising interest rates to over 20 percent, we had a bubble during the Reagan/G.H.W. Bush years based on business mergers and acquisitions. It was then that the fulcrum of the U.S. economy shifted from manufacturing to finance. This bubble collapsed in a recession that brought Bill Clinton to the presidency in 1992.

Then, using the strong dollar to attract foreign investment, the Federal Reserve and the Clinton administration floated the U.S. economy throughout the 1990s on what was called the dot.com or “tech” bubble. This bubble collapsed in 2000-2001 with an enormous loss of asset value to U.S. and foreign investors, including massive loss of pension funds.

In 2000 George W. Bush was elected president. Instead of taking steps to rebuild the U.S. manufacturing economy, the Federal Reserve under Chairman Alan Greenspan slashed interest rates and removed the regulatory controls, resulting in a huge inflation of home prices through the housing bubble. Cash entering the economy through mortgage lending was the economic engine for the Bush presidency. Taxes from the housing bubble paid for much of the Afghanistan and Iraq wars.

Other investment bubbles in equities, hedge funds, derivatives, and commodities also took off. All this collapsed in the financial crash of October 2008. Now, President Barack Obama is trying to restart the U.S. economy by a huge infusion of federal government money through the largest increase in the national debt since World War II.

The policy of creating economic growth through credit bubbles is speculation-based and highly inflationary. It’s why the U.S. dollar has lost 85 percent of its value since 1965. But credit will have to be tightened soon, and the federal deficit will have to be reduced to keep the value of the dollar from declining further. This is likely to lead to a very weak recovery from the current recession and will leave households, businesses, and government at all levels still deeply in debt if not bankrupt.

So Congressman Paul is saying, quite logically, that the Federal Reserve needs to be attacked in its very ability to create these destructive inflationary bubbles. The Free Competition in Currency Act would attempt to do this by introducing gold and silver as a legal currency along with Federal Reserve Notes.

Unfortunately, there is not enough gold and silver in existence to fund the monetary requirements of modern economies. Trying to restore a metallic currency that never really existed in sufficient quantity since this nation was founded would only replace control of the economy by the banking system with control by gold and silver speculators.

Congressman Paul’s solution is largely ideology-driven to satisfy his libertarian constituency. That’s why legislation like this which has no chance of passing and wouldn’t work if it were implemented is more a political protest than a genuine attempt to solve the problem.

A metallic-based currency, one of whose purposes is to uphold the value of money due to its scarcity, is based on a flawed concept. Money, even based on gold and silver, does not derive its value from being scarce nor is an abundance of money itself inflationary.

Actually, money should exist in sufficient quantity and availability to move all the legitimate trade that is waiting to be moved. Money is a medium of exchange and should be nothing more than that. When used by the banking system for wanton speculation, as money is today, it’s an abuse. But to artificially restrict the availability of money when people need it to trade and earn a living is also an abuse.

The underlying purpose of the proposed Free Competition in Currency Act is actually to support the private minting of metallic coinage such as the “Liberty Dollar” and free such coinage from the sales and capital gains taxes that reduce its value. But a serious proposal to make privately-minted money usable in trade should also standardize its gold and silver content and fix its value, which this legislation fails to do. Therefore the only value of the Act would be to give the Liberty Dollar special privileges as an investment option.

Nevertheless, something must be done about the disastrous state of monetary policy, and none of the current proposals to restructure the financial regulatory system or reform the Federal Reserve would address the underlying issue of the inflationary nature of a monetary system based on federal government debt, financial speculation, and the supremacy of banking over the manufacturing sector.

A better solution would be to look at the dozens of local currency systems that are springing up around the nation, as private cooperatives begin to print and distribute their own local currencies. These currencies do what money is supposed to do. They act as a medium of exchange that monetizes the labor and resources of localities and regions.

These currencies consist of alternative paper notes and computer entries. As this movement continues, it is conceivable that someday different currencies could begin to be knitted together by computer databases and networks, so that their value would reach across jurisdictional lines and become a new type of national or even international monetary supply.

This is what governments should be promoting, Think what would happen if first cities, then states, then the federal government began to accept these currencies in payment of taxes, fees, or utility bills. Such currencies would be based on the value of production within the economy and very well could replace Federal Reserve Notes in many instances.

This is already happening in business bartering networks and with the use of other forms of value, such as airline frequent flyer miles, exchanged in trade. Of course the same thing is happening in many other parts of the world. Local currencies owned and distributed by producer cooperatives rather than dictatorial central banks allied with central governments deeply in debt may very well be the wave of the future.

Of course local currencies take us in the opposite direction of the tyranny of the international financiers and their desire to consolidate world currencies into the handful they can effectively control. Congressman Ron Paul is to be commended in challenging the legitimacy of the Federal Reserve money monopoly and getting people to look in the direction of a monetary system that serves rather impoverishes us.

Richard C. Cook is the author of We Hold These Truths: The Hope of Monetary Reform, scheduled to appear by September 2007. A retired federal analyst, his career included service with the U.S. Civil Service Commission, the Food and Drug Administration, the Carter White House, and NASA, followed by twenty-one years with the U.S. Treasury Department. He is also author of Challenger Revealed: An Insider’s Account of How the Reagan AdministrationCaused the Greatest Tragedy of the Space Age. Read other articles by Richard, or visit Richard's website.

8 comments on this article so far ...

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  1. spinnikerca said on December 16th, 2009 at 3:13pm #

    Ron Paul’s goal is to hamper the ability of the Fed to print money from thin air, through competition. More, his bill is to let those who don’t trust the Fed’s policies save in gold and silver without the devaluation of the dollar, measured in the price of metals rising, being taxed as if it were income. Even Mexico allows its citizens to do that. We wouldn’t be putting the entire economy on a gold standard (although under the Constitution, that is what we should have) we would merely let the prudent opt out of using federal reserve notes.

    His real goal would be, were the Constitution to allow it, to have the dollar backed by value set by the market as to what was best, but he has mentioned a basket of currencies as an idea he likes better than fiat money. He really does have ideas for the way to get to stable money from ‘here’. He has been thinking about it for a long time.

  2. spinnikerca said on December 16th, 2009 at 3:15pm #

    and to Mr. Dawson, bimetalism is an issue, but it is fractional reserve banking that caused the real problems. The problems with bimetalism were minor in comparison, as I understand it. You may have deeper insights, but ad hominum attacks won’t win the argument.

    This bill would only allow those who WANT to use competing currencies to use them.

  3. Michael Dawson said on December 17th, 2009 at 5:03pm #

    Spin, take a look at the Jacksonian era. People had to guess what everything was worth, because “competing currencies” destroyed collective valuation. It caused an economic depression.

    By the way, I didn’t attack Mr. Cook personally. I said his ideas are wrong and seem to be uninformed about relevant history.

  4. Jeremy said on December 18th, 2009 at 7:03am #

    Dumb, dumb, and dumber..

    We have commodities, we can use them as money – period.

    Gold and silver will naturally win in competition because they are the easiest to use as money.

    The idea that there isn’t enough gold and silver is sooo stupid its laughable. I mean retarded stupid. Even if there was only one oz of silver in the whole world, that would mean you just would use much smaller units. As it stands however, there are BILLIONS of ounces of silver in circulation and much more in the ground. It gets pulled out of the ground by where I live all day.

    Silver currency is already being circulated by the American Open Currency Standard and its member merchants. Government will end.

  5. Richard C. Cook said on December 18th, 2009 at 7:26am #

    During the Jackson era, the local currencies were meshed by a very effective system of currency brokers. It was an excellent system that was destroyed only when the big New York banks got the government to pass the National Banking Act in 1863 which included a provision that unjustly taxed the local currencies out of existence. The Jackson depression Mr. Dawson refers to came through the Specie Circular of 1836 that decreed only gold or silver could be used to purchase public land. It was this reversion to metallic currency that was ruinous.
    And to Jeremy, who thinks I am so stupid, let me point out that the earliest standard for world currency in the ancient Middle East was the cow. It was much easier for the cow to be understood as a standard of value than shiny metal. In fact the gold currency that came into existence back then used the cow as its standard of measure. Plus ordinary people can raise cows and acquire wealth without having the market cornered by the Rothschilds who broker the price of gold out of London in the daily price fixing. So I would suggest to Jeremy and his fellow geniuses that they urge Congressman Ron Paul to introduce legislation making cows legal tender. It would make a lot more sense than gold or silver and might keep the monetary system out of the hands of the Rothschilds and their ilk. Another excellent proposal has come from a professor at Virginia Tech who proposed that bricks become legal tender. They are portable, identifiable, easy to standardize, and, unlike gold and silver coins, can be made by anyone with relatively inexpensive equipment. Yet they have the value of the labor that goes into making them. Money based on cows and bricks would be vastly superior to either Federal Reserve Notes or Dr. Paul’s mythical gold standard.

  6. Richard C. Cook said on December 18th, 2009 at 7:34am #

    For those interested, you can check out this PDF for a reference to Prof. Nic Tideman’s paper on “The Rationale for Brick Money.”
    http://www.science.vt.edu/facultystaff/AR/dept/econ-ar-05-06.pdf

  7. Leslie Jones said on December 18th, 2009 at 8:40am #

    I liked your article, Richard.

    However, as for your last comments, I’m not sure it makes good common sense to give poor people bricks to use as money with an oppressive rich elite. ;-)

    I think your strong questioning of the viability of this “gold standard” is starting to defeat your original point about rasing vital issues.

    Maybe it is “mythical” but it’s a better myth than one which states more of the same is going to get us anything but more of the same terrible results.

    Again, nice article

  8. Mark Herpel said on December 21st, 2009 at 11:33pm #

    Brilliant article…as usual. Silver seems the way to go, so we are stocking up or I should says stacking up. Of course, a paper currency backed locally by commodities or metal may end up being more practical for shopping and around town. Carrying 30 oz around in a bag on your hip may grow old. Also meshing silver with a simple digital transfer system like Loom.cc or Trubanc would then open up regional trade possibilities for all. No government needed :-)

    Happy Holidays,
    Mark
    http://www.twitter.com/dgcmagazine