Ron Paul's golden rule

The Federal Reserve should answer to the government and dollars should be good as gold.

By Alexandra Zendrian
Forbes.com, New York
Thursday, January 7, 2010

http://www.forbes.com/2010/01/07/gold-standard-fed-audit-intelligent-inv...

U.S. Rep. Ron Paul of Texas will be Steve Forbes' guest Monday on "Intelligent Investing," discussing his new book, "End The Fed," and his attempt, with U.S. Rep. Alan Grayson, to secure the right of the Government Accountability Office to audit the Federal Reserve.

Why do you think the Federal Reserve needs to be audited?

Paul: For lots of reasons. I don't believe in secrecy. I don't think anyone should have so much power that they can create money out of thin air and spend it and interfere in the markets and do central economic planning without any oversight. Congress has a responsibility to know what they're doing because they created the Fed. They're very, very important, and people benefit from their actions. And I'd like to know who benefits and who suffers the consequence. I just think that it would be in the interest of the people to know exactly what the Fed is doing.

Why don't we know what's going on with the Fed?

People have been pretty complacent, generally complacent, over many, many years because it's been an insidious problem. I mean, in 1913 they came into existence and a lot of people didn't know much about it. And they didn't call for it. But over the years, there's always been one or two saying, "We should know more about it."

And in the 1970s, when we had a pretty serious economic crisis with inflation and interest rates at 21%, there was a demand for an audit. So they passed an audit bill and what they did exactly was they put prohibitions in. Before that, it was a little vague, but instead of opening up the doors for an audit, they made it absolutely much more difficult for us to find out what they were doing. And my bill essentially repeals what they put in place in 1978 -- the prohibitions against auditing the Fed.

And they work in secrecy. They're allowed to make arrangements with foreign governments, foreign central banks, international organizations, and they've really abused their power, although their power's been on the books, to deal with corporations. It's been this recent crisis that has really brought this to a head. They have literally bought over a trillion dollars' worth of securities. And we don't know who benefited from that or how much they paid for them. So I think it's time that the people know what they've been up to.

The Fed is all-powerful and they scare people and tell people the world will come to an end. That's exactly what they're doing right now. "This would be so horrible, we would lose our independence." But all they're talking about independence is secrecy. They argue, "Oh, no, we don't want any political influence." Well, what other kind of influence is there? Presidential politics has influence on the Fed. The president appoints the federal board chairman and other members.

There's lots of influence behind the scenes. Companies like Goldman Sachs have influence. So there's a lot of political influence. Deficit financing is a political influence. Congress runs up debt and that puts a lot of political pressure on the Fed. But the transactions are secret, and that's what I consider wrong.

What do you think Goldman Sachs' influence is?

Well, I don't know exactly, but we do know that they usually have a say in who's secretary of the Treasury. And they also have influence, I think, with the people who get appointed to the Federal Reserve. Take Geithner. He was on the Federal Open Market Committe board as president of the New York Fed and now he's secretary of Treasury. And other secretaries have been associated with Goldman Sachs. They're probably the most influential company that I know of. But I don't know the exact details. There may be a lot more of them. I think we should know why Goldman Sachs thrives so well and Lehman Brothers failed.

What should replace the Federal Reserve, if anything?

Well, ideally nothing. I've talked about this for a long time. It came out of the gold commission report in the 1980s. Out of the gold commission, my conclusion was we should have competing currencies, just legalize competition. That's still my position. In the book, "End the Fed," I don't argue the case for locking the doors and closing it down. As a matter of fact, I say there should be a transition, repeal legal tender laws and you take taxes off money, which is gold and silver. And then if the people want to use it, let them use it. If people want to get paid in paper, let them get paid in paper.

In Mexico right now you can literally have an account in silver. They're making more progress in Mexico. And I have visited with their members of Congress. Before it all got passed, they consulted with me. Because the Mexican people know how bad it is when the currency goes to zero. The middle class really, really hurts, and they've experienced it. I'm just hoping we never get that bad. But there's no reason why we should be afraid of a little competition, allowing people to put their money in an account. You have these ETFs already; it would just be that a bank could offer that to you. And you could deal in another currency. The transactions that go on around the world today with the currencies trading, instantaneously they adjust values. And we could do that with gold and silver and dollar accounts. It would be pretty easy.

What effect would that have on the dollar?

I think that would strengthen it because it would shore up the dollar. That's one reason why the Fed doesn't like to see dollar prices go up. I mean, gold prices go up because that's an embarrassment to them. It should send a message to them. And sometimes they pretend that they do look at the gold price, thinking that if it goes up too much maybe there's something wrong. They work real hard to suppress the price of gold. And I think if you had competition, I think it would be sort of like home schooling. Home schooling doesn't hurt public schools. Sometimes it gives them a greater incentive because home schoolers do so much better. Of course, sometimes public school people resent the fact that people can learn as well at home as they can in public schools. So we should never be afraid of competition. If gold is not good money, then nobody will deal with it. But I'm on the side of history with this one because paper money has never worked. It eventually goes to zero and people quit using it. But gold has survived for many, many centuries.

Would you rather see a gold standard instead of the dollar?

I'd rather you let the markets decide. That would be my first preference. The Constitution has never been repealed to say that only gold and silver can be legal tender. But today, if we didn't get rid of the legal tender laws and do these other things, if you tried to use old silver dollars and say, "This is legal tender, I'm going to pay in silver dollars," you'd go to jail because with those silver dollars, they'd say, "That's not a dollar." That's $25. They'd argue that a silver dollar is worth $25, so they don't let you use it as legal tender.

Hayek always argued the case for competing currencies and they hated it when he suggested that maybe the market would pick a basket. People worry, "Well, there's not enough gold." Well, maybe if we put gold, silver, and copper together or something like that.

The most important thing is restraining the central banks from creating money out of thin air to accommodate special interests and Congress' deficits. That's the purpose.

How is our economy doing now and how do you think it will be doing next year?

Worse. I think it's in shambles and on its way down. Failed policies, Keynesianism -- they haven't given up on Keynesian economics. You know, deficit financing, printing press money, excessive spending, overregulation. Companies are still leaving this country. I live in a place where Dow Chemical has a big, big plant, here in Freeport, Texas, and in a few years, maybe five to 10 years, they're already building a plant to replace this one over in the Persian Gulf just because of the economic conditions. We're chasing our businesses overseas. We're not producers, we're debtors, so even if you get a blip in a statistic, I don't think it will mean anything. The important thing to tell us how we're doing is the unemployment rate, and at least today the government was admitting, "Well, it's really not 10%, it's 17.5%." But it's actually over 20%.

So are people being fooled by the stock market rally?

Well, not the people who are making money. They love it. But they're going to get caught. It's another mini-bubble that's forming; it's not that we're back on course again. Just think of all the liquidity and all the money pumped into this system. So it's starting to flow back into the stock market. Stocks are going up and somebody's going to get a little nervous and start selling and then you'll see it go down again. Markets are more powerful than the economic planners, so I think there will be another sharp selloff.

I don't think this economy has picked up. No, it really hasn't. We keep doing the wrong things. We have a housing crisis because we had way too many houses and the prices were too high. The policy in Washington today is to prop up the price of housing and to build more houses. And you want the prices of houses to go down as fast and as far as possible so people will start buying them again. And you want to take a rest on building houses because we have a couple billion houses too many. And it's all out of balance. And I lay that at the doorstep of the Fed, because even though congressional policies have a lot to do with this, it's the Fed's creation of credit and artificially low interest rates that produces the bubble.

Aside from changes at the Fed, are there other regulations you'd like to work on?

Only to try to stop the ones that are coming down the road. There's always so many.

What regulations are you worried about?

Well, the ones that we've been working on in the Senate Banking Committee. Almost everything in the financial reorganization that Barney Frank's been working on. That's not going to be very helpful. Telling businesses what they can do with people's salaries. Umpteen regulations. That's going to be a real disaster.

I don't believe in the regulations; I believe in the market. And what they do is they don't emphasize the responsibilities that they have and that is to protect the value of money and protect contracts and to allow bankruptcy law to work instead of bailing everybody out. They’ve done everything to perpetuate the problem and not allow the correction to evolve. You want things to be corrected. You want the debt to be eliminated. You want bad investments to be eliminated. But that takes a series of corrections and we don't allow it, so we just prolong it, postponing the inevitable, and that's what gives you the prolonged depressions. We did it in the '30s and Japan has done it since the '80s, all through the '90s and continues to do it. And we're going to do it all over again too because we're not allowing the marketplace to work.

What did you learn from your presidential run?

That there are a lot more people in this country who have heard of Austrian free-market economics and are interested in the Federal Reserve and who have come around to the belief that they're not going to trust the government to take care of them. And these are mostly college kids that I talked to. So I would say I was pleasantly surprised at how much enthusiasm there is for a strict constitutional approach to what we're doing.

How is your son Rand doing with his political race? [Rand Paul is running for the Senate in Kentucky. He has been endorsed by Steve Forbes.]

He's doing real good. He's raising a lot of money, and he's hanging in there. He surprised me at how well he's doing because he has to run against the establishment. You know, the pick of the Republican establishment. They don't want independent-minded people. He's worked a lot in my campaigns. He's had pretty good exposure to some of the management of campaigning. But he's also well-read. We have five kids and he had probably the most interest in reading economic policy.

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The most important thing is restraining the central banks from creating money out of thin air to accommodate special interests and Congress' deficits that they run up. That's the purpose.

How is our economy doing now and how do you think it will be doing next year?

Worse. I think it's in shambles and on its way down. Failed policies, Keynesianism, they haven't given up on Keynesian economics. You know, deficit financing, printing press money, excessive spending, over-regulation. Companies are still leaving this country. I live in a place where Dow Chemical has a big, big plant here in Freeport, Texas, and in a few years, maybe five to 10 years, they're already building a plant to replace this one over in the Persian Gulf just because of the economic conditions. We're chasing our businesses overseas. We're not producers, we're debtors, so even if you get a blip in a statistic, I don't think it will mean anything. The important thing to tell us how we're doing is the unemployment rate, and at least today the government was admitting, "Well, it's really not 10%, it's 17.5%." But it's actually over 20%.

So are people being fooled by the stock market rally?

Well, not the people who are making money. They love it. But they're going to get caught. It's another mini-bubble that's forming; it's not the fact that we're back on course again. Just think of all the liquidity and all the money pumped into this system. So it's starting to flow back into the stock market. Stocks are going up and somebody's going to get a little nervous and start selling and then you'll see it go down again. Markets are more powerful than the economic planners, so I think there will be another sharp sell-off again.

I don't think this economy has picked up. No, it really hasn't. We keep doing the wrong things. We have a housing crisis because we had way too many houses and the prices were too high. The policy in Washington today is to prop up the price of housing and to build more houses. And you want the prices of houses to go down as fast and as far as possible so people will start buying them again. And you want to take a rest on building houses because we have a couple billion houses too many. And it's all out of balance. And I lay that at the doorstep of the Fed, because even though congressional policies have a lot to do with this, it's the Fed's creation of credit and artificially low interest rates that produces the bubble.

Aside from changes at the Fed, are there other regulations you'd like to work on?

Only to try to stop the ones that are coming down the road. There's always so many.

What regulations are you worried about?

Well, the ones that we've been working on in the Senate Banking Committee. Almost everything in the financial reorganization that Barney Frank's been working on. That's not going to be very helpful. Telling businesses what they can do with people's salaries. Umpteen regulations. That's going to be a real disaster.

I don't believe in the regulations; I believe in the market. And what they do is they don't emphasize the responsibilities that they have and that is to protect the value of money and protect contracts and to allow bankruptcy law to work instead of bailing everybody out. They’ve done everything to perpetuate the problem and not allow the correction to evolve. You want things to be corrected. You want the debt to be eliminated. You want bad investments to be eliminated. But that takes a series of corrections and we don't allow it, so we just prolong it, postponing the inevitable, and that's what gives you the prolonged depressions. We did it in the '30s and Japan has done it since the '80s, all through the '90s and continues to do it. And we're going to do it all over again too because we're not allowing the marketplace to work.

What did you learn from your presidential run?

That there are a lot more people in this country who have heard of Austrian free-market economics and are interested in the Federal Reserve and who have come around to the belief that they're not going to trust the government to take care of them. And these are mostly college kids that I talked to. So I would say I was pleasantly surprised at how much enthusiasm there is for a strict constitutional approach to what we're doing.

How is your son Rand doing with his political race? [Rand Paul is running for the Senate in Kentucky. He has been endorsed by Steve Forbes.]

He's doing real good. He's raising a lot of money, and he's hanging in there. He surprised me at how well he's doing because he has to run against the establishment. You know, the pick of the Republican establishment. They don't want independent-minded people.

He's worked a lot in my campaigns. He's had pretty good exposure to some of the management of campaigning. But he's also well-read. We have five kids and he had probably the most interest in reading economic policy.