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On Money, Inflation and Government

by Ron Paul | March 31, 2008

These past few weeks have provided an unfortunate opportunity to discuss inflation. The dollar index has reached new all-time lows. The total money supply, M3, as calculated by private sources, is growing at a disturbing 17% rate. The Fed is pumping dollars into the economy at an alarming rate. Just recently the Fed announced new loan auctions totaling $100 billion. That is new money created from thin air. If these money auctions, combined with the bailout of Bear Stearns, continue to be the trend, we are in for some economic stormy weather. The explanation lies in understanding the basics of money, and why it is dangerous to give government and big banks control over it.

First, money is not wealth, in and of itself. You cannot create more wealth simply by creating more money. Wall Street bankers cry out for more liquidity, but what is really needed is more value behind the dollar. But the value, unfortunately, isn't there.

You see, the Fed creates new money and uses it to purchase securities from banks. Flush with funds, these banks seek to put this money to use. During the Fed's expansionary period, much of this money went to home loans. Through a combination of federal government inducements to lend to risky borrowers, and the Fed's supply of easy money, the housing bubble took shape. Fannie Mae and Freddie Mac were encouraged to purchase and securitize mortgages, while investors, buoyed by implicit government backing, rushed to provide funding. Money that could have been invested in more productive, less risky sectors of the economy was thereby malinvested in subprime mortgage loans.

The implicit guarantee from the Fed is quickly becoming explicit, as those institutions deemed "too big to fail" are bailed out at taxpayer expense. Wall Street made a killing during the housing bubble, reaping record profits. Now that the bubble has burst, these same firms are trying to dump their losses on the taxpayers. This approach requires more money creation, and therefore debasement of all dollars in circulation.

The Federal Reserve, a quasi-government entity, should not be creating money or determining interest rates, as this causes malinvestment and excessive debt to accumulate. Centrally planned, government manipulated economies always fail eventually. The collapse of communism and the failure of socialism should have made this apparent. Even the most educated, well-intentioned central planners cannot plan the market better than the market itself. Those that understand economics best, understand this reality.

In free markets, both success and failure are options. If government interventions prevent businesses, like Bear Stearns, from failing, then it is not truly a free market. As painful as it might be for Wall Street, banks, even big ones, must be allowed to fail.

The end game for this policy of monetary inflation is that the money in your bank account loses purchasing power. So, by keeping failing banks afloat, the Fed punishes those who have lived frugally and saved. The power to create money is a power that should never be granted to government. As we can plainly see today, the Fed has abused this power, and taxpayers are paying the price.

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The root of the problems is that people only see money as

a store of value or a medium of exchange or a standard unit of value.

Think about why money can be a store of value. Let's say you are a milk producer. Your milk would go bad after a while, but if you sell your milk and get money, the money is expected to retain its value for a long time.

Why? Why is it that the money is still good even after your milk has gone bad?

A logical explaton is that money represents ownership of the economy, much like stock certificates. So, I say that money is certificates of ownership of the economy or money is the title of the economy.

What would shareholders do if a comany starts to dilue the shares?
Or what if someone starts to duplicate the title of your house?

government of the people, by the people, for the people

Slow down there Razorwind

The Constitution does not give Congress the power to "CREATE" money, it gives it the power to "COIN" money. Big difference. Creation of wealth is a completely different animal altogether. The proper system of money would be and should be (as it was) denominations of Gold and Silver. Money must have a value anywhere to be really worth anything. As an example in the Roman times the price of a well made Toga and matching Sandals was one gold ounce. Before the devaluation of the Dollar recently the price of a well made suit and shoes was roughly $700 to $900 which was exactly what an ounce of gold was worth. So you see the same ounce of Gold had te same value over time. I hope I have helped.

Wait a tic

Razorwind Studios is an official endorser of Ron Paul, and we will live free or die! 14th alternate to MN state!
In the Constitution, the founding fathers gave the power to create money to Congress.

The Fed is not part of the government. It is a private corporation that wants to make money.

If we would have left it in the hands of Congress, things would have turned out better.

Maybe, maybe not

Allowing a few powerful private individuals to control the issuing of our currency is pretty bad, which is what we do now. Suppose we transfer that authority to the government. Are you really confident it would be better? Give Congress the authority to print the money, and on the plus side you wouldn't be paying interest to these super rich bankers. But on the down side do you really trust the government to limit the printing presses? Both options are pretty bad. Ron Paul wants to allow competing currencies. I think that is the answer. Private issuance of currency is fine as long as there isn't a monopoly on money.

Thats why

it's so important to have our currency backed by a commodity. This way the government can't spend more than what it has on hand.

I just started reading the

I just started reading the book "the mystery of Banking" my Murray Rothbard, and though I am only a few chapters in, I finally am starting to understand how all of this money stuff works and what a big deal all of this is. Its amazing how once you start to understand how some of these things work you realize just how rediculous the things our government does are.

Follow the money

Think self-interest and what is going on is not so ridiculous at all.

Some people, the "controllers", are making their millions out of this economic turmoil, as well as gaining possible future control of the world.

"Absolute power corrupts absolutely"