Saturday, March 15, 2008

The Federal Reserve

I have been reading a few of Ron Paul’s book the past few weeks and have been impressed with how much sense he makes. As we approach what is very likely to be another massive rate cut brought forth by the Federal Reserve that will devalue the American dollar even more and increase "inflation" even more, I thought this passage from Paul’s text was very applicable to today(I added the highlights). This was written in the mid to late 1980’s, but I think it is hard to argue that we are not seeing these same issues right now. The real question is what can we do about it? I wish there was a good answer. Does anyone have one?


“The third major reason we have a powerful central bank that maintains monopoly control over credit is that those in charge of policy are granted overwhelming political and economic power. The individuals who, behind the scenes, pull the monetary strings are very much aware of the power they have.


Some have said that the Chairman of the Fed is the second most powerful man in the world, the President being the most powerful. A strong case can be made for the Chairman of the Fed's being more powerful than even the President. The dollar is the reserve currency of the world, and the Chairman has more to say about the dollar than the President. Economic and political events can be endlessly manipulated by U.S. monetary policy. Since our policy is in the hands of dedicated internationalists and the dollar is the international unit of account, world events are totally dependent upon the dollar's value and interest rates.


Third-world debt, foreign aid programs, the IMF, the World Bank, and international trade are all closely related to Federal Reserve policy. Continued monetary inflation to keep the debt system afloat is the essential element of today's policy. Propping up illiquid debtors domestically and internationally by inflation is clearly a process penalizing the innocent middle-class Americans who are being victimized by the process.


Since nothing in life is ever free, someone has to pay. In this case the middle class suffers through job losses and a lowered standard of living. Both the political and economic elite benefit by accumulation of more power and wealth. The inflationary process allows some to benefit at the expense of others. Since transferring wealth through inflation is more difficult to understand than a direct tax, it continues for long periods of time before it is rejected by the people (who mustfind new leadership to redirect events.)


Economic benefits accrue to those knowledgeable about Federal Reserve policy. Paul Volcker once admitted to me (to my surprise) before a banking committee hearing, that leaks did indeed occur regarding secret monetary policy. We also clearly know that appointments to the Fed require approval from the international bankers led by David Rockefeller. The key positions are always held by establishment-appointed bankers: the Federal Reserve chairmanship is the presidency of the New York Fed. The president of the New York Fed is always on the Federal Open Market Committee, while other regional presidents rotate their positions on the committee. Frequently, this position is a steppingstone to the chairmanship of the Fed.


Monetary policy can be instrumental in presidential campaigns. The strength of the economy and the level of interest rates can make or break a President seeking reelection. There is clear evidence that monetary policy is frequently manipulated for presidential elections.


Since every transaction is measured in terms of the monetary unit, the power to artificially alter the unit's value literally allows the monetary authorities to control the economy. A free market is very sensitive to freely fluctuating prices and interest rates. The Fed, on an hourly basis, manipulates rates and yet follows an announced policy of stable prices. Of course their goals and their achievements are not always the same, but their efforts play havoc with those honestly trying to make a living without any benefit of inside information.


As powerful as the Fed is, the markets eventually win out. Economic law will not permit endless inflation of the money supply without a subsequent increase in prices. Since gold is the ultimate money of the people, currency depreciation always leads to higher nominal prices for gold and the other precious metals.


The breakdown of international trade eventually comes when enough people discover that the monetary policy is a charade and a fraud. A contest between market forces and government forces then erupts. The name of the game for the monetary authorities is maintaining power over the economy and political events. When paper is rejected by the market, governments inevitably retaliate by enforcing rules regarding currencies, flow of capital, financial privacy, and freedom to travel.


The conflict is already visible and we can expect it to get much worse (including a new paper currency) before it's all over.


The monetary crisis will end when one side is victorious. If paper wins, an authoritarian government will be required. If gold wins, a free society will prevail.”


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