In the “Hearing on Restoring the Economy: Strategies for Short-term and Long-term Change”, Ron Paul and Paul Volcker discuss the history, present and future of fiat currencies.
Chairman: Mr. Paul for one minute?
Ron Paul: Thank you, Madam Chairman. I, too, hear my voice all the time and I’m sure the rest of you are tired of hearing it. But, nevertheless, I will take a moment. In California they worry about the big one, the big earthquake, and I think financially the big one is here – the very big one, and nobody seems to know what to do about it and I think it’s because they don’t quite understand how it came about. It’s been building, the bubble has been building since 1971, but it has exploded and I visualize it as we in the Congress and Federal Reserve are there with this tiny little pump, pumping into a bubble that has a huge hole, and the longer you pump, the poorer this country is going to get and there will be no solution. Even a bigger pump is not going to solve the problem. The past year, we have run up a debt of additional $1.5 trillion. We have created about $9 trillion worth of credit in the financial system. It hasn’t done any good. We have to reassess what we’re doing because I think we’re on the wrong track.
Chairman: Thank you very much and Senator Bennett? [...]
Ron Paul: Thank you, Madam Chairman. Chairman Volcker some of your comments sort of frightened me, not because you remind us that we’re in an economic and financial crisis, and I’m satisfied that you admit that, especially since it’s a reflection of the monetary and financial system that we’ve been working with for so long. But some of the suggestions you make, give me some concern. But I did date our current problem from 1971, I won’t quibble over the dates but 1971 to me was significant because it ended the monetary order of the Bretton Woods agreement, and that was a major, major event. And that was the Gold Exchange Standard and it was flawed and it failed. In ’71, we as a nation, as a world financial system we accepted a paper dollar as the reserve dollar of the world.
I think that’s related to a concern that you have, I have, and every single economist I’ve ever talked to in Treasury or in the Federal Reserve has expressed the same concern and that is the current account deficit which again, didn’t start in the 70s as much as exploded in the 80s and the 90s. We’re the biggest debtor nation in the history of the world, and we recognize that, but where the difficulty comes is to understand why we got there, and I put the blame on the dollar standard, because we became the privileged nation that we’re allowed to print the gold. And the world accepted and they still do to a large degree and they’re still taking our dollars. But, I think, the hand-writing on the wall now is, that system has ended. And all the inflating and all the manipulation and all the spending will not put that system back together again. So, there’s a lot of people now, thinking about it and coming up with that replacement, and that’s what I’m concerned about. And I want to study and understand and maybe have some influence on it.
There’s a few of us, and it’s a growing number who believe in the free market, sound money and national sovereignty, and believe that you can have a world economy without violating any of those principles. But, in your next to last paragraph is where I find some frightening things, because you talk about a strong coordination of national authorities, unifying accounting standards and liquidity requirements and internationally agreed to, and it has to be comprehensive and not piecemeal. You know, that invites a lot of questions to me. Is this going to be a super IMF? Are we going to revive the SDRs? Who’s going to issue the credit? What will happen to the dollar? Who has the authority? These are major things. I’d like to know, what kind of discussions are going on internationally right now to devise a standard, and are you a participant in these international negotiations to come up with this new system?
Volcker: Well I think the answer to that question is no, no. I mean, I don’t know of any coherent or regular discussions going on officially, and there are very few going on unofficially in terms of the construction of the monetary system. Now the comments that you quoted from my testimony are directed toward, I suppose what you may think of secondary considerations, how you regulate whatever system you have. How you regulate banks and other institutions and financial systems. It’s kind of a lower level generality. The questions that you raise are relevant questions. I agree with much of your description. We may not agree upon remedies. But, I tell you, I don’t think anybody is very seriously thinking about that right now. Nobody’s talking about a super IMF. We’ve been talking until recently about the IMF not having too much to do. We suddenly changed that in the regulatory area where they may have some responsibility. I would like to see the questions you’re raising debated. That’s not what I meant to raise in this statement.
Ron Paul: So you think there is a need. You think the system that we have today are over and done with, and that we can’t patch it together in just more trillions of dollars of credit by the Fed and more debt by the Congress is going to solve this problem?
Volcker: I think there are problems with the present international monetary system that have not received sufficient attention. I would like to leave it at that.
Ron Paul: That’s ducking it a little bit.
Volcker: Yes. Yes, I agree. I can’t tell you, the answers are not apparent but we are on, make no mistake about it, this is a unique moment in economic history where the world is going on the basis of fiat currencies. And that’s kind of, what a lot of economists like and they thought it was a good idea, let it flow up and down and you don’t get constricted by gold or other unofficial arrangements. But it’s a little tricky, if you’re going on a world of fiat currency, you better pay attention to the stability of that currency and the maintainability of the currency, and I think we are inclined to forget about that.
Ron Paul: It just may be…
Chairman: The gentleman’s time has expired. Senator Bennett…