Our Money
Henry Ford once said, “It is well that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”
Are you confused by all the talk about monetary policy, fiat money and inflation? You’re not alone. Bankers and politicians have worked hand in hand for many decades to obscure their activities from the public. They hide behind elaborate structures designed to inflate the money supply while creating the false impression that they are looking out for our best interests.
Inflation is a very simple concept to understand: More money = less value. It seem contradictory but it’s very straightforward.
For illustration purposes, join me on a brief journey of the imagination. One beautiful morning, you wake up and realize that you own twice as much cash as you had just last night. Magic money elves entered your home and bank account and simply doubled your entire cash assets. You’re now twice as wealthy (or half as poor as the case may be).
But you soon realize that the same thing happened to everyone else in the country. The money supply (total amount of money) has doubled! It’s just a one-time event and your regular income remains the same… you just got lucky this one time. It’s okay to dream, so stay with me.
What happens next? If you’re like most people, you probably start spending. You buy things you always wanted to buy but couldn’t afford. You pay back some debts. You buy stocks. In other words, you put the new money into circulation. So do most other people in the country.
Demand for many products increases because a lot more people can afford them now. Consumers are buying so much stuff that some shortages occur. To protect themselves against these shortages, shops and businesses decide to increase their prices. They know that once prices go up, fewer people will be competing to buy the same products, and the situation will be back to normal.
As a side effect of these higher prices, shop owners start earning higher profits than usual. They have more money in their bank accounts, which allows them to increase their spending. They will invest in new stock or expand their business. They might pay out dividends to their investors and bonuses to their employees, allowing these people to buy more products as well. This additional demand puts even more pressure on other shops to increase their prices.
A few weeks later, prices of almost everything have gone up. Suppliers and manufacturers are faced with the same threat of too much sudden demand from their clients so they too decide to start charging more.
You went on a one-time buying spree and look what happened! Your income stayed the same, but after a few weeks you can suddenly no longer afford the products you used to buy all the time because all prices in the economy have gone up.
Naturally, you demand a higher salary from your employer. If you’re self-employed or in business, you have to charge your customers more money just so that you can maintain your standard of living. Everyone else is in the same situation. Higher prices keep spreading throughout the entire economy, and it’s getting more and more difficult to make a living.
Can you see how this lucky one-time incident which at first seemed so exciting was extremely harmful not just for you but for the entire country? You briefly had a good time but now you’re worse off than before. In our story there are now twice as many dollars in circulation, but your income remains the same and each dollar you earn is worth only about half as much as it used to be. You’re really hoping for those money elves to come back.
Let’s stop dreaming and look at the reality of things. What if I told you that these “money elves” do exist and that they spring into action not just once in a lifetime, but every couple of weeks? And that they repeatedly give money to their closest friends, but not to you? That prices are going up because the total amount of money in circulation increases, but that you’re missing out on all the fun?
Well, that’s inflation at work. Who benefits from inflation? Only those who are at the top of the pyramid and receive all that new money directly from the source. As you might have guessed by now, the source is the Federal Reserve, and its recipients include the government which “borrows” a lot of new money each year, without any intention of ever paying it back. Another beneficiary these days are failed banks that are being “bailed out” for the good of the “economy”, or defense contractors that receive money to build up our military so we can have a constant presence all over the world and fight never-ending and unnecessary wars.
What, then, is fiat money? It’s exactly what we just talked about: money that can be inflated or increased at the push of a button at the say-so of a powerful person or organization. Nowadays most dollars are just blimps on a computer screen and it’s extremely easy for the Federal Reserve to create money out of thin air whenever they want to.
If our money were backed by gold and silver, people couldn’t just sit in some fancy building and push a button to create new money. They would have to risk their lives and assets to find a suitable spot to build a gold mine, then get dirty and sweaty and actually dig up the gold. Not something I can imagine our “money elves” at the Fed getting down to whenever they feel like playing God with the economy.
As you can see, inflation and fiat money are very seductive and beneficial to those at the top, and very dangerous to everyone else and the nation as a whole. That’s exactly what Henry Ford was talking about. He knew that every country that relies too much on fiat money is ruined sooner rather than later.
There is only one possible solution to the inflation problem: Stop creating money out of thin air. But we’re already in such a mess that the only way to have a real impact on the money supply is to increase interest rates so that people pay back their loans and borrow less money from the banks, which decreases the amount of money in circulation. However, higher interest rates might very well crash the economy. So the Fed’s current “solution” to overcoming inflation is… creating even more of it.
Fiat money is a dangerous addiction. Even if the Fed found a way to stop inflation, as long as the current system persists the temptation will always be there to resume pushing the easy money button. That’s why we need to get back on the gold standard and eliminate the Federal Reserve altogether.
But that won’t happen “before tomorrow morning” or even this year. Ron Paul believes that the first step towards monetary freedom is to allow open competition in currencies. Once gold and silver are allowed as legal tender and can be sold without sales tax, everyone can use them to store their wealth and to pay for the things they want to buy. The Federal Reserve will finally have a very compelling motivation to stay honest and maintain the value of the dollar because if they don’t, they will simply lose all their customers.
Ron Paul has been an advocate of the gold standard and open competition in currencies for many years. He is the Federal Reserve’s most outspoken opponent in Congress and has frequently questioned Alan Greenspan and Ben Bernanke about the Fed’s actions.
Join the Ron Paul Revolution and help us put the Fed where it belongs: into the history books and out of our financial lives.
http://mises.org/
The Ludwig von Mises Institute is an great website that explains Austrian Economics, the particular branch of economic theory Ron Paul prescribes to.
[...] Our Money [...]
Hi:
What can be done about the manipulation of markets ( particularly the precious metals markets ) by the Federal reserve and Treasury through Golman Sachs and J P Morgan ( & others ) to cover up the magnitude of the inflationary effects of their current monetary activity ? It is my understanding that over a trillion dollars has been injected into our monetary system to cover the Iraq war and to bail out the sub prime scoundrels in the past year alone. It is criminal that this is taking place and that the standard of living of we Americans is being raped by the Fed and Treasury under the lead of Bernanke and Paulson
What Mr. Paul states makes incredibly easy to understand sense. The big question is why hasn’t our government subscribed to this theory since they mistakenly took the U.S. off the gold standard? That was a mistake that many saw coming, and the results too, so why is it not clearly obvious that they should rethink the need for the Federal Reserve and revert to the gold standard? Mr. Paul may just be the best candidate for this issue for our times, although I do not know his views on domestic or foreign policy, but we seriously need someone who can bring back the power of the “allmighty” dollar.
How would the gold standard work if there’s increases in population? If the population increased, there would be less dollars and more demand. This would create shortages too, but also not enough currency for people to use it to make purchases. The only answer would be to increase the money supply, which would require some sort of revaluation of the currency or gold. How would that work?
Jake, I think you bring up a good question, and the first thing I need to know is what is gold worth and how much does the U.S. have. There may be ample gold in our reserves now to back a successfully valued currency, but in the old days, the only way to maintain the value is to get out there and dig more up.
Jack,
Think about what you just said and lets talk about if. If there are more people demanding more goods and services then the value of those services goes up. The value of the dollar would not go up because it is based on gold. Therefore, you are right in some ways that there would be shortages, but they would even out because only so many people could afford the most in demand services and goods. This has the benefit of creting competition, some one else offers the good for chaeper and more people can buy it, or (heaven forbid) savings:) If you need something bad enough, the way it used to be, you figured out how to save or make enough money to get it, these days you just use credit and that is what has caused a credit crisis.
All good points. Gold is the only TRUE money in the world. by that I mean gold is excentric which means whatever goods may
cost at any time golds value will always increase with the cost
of the goods. I bilieve that the private owner’s of the Federeal
Reserve have figured this out a long time ago. The authorization to print currancy and just take over the money in this country needs to be taken out of the private owners of the Federal Reserve
Bank and be put back into the hands of our House of Representatives
like it should be. Our country will continue to go in debt as long as the Federal Reserve Bank prints money and charges our Government outragious to pay it back. Which in point puts the burden on good hard working Americans.
Nice, a paleo-liberaterian fiscal policy right of Margret Thatcher that does next to nothing to secure job oppritunity for the proletariat. Thanks a lot, Pon Raul!
“hey guize, let’s reinstate an abandoned policy of sound money/metal fetishism and have some more lassiez faire, that worked great, didn’t it?”
We must be carefull to recognize what “Our Money” is. It is not dolars earned per hour or per dollar invested. Our mony is the INTERNATIONAL recognition of our productivity. Manipulation through government taxation, government incentives, monetary policy, are only factors which cloud the true performance of our economic system.
The United States thrived for a long period because of our ability to “out produce” the rest of the world. I believe continued true producivity growth occurred for much of the 20th century. Thus our increasing standard of living. That being said we were sitting on a very high relative productivity level, but also a very high level of entitlement which is basically the funding of our “public sector”.
Inter-National competition is the new factor of the last 20 years affecting our economy. Competition is with natural resources, prodcutive ability, government and monetary policy.
With the EEC established to hide individual euopean country weeknesses, Rusian liquidation of natural resource, Middle east liquidation of Oil, and Asian liquidation of Labor and environment the playing field has changed.
It is a competition for our future expections, which include wealth, environment, and our sustainability. Given the fact that the world economy is now valuing our productivity ($s) less, we must carefully adjust to accept that we must start increasing true productivty again.
Ron Paul’s economic message I will say again can not be a carcophony of dissenters, but a true justifiable economic model which provides us a future with expectation.
One can debate the Gold Issue forever. There are benefits, but there are consequences, too! The problem is Congress and the fact that they illegally gave the power vested in them to a Private Bank, that manipulates the market, so as to Bankrupt the suckers at will so it can “cleanup” at bargain prices. It’s goals are to OWN everything, even Countries and Governments. By not allowing a Bank to FAIL is to prop up the fraudulent system of ever increasing inflation and the destruction of the Dollar.
A Gold Standard in an expanding Economy will definitely STIFLE opportunity, which is why the Government had the power to print US Notes to allow expandability and without INTEREST which can be taxed out of existance in better times. That is probably why two GREAT Presidents were assasinated. (another debate)
We are at the mercy of a private Monopoly Banking System that creates money out of thin air, lends it to the Government at INTEREST, in exchange for Bonds, backed by the American People which must be paid sooner or later by our children and grandchildren.
What we need is for the Government to do it’s JOB authorized in the Constitution. My advice would be a FIXED monetary system, maybe 3 percent, PERIOD! That would allow the Government to have an income stream and could ELIMINATE the Income Tax. The Economy would adjust quickly and the added income would allow the people to enjoy a better life without Inflation that literally is stealing our wealth like a one armed bandit!
Traditionally, before the federal reserve was created in 1913 banks lent money out based on the amount of precious metals in its reserves. These were gold and silver backed certificates to be used as a medium of exchange. Interest rates would be adjusted based on the amount of these certificates in circulation and the amount in a banks reserves. Then a group of privately owned banks endorsed by our government called the central bank decided that when the banks cut back on the money supply and raised interest rates they would step in and supply more fiat money, hence we have the Great Depression of 1929. Ironically the central bank was initially created to make our economy recession proof. Also quite interesting is that gold and the gold standard somehow came to be the scapegoat for the cause of the great depression. Our government realized that it couldn’t finance all its expenditures in an economy regulated by precious metals. It needs a deficit and it needs inflation. We should just change the name of our country from United States to Welfare States. We are now born into debt and can never truly be debt free. I only see it getting worse if we continue to follow the same economic policy. Our government is going to milk us till their is nothing left. What is the saddest thing of all is that you won’t learn this truth in school and most americans are to busy trying to be good little citizens, paying there bills, and being what our government calls relatively debt free to educate themselves on the flaws of our system. Do your part and tell everyone you know!!!!
I read similar article also named ey | Ron Paul .com, and it was completely different. Personally, I agree with you more, because this article makes a little bit more sense for me
Hi, I’m just wondering if the Fed got back on the gold standard would that eliminate inflation completely?Most economists agree that a good inflation rate is around 2-3%.You definitely don’t want deflation where the dollar gets more valuable to a point where prices go down.In this situation people hoard money as it becomes more valuable over time.This is extremely difficult to stop,actually more difficult than inflation.At the moment if the fed were to reduce interest rates it would make the dollar weaker,exports cheap,imports expensive and contribute to already high inflation caused by food,oil etc.One of the reasons they’ve been reducing rates over the past 10 years is because of cheap consumer goods from China made the fed think that inflation was no problem.If high inflation increases any more,ordinary working people could get it into their heads that inflation for the future will continue and so start making higher wage demands which could increase inflation even more.This happened back in the ’70s and was extremely difficult to stop.Finally the Chinese currency is pegged/fixed against the dollar and so if the dollar gets weaker even more cheap goods will flow into America.
You can debate a Gold Standard all day. As I said there are pros and cons. As long as we have a “FIXED” rate of exchange, everything else will revolve around it. The TRUE FREE MARKET, or the “UNSEEN HAND” of Capitalism, will always be volatile depending Market Forces. Yes, there must be flexability built into the System to allow for EMERGENCIES, but that was why the Government was allowed to print US NOTES at ZERO Interest and then remove the excess in better times trough Taxation and Credits.
What is happening TODAY, by bailing out Private Industry and failing Banks, is ILLEGAL and only STEALS from the future of the Economy. In the long term, Technology should make things cheaper, as that’s the natural way and a strong Dollar saved for a rainy day is the best tool the Economy could have.
I live in Italy, which is part of the euro zone. The tale of Ron Paul fits perfectly what happened here, of course not overnight, but in a span of roughly 3 to 5 years from the advent of the euro (€)in place of the lira (£) in 2002. The euro was fixed by our Gov’t officials at 1937 liras. Everybody was mentally biased to view an item priced at say 35 euros as if it were costing 35,000 liras, while it was really costing almost TWICE as much: we were reading 1 euro as though it corresponded to 1,000 liras, it’s a psycological trick! Moreover, cents were looked down at, as if they were just liras, while they were worth amost 20 times as much (exactly 1 cent = 19.37 liras). On the other hand, salaries and pensions remained stuck to the official exchange. Therefore we Italians now earn the same amount of liras converted into euros, but have to pay everything double, so now our purchasing power is half as it was before that damn euro came to destroy our economy, on top of the frontiers open to China and the like. So, please don’t envy us because the euro is so “fatter” than the dollar: we share your destiny…
The problem with the gold standard is that it would hand control of our economy to the major gold producing countries, Russia and South Africa. By changing the rate at which gold is mined, they could cause inflation or deflation in the U.S. Not very smart!
Let’s compare a mining increase to the increase of speed on the printing press and take a look at the results. Increase of production of gold hey we have more gold. Increase in printing the dollar hey more worthless paper…. gold still has a value and a use, even if it is worth less. I think there are many companies that could still use the gold though devalued. I.E the jewler down the street. Try winning your loves a heart with a devalued dollar fashioned into a beautifull paper ring…..
Question for Ron Paul: So part of your solution is to raise interest rates and “shock” the economy into an overdue recession. Kinda what Regan did back in ‘81. If that occurs, where do we go from there? What’s the way ahead to remove the unlimited government that the baby boomers created? How do you change the likes of Nancy Pelosi, Ted Kennedy, Barak Obama, and the numerous liberal Republicans whose very careers depend of the way things are?
I first learned of this issue through Zeitgeist, Part III.
http://video.google.com/videoplay?docid=530806696524042736
Since then, I won’t support a candidate that doesn’t plan on doing something about the Federal Reserve. Which is why I wish Ron Paul was still running. I back him 100% of this and many other issues.
Ron Paul wrote the prologue for Michael Minns’ book, The Underground Lawyer. In this book, I saw how the IRS treats their targeted victims and why the IRS needs to be reigned in. Just follow the link to find out more. Let’s hope Ron Paul runs again in 2012 and shuts down the IRS!
If you are interested enough to get more facts on this exact issue and how it has come to control so much of our wonderful America, read “The Shadows of Power” by James Perloff.
ron paul is the last hope for this country without him we are doomed
bush and mccain want to see world war 3 so bad they can taste it
and obama dosent seem to like the american flag not only pinned on himself or on his airplane either so im sorry i cant trust him
RON PAUL 08 OR ELSE WE ARE DOOMED
THANK YOU
Dear Ron Paul fans,
I think there is also a short term solution to the financial crisis.
I know mortgage bond investors are banking on interest rates of ARMs resetting at higher rates but it seems to me this whole forclosure problem could be mitigated by the financial institutions themselves extending the terms of the loans out a few years or fix them at reasonable rates. ARM extensions could be distributed and graduated out to minimize the risk of exposure to defaulted loans.
This action could be self regulated or government regulated. The bond investors may see lower yields, banks might make slightly less but all would continue to profit. Foreclosure rates would fall dramatically. Business models would stabalize. The government (the people) would not need to save anyone. The entire economy would recover.
Fractional reserve lending laws permit banks to loan out 10 times the value of their reserves. This means if mortgage interest rates are 6% then their actual profit is 60%. That is an extremely good return and does not include other revenue streams. This economy is being crushed by entities who are capable of fixing it with a stroke of their pen and who could remain extremely profitable in the process.
Why not do it. Why not extend out the terms of these ARMs facing default or foreclosure because of interest rate adjustments. Auctioning homes for less than they are worth can not be good business. Bankruptcy, corporate take over, government bailed outs, recapitalization and federalization do not seem like a better alternatives.
We need to publicly make this suggestion to the banking industry. This is how to recover the US economy on the short term.
Interesting note: I was watching an alumni video from one of the nations top ivy league schools. Bernanke was a guest speaker invited to discuss money and debt with graduate level economics students. His main point was, debt is motivation for innovation and without debt, corporations would continue to stagnate on steady streams of income until some event takes them out. Like an environmental change in the market or a new competitor. To motivate officers to innovate and get off the golf courses, CEO’s may plunge corporations (as polititions may lead nations I guess) into debt. This is a tool used to cultivate creativity and nose to the grind stone work ethic. This may also be why we see executives receiving golden parachutes despite their leadership driving companies into financial dispair. It is all about creating ruthless competitors. It is all psychology, like our belief in the dollar or the value of the stock market. Perception is everything and money means nothing to those with the power to print it. It is simply a tool or carrot at the end of a stick.