Why monetary freedom matters.

• Author: Paul, Ron
• Position: Essay

I've thought about and have written about the Federal Reserve for a long time. I became fascinated with the monetary issue in the 1960s, having come across the Austrian economists, especially Hayek and Mises, and I was very impressed with August 15, 1971, because the predictions made in the 1960s came about. As a matter of fact, Henry Hazlitt made that prediction in 1944 when the Bretton Woods system was set up. He said it wouldn't work and it would fall apart--and it did--so that was a strong confirmation.

But even after all these years of studying and reading and trying to figure out the monetary system, I have come to the conclusion that the Federal Reserve is unconstitutional--and we don't need it (Paul 2009). So with that approach I have worked hard in Congress for sound money.

A False Trust in Fiat Money

I have always operated under the assumption that the pure fiat money system that replaced Bretton Woods in 1971 would not be a good system; it would be much worse. It's been rather impressive that it has lasted this long. But I think the handwriting is on the wall. I think that the dollar reserve standard, which the world has embraced for 40 years, is coming to an end. I don't think there is any admission of this yet. Many policymakers believe they can patch up the pure fiat money system, but I believe the dollar reserve standard has ushered in probably the world's biggest financial bubble in all of history. The total weight of the world's financial system relies on a false trust in the paper dollar, namely, that the U.S. dollar will be able to rescue everybody.

So far this undertaking hasn't really destroyed the confidence in the dollar. I think one reason is that when you look at the dollar in comparison to other currencies, people are still buying dollars and loaning money to us at very low rates. However, our competition--primarily the euro and the yen--are not necessarily very strong themselves.

The important point, however, is that when it comes to the question of purchasing power, which is the ultimate test of a currency, I don't think we are doing very well. Consumer prices are going up by nearly 4 percent, according to the CPI measure of inflation. But if you use the old CPI, they are going up more like 8 percent. And if you compare cost of living increases for certain individuals versus others, it's much more painful. So if you're on Social Security, for example, your standard of living has been falling, even though there will be a small increase for inflation this year.

Lax Congressional Oversight of the Fed

The Federal Reserve is an institution that was created by Congress, and Congress has been totally derelict in its duties as...