A few months ago I recorded some of my thoughts and feelings on monetary policy. You can view that HERE if you didn't get a chance to see it initially. I have finished reading Ron Paul's "The Case for Gold" and I'm ready to revisit my thoughts to see what may have changed.
Overall, the book isn't something everyone could read, you need a good base understanding of how the money system operates before you can get any useful information. That being said, there are a few good short videos and articles which can bring you up to speed quickly. I consider this type of self-education essential for all citizens if we have any hope of avoiding future economic problems and also solving the problems we face right now. It should be clear to everyone, at this point, that it is not as easy as simply cutting one type of spending and increasing another, nor will any amount of so called quanititative easing, bailing out or austerity measures reconcile problems when the system, at it's core, is incapable of growth without constant inflation. Thusly, I encourage everyone to read up on this for themselves, including Dr. Paul's book, which is certainly unparalleled in useful information regarding the former success and failures of free market monetary systems within and without the United States, along with the consistent failures of fiat based paper money.
To digest the book as much as possible for the sake of this discussion, Ron Paul's basic case revolves around examples of every government controlled paper money system in recorded history becoming debased, first to the point of worthlessness, then collapse. He then contrasts that with systems that used specie directly or had paper money that was backed by specie, all of which were very efficient and well regulated through free-market principles, leading to extremely prosperous economies. Contrary to what many people believe, he does not propose resolving this through an abrupt dismantling of the Federal Reserve Bank and an instant return to a gold standard dollar or specie alone. His plan is actually very balanced and can be implemented in a way where it either works or fails, we don't really have anything to lose.
The idea is that the U.S. Treasury would begin minting gold and silver coins as a competing currency to the Federal Reserve's dollar. At the same time, laws which currently ban citizens from keeping savings or making payments in specie will be lifted so that private citizens can choose the currency they wish to use. In response to this, the Federal Reserve would be forced to set a real value on the dollar, or at least to allow free markets to set the value. With the value of gold remaining constant in the face of an ever fluctuating dollar, people would naturally begin using and saving in gold as an alternative. There are many more details which I hope you choose to read for yourself. As I said, the plan offers no downside, if it doesn't work we are still using worthless paper money, but if it does, we can reap the rewards of a system based on tangible goods.
On to my original thoughts.
1.The Federal Reserve was only created to act as an executive credit card that could bypass a notoriously stingy congress.
Dr. Paul does touch on this topic, but he also shows many other past examples in our country and others where centralized banking have used similar agencies to increase executive access to money. This is almost unanimously done in times of war, or economic distress following expensive wars. He definitely supports the graceful dismantling of the Federal Reserve Bank (state sanctioned) monopoly, not to put them out of business, but to allow for the free creation of banks which can offer competing currency. Such an action would help keep all banks more competitive, honest and will make times of regression less severe, evenly spread and over quickly. He doesn't spend much time discussing the corruption of the Federal Reserve, or it's creation, I believe, because the error in allowing it to monopolize our currency seems self evident and also because it is only the latest flavor of the larger problem of worthless, debased currency (of which he has provides many other examples).
2. Paying interest to the Federal Reserve as a private institution is pointless since we could do everything they do, but without the added cost of interest and with the added benefit of running it with elected officials.
He touches the fact that we pay interest to the Federal Reserve for the money we use. His main focus is on the fact that this is an unfair and unnecessary monopoly. In the past, in our own country and in many others, free marketplaces which have been operated on a truly level playing field have allowed banks to create their own notes (essentially money) backed by specie, which allowed consumers to choose their bank based on the reputation they had for being honest. the bigger underlying problem in those systems was when the lending pyramid (fractional reserve lending) became too big to support. Even with fractional reserve lending, however, truly free-market banks were still able to run functional systems through the use of private clearing houses and banking networks which ensured that consumers could trust an institution based on their reputation for providing specie upon request. More on fractional reserve lending in a little while...
Although he doesn't come out and say it explicitly, I think that Dr. Paul would not support paper money issued by the government directly, even if it was backed by specie, because the system would allow for too much corruption without any level of separation for the public who theoretically owned and was responsible for any mistakes. That is to say, if elected officials began debasing the currency, the taxpayer has to pay for their mistakes. When a private bank debases their own promisary notes, the investors in that bank have to pay for their mistakes. This degree of separation doesn't give our elected officials direct control, but it also gives us a layer of security in general. If this was done in a system with the appropriate number of national banks (thousands at minimum), the impact of even a few hundred corrupt banks failing would barely be noticed. He doesn't truly support the complete de-regulation of banking, he supports the right amount of regulation to maintain a level playing field. Since failure is more or less innevitable given enough time, we should adopt a system which allows failure to happen gracefully with the least impact to everyone.
3. The fractional reserve banking system is completely unfair and only makes higher profit for banks at the expense of greater, impractical debts for the people.
For those who don't understand how our current banking system works, I will explain as briefly as possible, for everyone else, here is a short review.
Fractional reserve lending gives private banking institutions the legal right to lend out more money than they have. A bank receives money from investors, depositors and payments made by the indebted. With a pyramid of 10-1, they can then loan out 90% of that money, holding only 10% of it in reserve for despositors who wish to make a withdrawl. In reality, they don't actually loan out money as cash, they write mortgages and promisary notes which only exist as contracts. So when if I make a $1000 payment on my mortgage, part to principle and part in interest, a bank is able to loan out (after expenses) 10 times that amount. They may have never actually possessed that money, they are simply allowed to make contracts of debt for that amount as long as they have 10% of what they are actually obligated to pay out in reserve. In a few months of operation, it's easy to see how quickly this system could get out of hand. At that, why permit a bank to more or less create funds that don't exist when your average citizen has no such ability?
There is a benefit to this system offers, which is flexible and rapid growth due to the widely available access to funding. A major industrial change is made easier to facilitate in a proven industry with an organization that has good credit history. That benefit, however, also rewards monopoly and in itself comes with great dangers to all of the investors, depositors and those who hold debt. In my opinion, the system allows too much risk for one benefit. The streak of 'bubbles' we have experienced in the last two decades are obviously exacerbated by credit which was too easy to come by and agencies who had no incentive to lend wisely.
4. Attempting to control inflation with interest rates does not work.
Dr. Paul didn't really cover this topic in any depth. If you are interested, however, there are many research articles on this topic which show that the control of the prime rate has had virtually none of the desired outcomes in control. We are in the midst of a perfect example of this since the rate is astoundingly low, but lending and borrowing are still suffering drasticaly.
5. Money is a representation of debt, in this case, money should circulate because the government prints it to pay for goods and services rendered. It is removed from circulation by taxes. This works kind of like an investment, where the money paid is reused exponential times so that when it is collected again through a tax, it should have served numerous people with beneficial exchanges before being collected as a tax. That being the case, even a high tax rate (which shouldn't be necessary in a balanced system) should reflect an equally high output of products.
This sentiment remains unchanged, Dr. Paul suggests moderating this by restricting the government to their constitutionally specified role of minting coins with silver and gold, making all payments in specie and accepting specie for payments of debt. Doing so would keep our government on a narrow path of honesty, where corruption will become obvious quickly.
6. In order to use government minted money as currency, it needs to be readily available to everyone. This means that annual spending (investment) should be very high, but that they should also succesfully balance debts using short terms. Instead of a system of unmitigated and substantial debt growth, it should be a system of frequent monetary rotation, but with controlled thought regarding our next moves.
Dr. Paul strongly advocates controlled debt, at the time of it's creation, our debt was nothing in comparison to what it is now and his predictions of out of control spending, booms and busts have all come true to a degree even greater than he suggested.