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Statement for the Record
Congressman Ron Paul
Mr. Chairman, today the Federal Reserve finds itself in an
unprecedented and unenviable position. It has boosted the monetary base by nearly
$1.5 trillion since September of 2008. Excess bank reserves remain at
historically high levels, and the Fed's balance sheet has ballooned to over
$2 trillion. If the Fed pulls this excess liquidity out of the system, it
risks collapsing banks who rely on this newly
created money to boost their balance sheets. However if the Fed fails to pull
this excess liquidity out of the system we risk hyperinflation.
The Federal Reserve has never had such an inflated balance sheet, nor
has it ever pumped up the monetary base by such a large amount. During the
belt-tightening years of the late 1970s and early 1980s, both the balance
sheet and the monetary base continued to expand during a severe recession. We
have to look back to the 1920s and 1930s before we see the Fed lowering the
monetary base, and even then the Fed lowered the base only by 16%. What we
are talking about now is a 60% lowering of the monetary base in order to
return to pre-crisis levels. That is a major decrease in the monetary base
and, if it is undertaken once these excess reserves have begun to enter the
system, it could undermine the viability of banks and lead to the collapse of
the financial system that the Fed sought to avoid.
What the Federal Reserve still fails to realize is that intervention
in the economy is always harmful. Unlike the late French economist, Frederic Bastiat, the Fed only sees what is seen, the superficial
results of its policies, and not what is unseen, the effects of its monetary
intervention throughout the economy. Monetary inflation leads to malinvestment and causes the boom phase of the business
cycle. Once the malinvestment is realized the bust
phase occurs, and these malinvested resources need
to be liquidated in order for the economy to recover. But the Fed actively
works to prevent this liquidation and does everything in its power to
continue inflating in order to prolong the boom. The first act of
intervention begets the second and subsequent interventions, each bigger than
the first, as each economic bust gets larger and more severe.
The idea that a handful of brilliant minds can somehow steer the
economy is fatal to economic growth and stability. The Soviet Union's economy
failed because of its central planning, and the United States economy will
suffer the same fate if we continue down the path toward more centralized
control. We need to return to sound money, bring back free markets, and rein
in the Fed.
U.S. House of Representatives
Committee on Financial Services
Hearing on Monetary Policy and the State of the Economy
March 25, 2010
Ron Paul
www.house.gov/paul
Congressman Ron Paul of Texas enjoys a national
reputation as the premier advocate for liberty in politics today. Dr. Paul is
the leading spokesman in Washington for limited constitutional government,
low taxes, free markets, and a return to sound monetary policies based on
commodity-backed currency. For more information click on the Project Freedom website.
Published with the authorization of Dr. Paul.
Copyright Dr. Ron Paul
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