Statement Introducing the Free Competition in Currency Act

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by Ron Paul: Americans
Deserve a Transparent Fed

Before the
US House of Representatives, December 9, 2009

Madame Speaker,
I rise to introduce the Free
Competition in Currency Act of 2009
. Currency, or money, is
what allows civilization to flourish. In the absence of money, barter
is the name of the game; if the farmer needs shoes, he must trade
his eggs and milk to the cobbler and hope that the cobbler needs
eggs and milk. Money makes the transaction process far easier. Rather
than having to search for someone with reciprocal wants, the farmer
can exchange his milk and eggs for an agreed-upon medium of exchange
with which he can then purchase shoes.

This medium
of exchange should satisfy certain properties: it should be durable,
that is to say, it does not wear out easily; it should be portable,
that is, easily carried; it should be divisible into units usable
for every-day transactions; it should be recognizable and uniform,
so that one unit of money has the same properties as every other
unit; it should be scarce, in the economic sense, so that the extant
supply does not satisfy the wants of everyone demanding it; it should
be stable, so that the value of its purchasing power does not fluctuate
wildly; and it should be reproducible, so that enough units of money
can be created to satisfy the needs of exchange.

Over millennia
of human history, gold and silver have been the two metals that
have most often satisfied these conditions, survived the market
process, and gained the trust of billions of people. Gold and silver
are difficult to counterfeit, a property which ensures they will
always be accepted in commerce. It is precisely for this reason
that gold and silver are anathema to governments. A supply of gold
and silver that is limited in supply by nature cannot be inflated,
and thus serves as a check on the growth of government. Without
the ability to inflate the currency, governments find themselves
constrained in their actions, unable to carry on wars of aggression
or to appease their overtaxed citizens with bread and circuses.

At this country’s
founding, there was no government-controlled national currency.
While the Constitution established the Congressional power of minting
coins, it was not until 1792 that the US Mint was formally established.
In the meantime, Americans made do with foreign silver and gold
coins. Even after the Mint’s operations got underway, foreign coins
continued to circulate within the United States, and did so for
several decades.

On the desk
in my office I have a sign that says: "Don’t steal — the government
hates competition." Indeed, any power a government arrogates
to itself, it is loathe to give back to the people. Just as we have
gone from a constitutionally-instituted national defense consisting
of a limited army and navy bolstered by militias and letters of
marque and reprisal, we have moved from a system of competing currencies
to a government-instituted banking cartel that monopolizes the issuance
of currency. In order to reintroduce a system of competing currencies,
there are three steps that must be taken to produce a legal climate
favorable to competition.

The first step
consists of eliminating legal tender laws. Article I Section 10
of the Constitution forbids the States from making anything but
gold and silver a legal tender in payment of debts. States are not
required to enact legal tender laws, but should they choose to,
the only acceptable legal tender is gold and silver, the two precious
metals that individuals throughout history and across cultures have
used as currency. However, there is nothing in the Constitution
that grants the Congress the power to enact legal tender laws. We,
the Congress, have the power to coin money, regulate the value thereof,
and of foreign coin, but not to declare a legal tender. Yet, there
is a section of US Code, 31 USC 5103, that purports to establish
US coins and currency, including Federal Reserve notes, as legal

legal tender laws have been used by governments to force their citizens
to accept debased and devalued currency. Gresham’s Law describes
this phenomenon, which can be summed up in one phrase: bad money
drives out good money. An emperor, a king, or a dictator might mint
coins with half an ounce of gold and force merchants, under pain
of death, to accept them as though they contained one ounce of gold.
Each ounce of the king’s gold could now be minted into two coins
instead of one, so the king now had twice as much "money"
to spend on building castles and raising armies. As these legally
overvalued coins circulated, the coins containing the full ounce
of gold would be pulled out of circulation and hoarded. We saw this
same phenomenon happen in the mid-1960s when the US government began
to mint subsidiary coinage out of copper and nickel rather than
silver. The copper and nickel coins were legally overvalued, the
silver coins undervalued in relation, and silver coins vanished
from circulation.

These actions
also give rise to the most pernicious effects of inflation. Most
of the merchants and peasants who received this devalued currency
felt the full effects of inflation, the rise in prices and the lowered
standard of living, before they received any of the new currency.
By the time they received the new currency, prices had long since
doubled, and the new currency they received would give them no benefit.

In the absence
of legal tender laws, Gresham’s Law no longer holds. If people are
free to reject debased currency, and instead demand sound money,
sound money will gradually return to use in society. Merchants would
have been free to reject the king’s coin and accept only coins containing
full metal weight.

The second
step to reestablishing competing currencies is to eliminate laws
that prohibit the operation of private mints. One private enterprise
which attempted to popularize the use of precious metal coins was
Liberty Services, the creators of the Liberty Dollar. Evidently
the government felt threatened, as Liberty Dollars had all their
precious metal coins seized by the FBI and Secret Service in November
of 2007. Of course, not all of these coins were owned by Liberty
Services, as many were held in trust as backing for silver and gold
certificates which Liberty Services issued. None of this matters,
of course, to the government, which hates competition. The responsibility
to protect contracts is of no interest to the government.

The sections
of US Code which Liberty Services is accused of violating are erroneously
considered to be anti-counterfeiting statutes, when in fact their
purpose was to shut down private mints that had been operating in
California. California was awash in gold in the aftermath of the
1849 gold rush, yet had no US Mint to mint coinage. There was not
enough foreign coinage circulating in California either, so private
mints stepped into the breech to provide their own coins. As was
to become the case in other industries during the Progressive era,
the private mints were eventually accused of circulating debased
(substandard) coinage, and with the supposed aim of providing government-sanctioned
regulation and a government guarantee of purity, the 1864 Coinage
Act was passed, which banned private mints from producing their
own coins for circulation as currency.

The final step
to ensuring competing currencies is to eliminate capital gains and
sales taxes on gold and silver coins. Under current federal law,
coins are considered collectibles, and are liable for capital gains
taxes. Short-term capital gains rates are at income tax levels,
up to 35 percent, while long-term capital gains taxes are assessed
at the collectibles rate of 28 percent. Furthermore, these taxes
actually tax monetary debasement. As the dollar weakens, the nominal
dollar value of gold increases. The purchasing power of gold may
remain relatively constant, but as the nominal dollar value increases,
the federal government considers this an increase in wealth, and
taxes accordingly. Thus, the more the dollar is debased, the more
capital gains taxes must be paid on holdings of gold and other precious

Just as pernicious
are the sales and use taxes which are assessed on gold and silver
at the state level in many states. Imagine having to pay sales tax
at the bank every time you change a $10 bill for a roll of quarters
to do laundry. Inflation is a pernicious tax on the value of money,
but even the official numbers, which are massaged downwards, are
only on the order of 4% per year. Sales taxes in many states can
take away 8% or more on every single transaction in which consumers
wish to convert their Federal Reserve Notes into gold or silver.

In conclusion,
Madame Speaker, allowing for competing currencies will allow market
participants to choose a currency that suits their needs, rather
than the needs of the government. The prospect of American citizens
turning away from the dollar towards alternate currencies will provide
the necessary impetus to the US government to regain control of
the dollar and halt its downward spiral. Restoring soundness to
the dollar will remove the government’s ability and incentive to
inflate the currency, and keep us from launching unconstitutional
wars that burden our economy to excess. With a sound currency, everyone
is better off, not just those who control the monetary system. I
urge my colleagues to consider the redevelopment of a system of
competing currencies and cosponsor the Free
Competition in Currency Act

the Ron Paul File

10, 2009

Dr. Ron
Paul is a Republican member of Congress from Texas.

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