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THE PRICE OF MONEY: CONSEQUENCES 

OF THE FEDERAL RESERVE’S ZERO 

INTEREST RATE POLICY 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

DOMESTIC MONETARY POLICY 

AND TECHNOLOGY 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

SEPTEMBER 21, 2012 

Printed for the use of the Committee on Financial Services 

Serial No. 112–160 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

SPENCER BACHUS, Alabama, Chairman 

JEB HENSARLING, Texas, Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

NAN A. S. HAYWORTH, New York 

JAMES B. RENACCI, Ohio 

ROBERT HURT, Virginia 

ROBERT J. DOLD, Illinois 

DAVID SCHWEIKERT, Arizona 

MICHAEL G. GRIMM, New York 

FRANCISCO R. CANSECO, Texas 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

FRANK C. GUINTA, New Hampshire 

BARNEY FRANK, Massachusetts, Ranking 

Member 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

JAMES H. CLINGER, Staff Director and Chief Counsel 

(III) 

SUBCOMMITTEE ON DOMESTIC MONETARY POLICY AND TECHNOLOGY

RON PAUL, Texas, Chairman 

WALTER B. JONES, North Carolina, Vice 

Chairman 

FRANK D. LUCAS, Oklahoma 

PATRICK T. MCHENRY, North Carolina 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

NAN A. S. HAYWORTH, New York 

DAVID SCHWEIKERT, Arizona 

WM. LACY CLAY, Missouri, Ranking 

Member 

CAROLYN B. MALONEY, New York 

GREGORY W. MEEKS, New York 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GARY C. PETERS, Michigan 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

September 21, 2012 .......................................................................................... 1 

Appendix: 

September 21, 2012 .......................................................................................... 19 

WITNESSES 

FRIDAY, SEPTEMBER 21, 2012 

Grant, James, Editor, Grant’s Interest Rate Observer ........................................ 5 

Lehrman, Lewis E., Chairman, The Lehrman Institute ...................................... 6 

APPENDIX 

Prepared statements: 

Paul, Hon. Ron .................................................................................................. 20 

Grant, James .................................................................................................... 22 

Lehrman, Lewis E. ........................................................................................... 27 

(1) 

THE PRICE OF MONEY: CONSEQUENCES 

OF THE FEDERAL RESERVE’S ZERO 

INTEREST RATE POLICY 

Friday, September 21, 2012 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON DOMESTIC MONETARY

POLICY AND TECHNOLOGY, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 9:33 a.m., in room 

2128, Rayburn House Office Building, Hon. Ron Paul [chairman of 

the subcommittee] presiding. 

Members present: Representatives Paul, Jones, Lucas, 

Luetkemeyer, Huizenga, and Schweikert. 

Chairman PAUL. This hearing will come to order. And without 

objection, all Members’ opening statements will be made a part of 

the record. 

I want to welcome our two witnesses here today, and I will now 

recognize myself for 5 minutes to make an opening statement. 

Today, we are emphasizing the importance of interest rates. In 

a free market, interest rates are crucial. It is a crucial bit of information that tells a lot of people what to do, whether it is the investors, the savers, the spenders, consumers, whatever. 

But once it is interfered with and interest rates are artificial, it 

tends to mess things up. 

We talk a lot about monetary policy and the soundness of the 

dollar and the spending and monetizing of debt. Today, we are 

more or less concentrating on that aspect of monetary policy that 

deals with interest rates—how important is it—and has that whole 

emphasis on interest rates and this concession through the Federal 

Reserve (the Fed) that they have a duty and sometimes an unregulated duty to pretend they know what the interest rates should be. 

This opens up a lot of questions. Who benefits and who suffers 

from this? Has it done any good? Is it a worthy effort even to try 

to pretend that we know what interest rates should be? And figure 

out exactly how much difficulty it has caused. 

From my viewpoint, I think that, from the viewpoint of the marketplace—just as all prices, I want the market to set these prices. 

And we have been living now with a Federal Reserve for 100 years, 

and early on, they were manipulating interest rates. 

It is hard to manipulate the supply of money or be the lender of 

last resort without getting involved in interest rates. And it is usuVerDate Nov 24 2008 16:16 Nov 27, 2012 Jkt 076130 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 K:\DOCS\76130.TXT TERRI
2 

ally done with either trying to prevent a problem or to solve a problem. 

But if we look at history, especially in our last 100 years, we 

have had a lot of ups and downs. It hasn’t been smooth sailing. The 

Federal Reserve is supposed to be providing for a sound dollar and 

making sure that prices are stable and that there is high employment. 

And yet the results that we see today, because they have pursued this almost obsession on believing that they can leap over into 

a central economic planning through the manipulation of money 

and credit, and in particular interest rates, we have ended up with 

some pretty poor results. 

So I am working under the assumption that we are in a period 

of time probably unparalleled in our history, possibly unparalleled 

in the history of the world, because we have never had quite the 

global economy involved like we have today and we have never had 

a single fiat currency for 30, 40 years being used as the reserve 

currency of the world. So I think the distortions now are so great. 

And if it is indeed true that the concentration on interest rates 

might be the culprit, it would be good to get it exposed, so that 

when the time comes when it becomes an absolute necessity to try 

to correct this problem, we might be able to put a better system 

together. 

So I am delighted today that we have been able to bring two individuals who are very well-versed on this subject to talk about 

this, and other members of the committee, to emphasize the importance of price fixing of money. 

Some people don’t like to call it price fixing and they refer to it 

as something in interest. But in a way, it is easy to understand it 

is a price fixing. 

Price fixing is bad when we have wage and price controls. Not 

many people are advocating wage and price controls at the moment, even though there is a lot of that going on in a subtle way, 

if money is one-half, the currency is one-half of every transaction 

and you have some price fixing involved in the price of money, it 

can be a fairly significant event that should be exposed, and we 

certainly ought to recognize that as we move into that period of 

time when there is a necessity for monetary reform. 

So I am delighted that we have had this opportunity to further 

this discussion. 

I would now like to yield 5 minutes to the gentleman from North 

Carolina, Walter Jones. 

Mr. JONES. Mr. Chairman, thank you. And I won’t take but 1 or 

2 minutes. I want to thank you again for your national leadership 

on this area of monetary policy and concerns of where this country 

is going. 

And to our witnesses today, thank you very much. I look forward 

to listening to your comments. 

I don’t think there is a better time, when we are going home for 

the next 5 weeks, all of us in the United States Congress, to be 

with the people. And knowing that I am from eastern North Carolina and the concern about the actions of the Federal Reserve, I 

think the topic today is absolutely fascinating and critical. 

3 

So I just want to say to you, Mr. Chairman, thank you very 

much for holding this hearing, and I look forward to listening to 

the witnesses and thank them for being here. And just thank you 

for your service to our Nation. 

I yield back. 

Chairman PAUL. I thank the gentleman. 

I now yield time to Mr. Lucas from Oklahoma. 

Mr. LUCAS. Thank you, Mr. Chairman. And as all of the hearings 

that you have called in your tenure as a subcommittee chairman 

reflect, this is an important subject matter and something on which 

we all need to focus. Perhaps not quite as exciting to the membership, as one can tell, as it should be, but nonetheless it cuts to the 

very basis of how our free market system works in this country. 

That said, let me reminisce for just a moment, since this session 

of Congress is beginning to wind down, and there is always a possibility this might be the last hearing of this subcommittee. I suspect 

we might be around after Election Day, but a lame duck session 

is to be avoided if it is humanly possible. 

I would just simply note that—having sat next to you on this 

dais on the full committee and served on your subcommittee for almost a decade now—we have had many a good policy discussion, 

and not just monetary policy, but we have discussed the intricacies 

of farm policy, agricultural economics. 

It might surprise some of you to know that Dr. Paul and I, while 

we agree on many, many, many things, we are not exactly in sync 

on agricultural economics. But we have had some lovely, very 

thoughtful, to-the-point discussions, and you have opened my mind 

in an area or two, and I appreciate that. And I hope perhaps even 

on an occasion or two, I have offered a thought for you to think 

about. But you have just been a pleasure. 

And if Congress is about free elections, and an open and thoughtful debate process where policies can be formulated in the best interest of the country, then I think you have done more than your 

part, and we will all be ever so appreciative of that for many, many 

years to come. 

And with that, thank you, Mr. Chairman. 

Chairman PAUL. I thank the gentleman. 

And now, I yield time to Mr. Luetkemeyer from Missouri. 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. I add my congratulations and empathies from Chairman Lucas as well. It has 

been an honor to serve with you these past 2 years. 

The subject we have today I think is extremely important from 

the standpoint that the Fed continues to tinker around with our 

economy through the money supply, and, from all things that I see, 

it is having minimal success. I am concerned about the direction 

that they are going, the situation that they are putting us in. 

If you look at the global situation, other entities, central banks 

around the world, they are struggling. And is this the proper path 

to take? I don’t know, I am not an economist, and I think there is 

a general disagreement even with good economists on whether it 

is a good policy or a bad policy. 

But I think that the discussion is pertinent, extremely important 

to today’s economic welfare from the standpoint that we are in an 

4 

economic stagnation period here, and how we get out of this is 

everybody’s concern. 

And I think monetary policy by the Fed and their money-supply 

policy is an extremely important subject to discuss. 

So with that, I thank you for the subject today, Mr. Chairman, 

and I yield back. 

Chairman PAUL. I thank the gentleman. 

Now, I yield time to Mr. Schweikert from Arizona. 

Mr. SCHWEIKERT. Thank you, Mr. Chairman. I will be very quick. 

You do realize that you letting me on this subcommittee has really screwed up my subjects of reading over the last 2 years. All of 

a sudden, I find myself reading more about monetary policy than 

I ever thought I would want to touch. And I have learned a lot. I 

have also worked through a series of things that I realize are just 

sort of complete folklore out there. 

And, Mr. Chairman, I am hoping also in our testimony and in 

some of the discussion, I am one of those who is absolutely fixated 

on the concept that interest rates ultimately are the pricing of risk 

and where interest rates and capital flows, and then that interest 

rate charged to where that capital flowed is sort of an allocation 

and a management of risk. 

Do you end up moving large amounts of capital, or even sometimes, us as individuals, capital to places that it shouldn’t be because it is misallocated and mispriced? And what are the ultimate 

consequences for what we have done here when we have basically 

destroyed what should have been the historical pricing mechanism 

or risk mitigation, risk analysis system, which is interest rates and 

our economy. 

And with that, Mr. Chairman, I look forward to the testimony. 

Chairman PAUL. I thank the gentleman. 

We will now proceed to our witnesses. 

First, Mr. James Grant is a noted investor and founder and editor of Grant’s Interest Rate Observer, a widely circulated bimonthly newsletter on finance that accurately foresaw the financial 

crisis. 

A former columnist from Barron’s, he is the author of five books 

on finance and financial history. Mr. Grant has appeared on television programs such as ‘‘60 Minutes’’ and ‘‘The Charlie Rose 

Show’’ to share his expert knowledge of finance, and his journalism 

has been featured in numerous publications, including The Wall 

Street Journal, the Financial Times, and Foreign Affairs. 

Second, Mr. Lewis Lehrman is a senior partner of the investment 

firm L.E. Lehrman & Co., and is chairman of the Lehrman Institute, a public policy organization he founded in 1972, where he 

heads up the Gold Standard Now Project. 

As a member of President Ronald Reagan’s Gold Commission, 

Mr. Lehrman helped write the Commission’s minority report entitled, ‘‘The Case for Gold.’’ 

Over the years, he has written widely about economic and monetary policies and has been featured in Harper’s, The Washington 

Post, and The New York Times, among others. 

Without objection, your written statements will be made a part 

of the record. You will each now be recognized for a 5-minute summary of your testimony. 

5 

Mr. Grant? 

STATEMENT OF JAMES GRANT, EDITOR, GRANT’S INTEREST 

RATE OBSERVER 

Mr. GRANT. Mr. Chairman, and members of the subcommittee, 

good morning. It is an honor and a pleasure, and may I underscore 

honor to be here. 

The price mechanism is our indispensable contrivance, and without it, the store shelves would be stocked with things we don’t 

want, if they would be stocked at all. Our economy is wondrously 

complex, and what coordinates the moving parts is Adam Smith’s 

invisible hand. 

For a superb critique of the perils of price control, look no further 

than Ben Bernanke’s own lectures last March to the students of 

George Washington University. ‘‘As you know,’’ the chairman reminded his charges, ‘‘prices are the thermostat of an economy; they 

are the mechanism by which an economy functions. So putting controls on wages and prices,’’ here Mr. Bernanke was referring to the 

disastrous Nixon experiment of the early 1970s, ‘‘meant that there 

were all kinds of shortages and other problems throughout the 

economy.’’ 

Yet this same observant critic is today leading the Fed in a policy 

of financial price control, to call the thing by its name. Interest 

rates are, after all, prices. They convey information, or are intended to. Market-determined interest rates are the prices that balance the supply of savings with the demand for savings. 

These, however, are not our interest rates. Actually, we hardly 

have any. They are so small you can hardly see them. They are 

tiny. Today, the Federal Reserve imposes interest rates, and those 

rates it does not impose, it heavily influences. 

Mr. Bernanke’s bank fixes at zero percent the basic money market interest rates called the Federal funds rate that manipulates 

the alignment of rates over time, the yield curve, and it has its fingerprints all over the relationship between government yields on 

the one hand, and the yields attached to private claims on the 

other. 

The Federal Reserve has decreed that ultra-low interest rates are 

a necessary if not sufficient condition for economic recovery. It says 

that miniature interest rates will boost hiring and another aspiration of the central bank, keep consumer prices rising by just 

enough; ‘‘a decent minimum, say, of 2 percent a year,’’ so says the 

Fed. 

Now, every market intervention has consequences, but not necessarily the consequences that the intervening authority intended. 

In the nature of things, there can be no predicting exactly what 

will come of today’s radical and indeed unprecedented monetary 

policies. 

Mr. Bernanke himself makes no bones about it in his widely 

scrutinized speech at Jackson Hole, Wyoming, on August 31st. He 

used the phrase, ‘‘learning by doing.’’ Indubitably the Fed is doing, 

nobody can doubt its manic energies, but it seems not to be learning. 

Artificially low interest rates must inevitably subsidize speculation at the expense of saving. It must raise up the prices of stocks 

6 

and commodities, but only temporarily. It must enrich the asset 

holders and inadvertently punish the wage earner. It must advantage one class of financial institutions—say, banks—over another— 

say, life insurance companies. It must disturb the currency markets, and therefore interfere with international trade, and it must 

conflate our understanding of the strength of the Treasury’s own 

finances. 

This year, in the just-ending fiscal year—or the soon to end—the interest cost in the debt will run to an estimated $125 billion. That 

happens to be slightly lower than the outlay the Treasury bore in 

2006 when the debt was 58 percent smaller than it is today, but 

when the average interest rate was a towering 4.8 percent as opposed to the current average of 2.1 percent. 

Ultra-low rates flatter the Nation’s credit profile, yet that credit 

profile remains the same. 

Mr. Chairman, millions of Americans are earning nothing on 

their savings. Having nowhere else to turn, they are investing in 

richly priced corporate debt, some of that speculative grade. The 

Fed author of this interest-rate famine of ours has inadvertently 

created a paradox that would be funny if it weren’t dangerous. 

Mr. Bernanke’s bank has created a high-yield bond market, junk 

bonds to the cognoscenti, but a market lacking one customary attribute of high-yield security. That is, the Fed has created a highyield bond market without the yield. 

I thank you. 

[The prepared statement of Mr. Grant can be found on page 22 

of the appendix.] 

Chairman PAUL. Mr. Lehrman, go ahead. 

STATEMENT OF LEWIS E. LEHRMAN, CHAIRMAN, THE 

LEHRMAN INSTITUTE 

Mr. LEHRMAN. So, Mr. Grant and I like to switch one sentence 

to express how much we honor the extraordinary record of the 

chairman in his 30 years plus, perhaps, service in the Congress. It 

has been a heroic effort on behalf of the authentic Constitution, 

and on behalf of the liberties which we have inherited from our 

forefathers, and of course, for sound money. 

Now, Mr. Grant is about six feet, five inches tall. I am only five 

feet, 10 inches tall, and he determined the protocol of our presentation. So, he established that he would focus on the problem, and 

I should spend a moment or two on the solution. 

Indeed, Jim has described the consequences of Federal Reserve 

quantitative easing and interest rate manipulation and suppression. 

From Mr. Grant’s analysis, one concludes that the Fed’s unlimited power to purchase Treasury debt and financial market securities not only funds the Treasury deficit with newly printed money, 

but the Fed’s market intervention process also makes of the financial class a special interest group of privileged investors and speculators, because of their special access to subsidized funds at near 

zero interest rates, while middle-income families depend upon their 

credit card balances and pay upwards of 20 percent or more. 

A well-connected financial class subsidized by the Federal Reserve is a crucial cause of increasing inequality of wealth in AmerVerDate Nov 24 2008 16:16 Nov 27, 2012 Jkt 076130 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 K:\DOCS\76130.TXT TERRI
7 

ica. In this regard, I would cite only one fact for the Monetary Policy Subcommittee to contemplate. Since the termination of dollar 

convertibility to gold in 1971, a mere generation, the financial sector has doubled in size as a share of the American economy, but 

the manufacturing sector has been cut in half. 

Only comprehensive reform of the Fed and termination of the Reserve currency role of the dollar will arrest this trend. For example 

in 2002, Mr. Bernanke described the Fed’s extraordinary power to 

create new money and credit in our present financial regime of inconvertible paper money and inconvertible bank deposit money. 

I quote Mr. Bernanke, ‘‘Under a fiat paper-money system, a government, the central bank in cooperation with other agencies, 

should always be able to generate increased nominal spending and 

inflation. Even when the short-term nominal interest rate is at 

zero, the U.S. Government has a technology,’’ Bernanke continues, 

‘‘called a printing press, or today its electronic equivalent that allows it to produce as many U.S. dollars as it wishes at essentially 

no cost.’’ 

Reading this, I don’t know whether to laugh or to cry. In effect, 

as James Grant wrote elsewhere, ‘‘The Fed is not only the American central bank, but with this exalted power to print money, the 

Fed is now the government’s central planner.’’ 

During the Volcker years, from 1979 to 1987, Fed interest rate 

manipulation was justified as the means to end inflation. By 1994, 

employment as a Fed target had all but disappeared from the minutes of Fed meetings. 

Now, in 2012, despite inflation being again on the rise, employment is as a practical matter the sole target of quantitative easing. 

The Fed and its apologists in the media and the academy justify 

quantitative easing and its unlimited scope and duration as the 

way to restore economic growth—surely, an extra-Constitutional 

form of fiscal spending through Federal Reserve capital allocation 

reserved for the Congress of the United States. 

But as soon as one examines that Federal Reserve balance sheet, 

which if I may say so, few politicians do, one sees that the Fed primarily buys Treasury securities and mortgage-backed securities. In 

effect, a subsidy by which to finance the government deficit, and 

to refinance bank balance sheets that is to say the promotion of 

more financial and consumption sector growth. In a word, quantitative easing is the most pernicious form of trickle-down economics. 

Now, the problem of the American economy is neither under-consumption nor is it under-banking. The problem is the lack of rapidly growing investment in domestic production and manufacturing. 

The investment is the necessary means by which to enable our 

producers to lead in both domestic and global markets. It is rapidly 

increasing investment and production growth which begets employment growth and with it healthy unsubsidized consumption 

growth, not by means of transfer payments. 

It is a truth of economic theory and practice that rising personal 

and family real income grows from increasing per capita investment in innovative businesses; new plant, new equipment. So the 

question is, in reforming the Fed, how can our runaway central 

8 

bank be harnessed by the financial markets to target the goal of 

economic growth through increased productive investment, not the 

promotion of consumption and Treasury deficit financing by means 

of interest rate manipulation and quantitative easing? 

The answer, I believe, is transparent. The Congress of the United 

States has the exclusive constitutional power under Article I, Sections 8 and 10, not only to establish the definition of the dollar, but 

Congress also has the power to define by statute the eligible collateral that the Federal Reserve may buy and hold against the issue 

of new money and credit. 

Thus, a simple congressional statute defining sound commercial 

loans as the primary eligible collateral for discounts and new credit 

from the Fed would have two primary defects. First, it should rule 

out Fed purchases of Treasuries, thus requiring the government to 

finance its deficits not with newly printed Fed money, but instead 

in the open market away from the banks. 

Second, the Fed would then become a growth-oriented central 

bank by which to finance productive business loans, encouraging 

thereby commercial banks themselves to make banks to solvent 

businesses in order to sustain economic and employment growth. 

Now, why is this the case? Commercial banks would focus on 

production and commercial loans because solvent loans, instead of 

Treasury debt, could then be used by commercial banks as the primary eligible collateral by which to secure credit from the Fed as 

the lender of last resort. In a word, Treasury subsidies by the Fed 

should be displaced by productive business loans oriented toward 

economic and employment growth. 

Mr. Chairman, this simple proposed reform of Fed operations 

was the very monetary policy insisted upon by Carter Glass, a 

leading Democrat who was the chief sponsor of the Federal Reserve 

Act of 1913. The congressional legislative leaders who created, indeed founded, the Federal Reserve System of 1913 designed the 

Fed by law to enable steady commercial investment and employment growth. 

The Federal Reserve Act was also designed explicitly to uphold 

and maintain dollar convertible to gold in order to maintain a reasonably stable general price level. Now, such a congressional Federal Reserve reform today, consistent with the original Federal Reserve Act, would require no further legislative mandate to sustain 

employment growth and to rule out systemic inflation and deflation. 

Just a word more—so today, the Fed reiterates at every meeting 

that it, the central bank, must manage and manipulate interest 

rates to fulfill a congressional mandate to maintain reasonable 

price stability and reasonably full employment. But the best way 

to do this is to remobilize the express intent and the techniques of 

the original Federal Reserve Act, namely the statutory requirement 

that the Fed uphold the classical gold standard and, as was intended by the original Federal Reserve Act, to substitute commercial market credit for Treasury debt as the primary eligible collateral for bank loans from the lender of last resort, the Federal Reserve System. 

Mr. Chairman, may I say with respect, Congress has defaulted 

to the Federal Reserve System its sole and solemn constitutional 

9 

authority to define and to regulate the value of the dollar and to 

define the vital economic use of eligible collateral by which to obtain productive business loans from the Federal Reserve System. It 

does not have to be this way. 

Thank you very much. 

[The prepared statement of Mr. Lehrman can be found on page 

27 of the appendix.] 

Chairman PAUL. Thank you. 

We will go into the questioning session right now. I yield myself 

5 minutes. 

I want to ask both of you the same question. In 1979, and the 

1980s, we had a bit of a crisis, quite different than we have today 

because interest rates were very, very high and even made higher. 

At that time, as I recall, not too many people were happy and 

claiming they were getting benefits from the higher interest rates. 

I don’t think the markets—the higher the rates went, I don’t think 

the markets were saying ‘‘wonderful, wonderful.’’ 

But today, even with this most recent announcement of the accelerated quantitative easing, there is almost an immediate response—as a matter of fact, instantaneous response. We are going 

to print a lot more money and those individuals who are holding 

stocks seem to be delighted with that and bonds rally. 

My question is: Under today’s circumstances, with this constant 

effort to keep lowering interest rates, now that they are down to 

essentially zero, below zero when you talk about real interest rates, 

who benefits from this? Who is really benefiting? And who are the 

people who are suffering? Can you divide it up and find out if there 

are some groups who have no benefit whatsoever and some people 

actually get punished? And other people are rewarded, whether it 

is temporary or not, at least they think they are being rewarded. 

And if there is a case where somebody benefits, and somebody 

else is hurt, is this done on purpose? Or would you want to make 

a stab at it to say is this sort of a consequence of just bad policy? 

Or what might be the motivation here if there are winners and losers? 

Mr. Grant? 

Mr. GRANT. Mr. Chairman, the great French economist Frederic 

Bastiat talked about that which is seen and that which is not seen. 

There are many obvious beneficiaries. There are many obvious victims. Let me suggest a subtler distortion that these policies are responsible for, and then I will touch on some of the ones that are 

perhaps as important or more so. 

Capitalism is a little like the forest floor. There is life. There is 

death. There is regeneration. There is movement. The famous 

phrase ‘‘creative destruction’’ defines the inevitable ebbing of economic power that was once constructive and now has passed its 

prime. 

One of the consequences of these subsidized interest rates is that 

organizations that perhaps ought not to be around are given new 

life. The financial markets on Wall Street are increasingly welcoming to the most marginal credits because there is a stampede 

for interest income. People are starving for it and Wall Street is 

providing for it. 

10 

When nearly anyone can get a new loan—when nearly anyone 

can get a pass in the public market that means there are not 

enough bankruptcies. It is a problem, albeit a paradoxical one. We 

need new enterprise and we need the exit of unprofitable or overthe-sell-by date enterprise; so ultra-low interest rates perpetuate 

the status quo. 

Interest rates, as someone mentioned, are among other things, 

great sources of information. When interest rates are pressed to the 

floor, the credit markets provide less and less information. The information is there, but it is not to be intuited by prices. 

So, as to the other beneficiaries and losers, some of them are 

painfully obvious. The Fed talks more or less nonstop about inflation, but then I think is troubled by the lack of it. It wants to see 

more of it. Well, one department of American finance in which 

there is rampant inflation is the cost of obtaining a dollar of income. One might say the cost of retirement is in a terrific inflationary crisis. 

A friend of mine and of Lew’s, a Wall Street figure of wonderful 

renown and of some mordant future, said a while ago, before he 

passed away, ‘‘You know,’’ he said, in all seriousness, ‘‘you really 

can’t get by today without $100 million.’’ 

The point survives the exaggeration. You need more and more 

capital to maintain a decent income as a saver. That, to me, is not 

the least of the cost of these policies. 

Chairman Bernanke, in Jackson Hole, spoke to try to put our collective minds at ease about the unintended consequences of quantitative easing. And he said, ‘‘I can enumerate four possible pitfalls’’—four. There are 400,000 possible pitfalls. 

The Chairman, I think, is in error when he implicitly tells us 

that for every monetary cause A, there is a predictable monetary 

effect B. There are effect B, C, D, N, Z, and myriad effects that are 

so weird that no proper letter in the English language can describe 

them. 

What we are now embarked on is one of the great monetary experiments of all times and, Mr. Chairman, we are the lab rats. 

Chairman PAUL. Mr. Lehrman? 

Mr. LEHRMAN. Mr. Chairman, you mentioned the period of 1979, 

1980—that period of high interest rates over which Mr. Volcker 

presided. I was there and I remember it, just as you do. One of the 

remarkable things about a review of the history of the Federal Reserve System from 1914 until the present is that the techniques 

that have been used either to suppress interest rates or the use of 

vaulting interest rates to bring about changes in economic activity 

has seen no reform. 

That is to say, Paul Volcker, you will remember in 1979, said his 

goal was to target the bank reserves; that is to say, to control the 

stock of money in circulation. This was another new experiment on 

interest rate manipulation, of course, with a noble intent. 

But this was just another form of interest rate manipulation 

which ultimately wound up putting the prime rate at 21 percent 

and market rates for a long-term Treasury at the highest level that 

they would been in American history, approximately 15 percent. 

It is forgotten in the dreamlike remembrance of that period that 

from 1979 to 1982 the American economy was in recession, the unVerDate Nov 24 2008 16:16 Nov 27, 2012 Jkt 076130 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 K:\DOCS\76130.TXT TERRI
11 

employment rate in New York State in 1982 in November—I remember that date very well for personal reason—was 11.2 percent, 

higher even than the unemployment rate at the peak of the ‘‘Great 

Recession,’’ which we have undergone since 2008. 

It was not a halcyon period. President Reagan’s first years of the 

Administration were almost impeached economically because of 

that. 

So as the French say, the more it changes, the more it is the 

same way; that is to say, Federal Reserve interest rate manipulation and management for one purpose or another. 

Who benefits and who suffers? In each period, under each of the 

Federal Reserve Chairmen who exercised this extraordinary power, 

it was different. 

Today, I want to point out only in response to the question the 

technique and its effect by which the Federal Reserve actually does 

operate in open market operations at the New York Federal Reserve System and has done so since the First World War. 

The Federal Reserve enters the market and purchases outright 

or on a match sale or on a repurchase agreement Treasury securities from the market against which they issue new money. 

That new money is made available only to the banks because— 

or the today 16 authorized dealers. So their portfolios are reduced 

and substituted with new money, which they then are in a position 

either to lend out to dealers and brokers or speculators or Wall 

Street investors who can post collateral, liquid collateral, by which 

they then can satisfy the lend that they can repay the loan. 

So the very first effect and the dominant effect, the generalized 

effect is commodity dealers and equity dealers who have first access to the money which is created anew by the purchase of Treasuries, which themselves cannot be repaid as they are refinanced 

with renewal bills. 

This is a prescription and has been in effect for a very long time, 

but especially since the end of the Second World War and even 

more dynamically since the end of Bretton Woods in 1971, to enrich 

the investor class. 

I cannot incriminate them because to a certain extent I am a 

member of that class, but one does not have to be a rocket scientist 

to see that the Federal Reserve’s process of monetizing the U.S. 

Treasury debt, providing new credit to the banking system to lend 

to their preferred clients divorces supply from demand, creating a 

monetary demand unassociated with the production of new goods 

and services. 

When total monetary demand exceeds supply, which is the prescription and the technique of the Federal Reserve, inflation must 

get under way. 

Now, that inflationary process today is hidden by the vast unemployed resources which we now have. And as a result, the new 

credit money immediately goes into the commodity and equity markets as well as into speculative vehicles like farmland, for example, 

which is the most exotic investment today of a sort of inside Wall 

Street investors. 

No change can occur in such a process without a full reform of 

the Federal Reserve System and a reform of the monetary system. 

Chairman PAUL. Thank you very much. 

12 

I now recognize Mr. Luetkemeyer for 5 minutes. 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. 

I appreciate your comments, Mr. Lehrman. They are interesting. 

You called farmland an ‘‘exotic’’ investment. 

I am looking to try and buy the farm next to mine, and I 

wouldn’t think it would be an exotic investment. But I understand 

where you are coming from. 

I am just kind of curious, if the Fed would not purchase all of 

the government’s debt, would there actually be a market out there, 

in your judgment, for our debt because of the size of the debt that 

we have, the amount of money that it would take to service that 

debt? Is there enough capital out there to service that debt? Is 

there enough capital out there to purchase that if we don’t run the 

printing presses here at the debt and pick it up, in your judgment? 

Mr. LEHRMAN. May I first say, Congressman, that I am the 

owner of a 1,600-acre farm—corn, soybeans. And it is exotic from 

the standpoint of speculators who have never set foot in a cornfield, 

but certainly not from those— 

Mr. LUETKEMEYER. That is who I am bidding against on the farm 

right now, are those guys. 

Mr. LEHRMAN. So then you understand what— 

Mr. LUETKEMEYER. Yes, I do. 

Mr. LEHRMAN. —I was getting at. 

Mr. LUETKEMEYER. But to me, it is not exotic. I would like to buy 

my neighboring farm, but to those folks, it brings the price up. I 

understand, but go ahead. 

Mr. LEHRMAN. So the question is: What would happen if, as the 

founders of the Federal Reserve System intended, the Congress of 

the United States and the budget of the Treasury were not able to 

finance its deficit by selling securities ultimately to the Federal Reserve System? Is the open market substantial enough to accommodate the vast sums presently required by the Treasury in order to 

finance its current spending? 

The answer to that is we would find that out, and it would be 

the ultimate discipline, which would require Congress on notice to 

the public that the financing of the Treasury was forcing interest 

rates higher and higher and excluding businesses and commercial 

firms from access to the credit markets because at the present level 

of deficits—let us call it all in about $1.5 trillion, including the 

credit financing bank—it would absorb almost all the net national 

savings available in the market, which gets right to the point of 

this hearing. What is the effect of the suppression of interest rates 

and their manipulation and the financing of 77 percent of the Federal Reserve’s budget deficit in Fiscal Year 2011; what is the effect 

of that? 

It disguises from the public, the sovereign people, the effects of 

the fact that only 60 percent of the revenues which Congress decides to spend are financed through taxes, and 40 percent of them 

through printed money either through the banks, the commercial 

banks, for foreign central banks. 

Mr. LUETKEMEYER. I think there is another point to be made 

here too, which is the fact that because they are driving rates so 

low they are also disguising or hiding the fact—the exposure that 

we have when you go to $16 trillion worth of debt in just—an addiVerDate Nov 24 2008 16:16 Nov 27, 2012 Jkt 076130 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 K:\DOCS\76130.TXT TERRI
13 

tional $4 trillion, $5 trillion, $6 trillion in the last 3 or 4 years— 

the amount of exposure we have to interest rate fluctuation. Right 

now, the cost of interest to our government is rather low compared 

to what it has been in the past because of driving interest rates 

down. 

If that would not happen the rates would go back—it would be 

very easy to double or triple the rates, because they are so low 

right now. Imagine what it would do to our budget if you doubled 

or tripled our cost of funds. 

Mr. LEHRMAN. We dealt with that issue at the last hearing, Congressman. We dealt with that issue. And were you to normalize the 

long-term interest rates—let us say for 30-year Treasury bonds— 

were you to normalize them consistent with the past history of the 

generation and given the scale of the direct debt of Treasury right 

now at $16 trillion, the total amount of the Federal budget devoted 

to interest payments could rise to as high as $800 billion, even towards a $1 trillion if the deficit were to continue. 

That puts, I think, a number on the effect. 

Mr. LUETKEMEYER. Very good. 

Very quickly, how do we unwind this? What happens when we 

unwind this thing? 

Mr. Grant? 

Mr. GRANT. We don’t know. The Fed is— 

Mr. LUETKEMEYER. We are still going to be a laboratory even for 

that. 

Mr. GRANT. Yes. That, too, will be a learning-by-doing experience. 

Mr. LUETKEMEYER. How painful will it be, do you think? 

Mr. GRANT. Sorry? 

Mr. LUETKEMEYER. How painful do you think it will be? Because—until interest rates rise, will inflation take place or will we 

go into a depression? Will it be runaway glory, everything going to 

be hunky-dory here? Or where are we going? If the Fed has to unwind this thing and get rid of the 2-point whatever—$8 trillion 

now— 

Mr. GRANT. Congressman, we can rule out hunky-dory. 

As for the rest, we will see. 

Imagine a day in which the Treasury, to finance another $1.5 trillion deficit is raising, say, $15 billion in 2-year notes in the 

morning; and in the afternoon the Fed is holding a special auction 

to liquidate the remaining excess portion of those balance sheets. 

So they will be one auction on top of another. 

We simply don’t know the outcome, but we do know, I think, that 

the Fed’s assurances must be discounted. The Fed is remarkably 

complacent with regard to its capacity to form financial judgments. 

This is the outfit that panicked in front of the prices of computer 

clocks in 1999—neglected to see or to take due measure of the speculative mania in technology stocks that ended in the early aughts. 

And that positively saw not one aspect of the greatest credit crisis 

in three generations looming before it in the mid-2000s. 

And we are meant to believe that the perspicacity of the judgment of the Fed will now help them anticipate the end of the necessity for this Q.E. and to unburden themselves of the excess security. 

14 

So I don’t doubt that they mean to have the techniques to affect 

the exit. What I do doubt—and I think there is evidence in support 

of doubt—is that they have the judgment to mark the time and the 

need. 

Mr. LEHRMAN. May I say a word on that question, Mr. Chairman? 

Every Thursday, at about 4 p.m., the Federal Reserve System 

publishes its balance sheet. That balance sheet as of Thursday 

night, last night—I looked at it—shows that to do it in round numbers, the Fed owns approximately $3 trillion of securities, primarily 

Treasury securities and mortgage securities, mortgage-backed securities and agency bonds. 

If you look further into the detail and the footnotes you will observe that the largest fraction of the balance sheet of the Federal 

Reserve System is in long-term securities. 

The historic practices of central banks during long periods of stable prices was only to own short-term securities so that were inflation to arise, they could, to use your phrase, unwind their portfolios 

selling securities, or letting them run off into the market in order 

to reduce the quantity of money and credit in circulation and stabilize the price level. 

The Federal Reserve is now faced not only with the daunting 

task of unwinding the enormous monetization of Treasury and 

mortgage-backed securities, but they have encumbered the balance 

sheet with long-term securities which will not run off on a regular 

basis the way short-term commercial bills do with 90-day maturities. 

They have the largest fraction of—far and away the dominant 

fraction in 10-to-30-year securities. So the only way they can get 

rid of them is to sell them into the open market. 

If the economy is running full-tilt at full employment, and let us 

say the employment rate might be at 5 percent, it could have nothing less than, as you implied, a very dynamic effect on interest 

rates in general, not just in the United States, but worldwide in 

as much as the United States dollar is the world reserve currency. 

Mr. LUETKEMEYER. Thank you. 

I yield back. Thank you, Mr. Chairman. 

Chairman PAUL. Thank you. 

We are going to a second round now of questioning. 

The first question I have I would like to get sort of a short answer for, because I have another question that follows and we will 

be voting on the Floor pretty soon. But what is your concept of the 

current situation now and whether or not we have a bubble? Most 

of us recognize a NASDAQ bubble. Others recognize the housing 

bubble. Do you see a bubble right now that could suddenly change 

and change the markets and all perceptions? 

Mr. Grant? 

Mr. GRANT. Yes, Mr. Chairman, I do. I see a bubble in Treasury 

securities. I see a bubble in sovereign debts worldwide. The world 

has come to believe that the promises to pay of sovereign governments are intrinsically safe—not everyone—but Northern European governments are meant to be intrinsically safe. Australia, I 

think there are seven or eight AAA-rated governments left on the 

15 

face of the Earth. People are crowding into the claims of these governments, not least into our own. 

These are interest rates that have not been seen in modern times 

in Northern Europe. There are plenty of governments borrowing at 

negative interest rates. And as was the case in every single market 

bubble in history, there are wonderfully persuasive stories circulated to rationalize what on the face of it is an abuse of common 

sense. 

So I nominate bonds themselves as our looming bubble. 

Chairman PAUL. Mr. Lehrman, any additional comments? 

Mr. LEHRMAN. The number of bubbles—even with vast unemployed resources in nations around the world, not just in the 

United States—is legion. And Jim has just mentioned some, but 

the Congressman and I were talking about farmland. 

The value of farmland, as one vehicle for speculation, not only 

among well-positioned farmers, but I mean to say the investor 

class, the price of farmland, high-quality, let us say 160-bushel-peracre, non-irrigated farmland from Central Pennsylvania all the 

way to the foothills of the Rockies, that is to say the great corn 

belt, has doubled just in the past 4 years. 

This has never been experienced at quite this rate of change; or 

I should say this bubble has never occurred on this scale in the 

past. It is one more example. 

Chairman PAUL. My follow-up question is to you, Mr. Lehrman. 

I would like Mr. Grant to comment as well. You talked about a 

long-term solution, more about the monetary reform and the use of 

gold. I want to concentrate more on that shorter-range solution or 

something you suggest that could help. And that is to look to the 

original Federal Reserve Act and not to allow the Fed to buy Treasury bills, but to allow the Fed to be the lender of last resort to 

sound commercial loans. 

Did I state that correctly? 

Mr. LEHRMAN. Exactly. 

Chairman PAUL. Okay. If the Fed buys a commercial loan, they 

could buy this with money creation. Would this be expanding the 

money supply? Would this be monetizing a debt? And could it lead 

to a problem as well? Or would you argue that this is not monetary 

inflation? 

Mr. LEHRMAN. I would argue it would not be monetary inflation. 

The difference is profound. The purchase of commercial bills for the 

purpose of production by the Federal Reserve or by commercial 

banks against the issue of new money goes to solvent firms who, 

in the process of production, then sell their output and they repay 

the loans. 

And as a result, the new credit which has been advanced against 

the commercial bill or against the productive loan expands the 

money supply during that particular market interval. But 90 days 

later or 120 days later, the goods that were produced as a result 

of that financing realize their value and then those loans are liquidated, restoring equilibrium to the money market. 

Chairman PAUL. So do you separate this from being the lender 

of last resort? Or would you put it in that category? 

Mr. LEHRMAN. I use the phrase ‘‘lender of last resort’’ because 

that is, of course, the rationalization that everybody uses to give 

16 

the Fed the privileges to create money without limit. As the lender 

of last resort, the Fed would have the possibilities of buying solvent 

commercial loans in the open market, which themselves would be 

liquidated in a windup naturally in the course of economic activity. 

Whereas, in the case of the Treasury, the Treasury is never able, 

under present circumstances, and has not been since pretty much 

the end of the Second World War, to liquidate the bills or the bonds 

which they are selling. And it leads to a permanent expansion of 

the money supply never to be unwound by the natural course of 

production. 

Chairman PAUL. Would doing this interfere with interest rates? 

Mr. LEHRMAN. In the case of commercial bills or productive 

loans, which the Fed would then discount when they were offered 

by the commercial banks against the desire for new credit, this 

would, in the same sense, lead to a rise in interest rates when credit demands were higher, and a fall in interest rates when the commercial loans were being repaid to the commercial banks, and the 

commercial banks repaying the central bank for the loans that they 

obtained against commercial lending collateral. 

Chairman PAUL. Okay. And our voting has started, but I would 

like to get Mr. Grant to make a comment on that, if he could. 

Mr. GRANT. I would vote. I am with Lew. 

Chairman PAUL. Pardon me? 

Mr. GRANT. I said I would go vote; I am with Lew on this. I can’t 

add to this or shouldn’t take your time in adding to it. 

Chairman PAUL. Okay. Mr. Huizenga from Michigan, would you 

like to ask some questions? 

Mr. HUIZENGA. I would. Also, Mr. Chairman, I want to say thank 

you for your service to our country and your time here in Congress, 

as well as your service to the philosophy, the battle that we have 

going on. 

And the question I have is, I am curious if we can touch on the 

dual mandate of the Fed and what you believe that may have done 

to get us in the current situation. And would you suggest us changing that dual mandate of having them pursue low inflation and 

high employment? And any time I have, I would like to give back 

to the Chair if he so desires to do a follow up. 

Mr. GRANT. Congressman, I think that one might, again, go back 

to the founding precepts of the Fed. The Fed got into business, if 

you read the opening paragraphs of the Federal Reserve Act, the 

Fed was to create a market in commercial bills and to exchange 

paper for gold in such a way as to support the working of the gold 

standard. 

And the phrase added was, ‘‘and for other purposes’’—pregnantly, it was added. But I would keep the mandate even simpler 

than one. I would say that the Fed ought to be in business to support an objective definition of the value of the dollar. 

In this day and age, we could not have anything resembling industrial commerce as we know it without the most precise specifications of material weights and measures. And somehow, we have 

neglected this in money. 

Money is what someone thinks it should be in some particular 

public institution like a central bank or a Treasury Department. 

The lead article of the Financial Times this morning was a plaint 

17 

by the finance minister of Brazil against quantitative easing on the 

grounds that the willful depreciation of the dollar—or I might say 

the willful redefinition of the dollar—would certainly lead to the 

interruption of trade and to frictions that did not exist previously. 

The gentleman to my left has written a fabulous book on this, 

and I think it is his view as well that what is wanted is the restoration of objective value in the dollar. And if the Fed could do 

that and maintain it, it seems to me that good things would follow. 

As it is, we have arrived at the most peculiar point in which people have come to think that if the Fed can raise up the value of 

stocks, bonds, farmland and commodities, somehow prosperity will 

follow. It seems to me that is a very peculiar horse in front of a 

very odd cart. 

Mr. HUIZENGA. I appreciate that. 

And Mr. Chairman, I am happy to yield my time to you. 

Chairman PAUL. I thank you. 

I will recognize Mr. Luetkemeyer. 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. 

Just very quickly, I only have a couple of questions. 

Mr. Grant, what do you believe would be the ideal interest rate 

or the ideal range that the Fed should shoot for, that our rates 

should be for, say, our T-bills or Fed funds rates or home loans or 

somewhere in there? Use some of those figures. 

Mr. GRANT. Sir, I think the Fed should not be shooting at those 

rates. I think that they should be determined in the marketplace. 

If you look back on history, kind of a normal mortgage rate was 

4.5 to 5 percent; T-bill rate, maybe 3 to 4 percent; long-dated securities, yielding perhaps 6, 7 percent depending on the credit; and 

higher with regard to junk or speculative grade credits. 

But I would let the wonderfully invisible forces of the marketplace into this line of work and let them do their thing— 

Mr. LUETKEMEYER. Okay, if that is the case then, do you get rid 

of the Fed, or do you think there is a place for it? 

Mr. GRANT. Sir? 

Mr. LUETKEMEYER. Would you get rid of the Fed then or do you 

believe there is a place for it? 

Mr. GRANT. I believe that the Fed ought to be doing much less 

than what it is doing, and it could do with many fewer economists. 

They could be doing with a much narrower mission statement and 

as long as we are talking about reforming this outfit, we should not 

fail to institute the Fed’s first office of unintended consequences. 

Mr. LUETKEMEYER. Mr. Lehrman, would you like to comment on 

that? 

Do you believe we need to have a Fed or do you believe— 

Mr. LEHRMAN. I have made the case in my book and in previous 

books that if we are going to have a Federal Reserve system—for 

it should be said it is not an indispensable necessity—but if we are 

going to have a mere agency of the Congress maybe with the stature, so to speak, of the Interstate Commerce Commission or the 

Federal Communication Commission, then it must be circumscribed by very careful rules, whereby it conducts its policy 

such that it is consistent with the activities of a free market and 

a free people. 

18 

So, that yes, I can embrace the Federal Reserve Act of 1913, and 

the very few moments in which it conducted itself according to Article I of the Constitution, Sections 8 and 10, namely, to define the 

value of the dollar, regulate the— 

Mr. LUETKEMEYER. So you could live with it as long as it went 

back to its original intentions and functions? 

Mr. LEHRMAN. I think we can go forward. We can’t go backward, 

but I think we can go forward to a restoration of a Federal Reserve 

System which operates with some restraints imposed by Congress, 

the definition of the collateral, which is eligible at the Federal Reserve for discount against new money to encourage economic 

growth as opposed to encourage Treasury budget deficit. 

Mr. LUETKEMEYER. Thank you. 

Mr. Chairman, I yield back. 

Chairman PAUL. Thank you. 

I wanted to thank our Members who are here today, and our witnesses. And I appreciate very much you being here. 

The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 30 days 

for Members to submit written questions to these witnesses and to 

place their responses in the record. 

This hearing is now adjourned. 

[Whereupon, at 10:36 a.m., the hearing was adjourned.] 

(19) 

A P P E N D I X 

September 21, 2012 

20 


76130.001

United States House of Representatives 

Committee on Financial Services 

Subcommittee on Domestic Monetary Policy 

Hearing on 

"The Price of Money: Consequences of the Federal Reserve's Zero Interest Rate Policy" 

September 21, 2012 

Congressman Ron Paul 

Statement for the Record 

One of the most enduring myths in the United States is that this country has a free market, 

when in fact nothing could be further from the truth. In reality, government has pervaded so many 

aspects of the market that what we see as a free market is merely the structural shell of formerly free 

institutions, while government pulls the strings behind the scenes. No better illustration of this can be 

found than in the Federal Reserve's manipulation of interest rates. 

The Fed has interfered with the proper functioning of interest rates for decades, but perhaps 

never as boldly as it has in the past few years through its policies of quantitative easing. In Chairman 

Bernanke's most recent press conference he stated that the Fed wishes not only to drive down rates 

on Treasury debt, but also rates on mortgages, corporate bonds, and other important interest rates. 

Markets greeted this statement enthusiastically, as they realize that this means trillions more newlycreated dollars flowing directly to Wall Street. 

What almost no one realizes, however, is that interest rates are a price, the price of money. 

Like any other price, interest rates perform both a signaling and a coordination function. Interest rates 

coordinate the actions of savers and borrowers: higher interest rates attract savers, lower interest 

rates attract borrowers, and the market interest rate provides an equilibrium between saving and 

borrowing. The interest rate also signals the availability of funds: lower interest rates signal an 

abundance of loanable funds, while high interest rates signal a paucity of funds. As interest rates rise, 

more people save and fewer people borrow; as interest rates fall, fewer people save and more people 

borrow. Lower interest rates also tend to favor longer-term, more capital-intensive projects. Projects 

which might not be profitable at eight percent interest rate may suddenly become profitable if the 

interest rate drops to three percent. 

In order to lower the interest rate, more loanable funds must be available. But if individual 

saving habits remain unchanged, the only way to lower interest rates is to inject additional money or 

credit into the financial system. This new injection of credit, which has its origins not in savings but 

merely through a new bank balance sheet entry, results in a lowering of the rate of interest. The lower 

rate of interest signals the availability of additional loanable funds, which spurs additional borrowing. 

These borrowed funds are then put to use to fund capital projects. Additionally, as the interest rate 

lowers some savers may judge that their funds are now better off being used to fund present 

consumption, rather than continuing to be saved for future consumption. 

Because the interest rate is the price of money, manipulation of interest rates has the same 

effect in the market for loanable funds as price controls have in markets for goods and services. Since 

demand for funds has increased, but the supply is not being increased by the market, the only way to 

match the shortfall is to continue to create new credit. But this process cannot continue indefinitely. At 

some point the capital projects funded by the new credit are completed. Houses must be sold, mines 

must begin to produce ore, factories must begin to operate and produce consumer goods. 

But because consumption patterns have either remained unchanged or have become more 

present-oriented, by the time these new capital projects are finished and begin to produce, the 
21 


76130.002

producers find no market for their goods. Because the coordination between savings and consumption 

was severed through the artificial lowering of the interest rate, both savers and borrowers have been 

signaled into unsustainable patterns of economic activity. Resources that would have been used in 

productive endeavors under a regime of market-determined interest rates are instead shuttled into 

endeavors that only after the fact are determined to be unprofitable. In order to return to a functioning 

economy, those resources which have been malinvested need to be liquidated and shifted into sectors 

in which they can be put to productive use. 

Another effect of the injections of credit into the system is that prices rise. Because credit 

functions as money, the effect of creating new credit is the same as printing new money. More money 

chasing the same amount of goods results in a rise in prices. And that rise in prices affects different 

groups of people in different ways. Wall Street always is the first to benefit from the new credit, 

because it is injected by the Fed directly into the financial system. From there it trickles down through 

the economy, but Wall Street and the banking system gain the use of the new credit before prices rise. 

Main Street, however, sees the prices rise before they are able to take advantage of the newly-created 

credit. The purchasing power of the dollar is eroded and the standard of living of the American people 

drops. 

We live today not in a free market economic system but in a '"mixed economy", marked by an 

uneasy mixture of corporatism; vestiges of free market capitalism; and outright central planning in 

some sectors. The folly of central planning that should have been learned after the fall of the Soviet 

Union never took hold in Washington. Each infusion of credit by the Fed distorts the structure of the 

economy, damages the important role that interest rates play in the market, and erodes the 

purchasing power of the dollar. Markets see the interest rate and assume that the price is functioning 

as it should, when in fact it is being manipulated by a select few bureaucrats in Washington. Fed 

policymakers view themselves as wise gurus managing the economy, yet every action they take 

results in economic distortion and devastation. 

The concept of the free market suffers as a result, since markets see a fa<;ade of marketdetermined prices as well as the reality of economic crisis. Wall Street makes out like bandits, while 

Main Street continues to suffer. The negative effects of manipulated interest rates are readily apparent 

in the economic malaise we are suffering now, but the real cause of this crisis, the Fed's centrally 

planned mismanagement, remains artfully concealed. Unless Congress gets serious about reining in 

the Federal Reserve and putting an end to its manipulation, the economic distortions the Fed has 

caused will not be liquidated; they will become more entrenched, keeping true economic recovery out 

of our grasp and sowing the seeds for future crisis. 
22 


76130.003

GRANT's lNTEF'f.sr flATE OB$ERVEl-{ 

~.~~, ""'-'~' ~ , ~~,-. . . ~ .. ,. 

Testimony of James Grant 

Editor, Grant's Interest Rate Observer 

Before the House Subcommittee on 

Domestic Monetary Policy and Technology 

United States House of Representatives 

September 21, 2012 

T\vo WALL S'IREEf' NLW YORK, NY 10005·212-809"7994· 2J2-g09~8492· w\\'\-\' OR,'\0iTSPl!B CO\l 
23 


76130.004

G 

N T ERE S T RAT E o B S E R V E R® 

Vol. 30, No. 17a Two Wall Street, New York, New York 10005 • www.grantspub.com SEPTEMBER 7, 2012 

What the chairman didn't mention 

An lllidrarnatic 

of doub!c~:-,paccd 

bonds. commodities and noD-dollar 

assets on the Frid:lV before 

l!l a few "hoft h(;urs, the 

rallied more th:m the 

ounce at it was official~ 

between the mid~ 19305 .lnJ 

1970$. The ":\.lonetary 

the Onset the Crisis," 

cllld mind of the man who recited 

rhe chainn.Ul of the Federal Reserve 

at 

"The 

" warned 

nankc, "not only because of the enOfadditional policy 

aw)m,nodbti,m as needed to promote 

and susmarket 

market scii'"cd on the 

phrase, "will provide additiona! policy 

accommodation as needed." For an inH.'stmcnr, it may profitably consider dle 

and rc\'(:aling \nmls, 

account of the unccrt:1inof its policy took" It 

makes all the difference that the ehairman docs not. in fact, take due account 

of the "uncertainties and Jimit~" of his 

"policy tools." He may pHy them lip 

~ervicc. as he did in hi~ ,~peech. But he 

doe.~ not really weigh the cost ~ amI bendits what no other American 

central has done before. With 

economic problems 

aTC susceptible to a monetary solution. 

For action, Berout loud, thefe is :l 

reaction .. fhHt is, for policy 

'lOll may bet your boots on outcome 
24 


76130.005

H. For ourselves. we have come to bclicvc--the past five years have decided 

us on the \vhik- policy 

A outcome B, it may alterserve up outcomes J o'r Q or 

Z-{)r, not some mher 

result too strange to be under 

a known Ellglish letter. 

Bernanke makes no hones that he 

is improvising. "Large scale asset pur-

,. a.k.a. QE, and the "maturity 

" a.k.a. Operation 

novel in 

exof the Japanese case--limited 

experience," the chairman 

admitted. "As a result, central bankers 

in the t lnitcd States, and those in othTo learn how 

to ride a bicycle, \\'e But 

h:1s heen circulating 

there is a voluminous monetary record. 

It is there to be read. Did the chairman or his staff consult the 'wisdom 

of the before deciding to muscle 

around yield curve, manipulate asset values, materialize dollars by the 

hundreds of billions and. in general, 

to short-circuit the price mechanism? 

Not on the evidence of the four-and-ahaJf~pa~e bibliography appended to the 

Bernanke text. Tn judge by rhis feadJist, the chairman consulted no aubefore 1965. He cj(e~ 

published l)efore 

the onset of the 2007 financial cave-in. 

I lis favorite amhors afe his employees 

at the Federal Reserve Board. 

conclude. 

experience with large-scale asset purchases." said Bernanke, "a substantial 

work on their effects 

and firmed up stock prices: "it is probably not a coincidence that the sustained 

in t 1.S. prices hegan in 

the [Federal 

Open I'.Luket Committee'sl decision 

securities purchases. 

potentially important 

because stock values affect both consumption and investment decisions." 

SO VOl! didn't built! !\fr. !\,larket. 

The l:'cdcral Reserve got 

ing-and mu~h to the 

omy 

rhese improvised measures. 

to take as a working assumpeffects of easier financial 

the chairman again 

"as of201Z, the first t\vo rounds of 

LSAPs may hll\'e raised the level of output by almost 3% and increased private 

payroll by more then 1:\..-0 

Inillion relative to what othcnvise 

scholar, next sought 

to persuade his listeners that he had 

considercd the risks, not just the rewards, of monetary experimentation. 

I Ie memioned four potential pitfalls, 

of which the first \vas the risk that the 

Fed's interventions might in1pair the 

"functioning" of the securities markets. Second was the chance that 

might frighten the uninitiated 

doubting the Fed's abili!:)' to normalize 

policy without seeding a ncw inflation. 

Third was the risk to "financial stahility" by the temptation to 

in thcse times 

interest rates. Fourth was the 

ity r1ut the Fed might suffer a mark-tomarket loss "should interest rates rise 

to an unexpected extent" 

losses ~l\vay from 

onto the Treasury; on this 

little-reported innovation, so handy for 

an activist and leveraged central bank, 

the chairman was silent). AI! these risks 

the chairman discoIlHted, 

Omissions from the Bemanke chcck~ 

list of unintended consequences and 

undesirable side effe('ts, though they 

received no press, deserve the attention 

I Ie said nothing about 

wrought by the so-called 

interest. rate policy on the 

of capital or on the analysis 

of investment value. Neither did he acknowledge hm." the whisking away of 

interest income has punished S<l\'crs and 

nudged them into unsuitable risk raking. 

Though quick to claim t.:redit for the decline in mortgage rates or the rise in srock 

prices, Bernanke \vas characteristically 

mute on the Fed's contribution to resurgent prices of commodities and farmland. We commend to the chairman the 

cover story in the August 1 H issue of Th(' 

Sawed in half $2,SO()r~=-===:-,-----::-----------,$2,SOO 

{.).S. comnlcrcial paper outstanding 

2,000 2,()()(J 

I.sUO 

LOOO 1,000 

soo son 

()L-________ --' __ ~ _________ __.J 

1/3101 1/1/03 1/5/05 1/3/07 1/7/09 1/5/11 6127/12 
25 


76130.006

for hours ill this n:in. The crisis-era 

market alone could have afhim all the materia! he needed. 

blanket 

promissory noteswas Less than half of that 

amount is issued today, As Bcrnanke 

did not get around to saying in Jackson 

zero-percent interest rates obvi-

;lte Y;llne of credit analvsis. When 

a given claim yie!ds nothing, the prudent investor \vil1 rol! Treasury bi!ls 

or·····-fullction:ally the same 

deposits at a too~big-(O-fail 

:fe,,,-,,,,,,,,cm interest rates lIlav impan no credit information, but' that 

docsn't mcan (he\'re "Be 

afraid,;\lr. or Ms.'Invcstor, the 

government is afraid," i~ rhc sublimina! message. It's a that the 

post-crisis 

reinforces. to 

Rule 2a-7 of the Investment Company 

An of t 9-to, for instance, slap tough new 

tests on money market mutual 

that 10% of the asfund be held in cash, 

l '.S. Trcasurys or securities that convert 

Post-crisis, the government 

kniyes our, and the nc"\\' mies 

funds into the 1<::,\st rCITlUUCra!,,"" 

on the neariy barren 

credit and li(llJidiry curyes. 

smaller funds face starvation. the big-

'lracks of the storm $IJWO ",--;---::-:--:--:-::---0-:--:--,----------, 

deposits at Federal Reserve (left scale) 

1.600 and the ECB (right scale) 

1...100 

J,ZOO 

~ LOOO 

NOO 

200 

1,hOO 

l,-toO 

!,Zoo 

Loon f 

gOO s., 

60() 5 

400 

zoo 

()~=~=="""'="""",.,,~~L ______ ._J 

12/02 12/04 12/06 12/08 l2/111 H/12 

That ultra-low interest rates tend to 

latera! itself--shnrt-datcd notes issued 

by the of Germany, Dcnnurk Switzerland, for instanceAsoj)timism 

O\VI1, so docs pessimism, 

and the central bankers are having a 

hard time cheering up the 

uf zoos. time of it after the €l,t trillion European money-market industry starts passnegative interest rates to ib 

as FT.com is reporting the funds arc preparing ro do, 

In 2011, Jamie Dimon put a 

ro Bcrnankc. at a bankinv con-

'J'hcCEOofJIt;'Mor-

& Co, asked thc chairman if 

Regulacredit committces arc 

examiners :lfe tougher, Dimon observed. "lla" anyone bothered 

that he, for one, 

how thoro\lghly the 

scoured the system. 

to Dimon's question, he answered 

rhat no one had attempted to study the 

cumulative effect of so much rule and 

tools to do 

And the had a most revealing 

afterthought. I Ie had a " he 

about people that "the 

cause of the crisis was 

was not a single cause of the crisis," 

Bcrnanke went on, "There were many, 

different causes, and they ime~-

in a way chat was in . 

unr)fc(iictablc<. and led (0 the 
26 


76130.007

So, ,tftcf :lil, the chJirm,ln was prepared to concede that OlW'::(1))e'> arc 

Ullprcdicubk, that financi,ll 

are and that policic" 

Inurc tiJ;!l1 crrnf i" the me"s...:ngcr who 

tell-. him abouf if. 

America \; ! )ear r .c'ldcrs arc the fllnc~ 

tionaries wh() :m: husily suhstituting 

burc:lllCf<lCY f(lr rhe price mechanism, 

;\fow,ltia;,"'" when pear~shaped. 

Chairman lk'rn:H1kc and center 

or ZIRP \\ill end in inflationary tC~lrs. 

Bernanke cOIm"c!ed ;It hl(, .. k:,;ol~ f 10k: 

"'I'he FO\!(; ha" ;,j)CIlt c~)J)sidcrablc cf .. 

:lnd our CXlt strat .. 

to cxecute it 

h,md out \nistw;\tchc<;, h i"n't the 

the 

o\'C'r-crank...:d the PrJIlllllg pre,>ses. 

The radical monetary '''',,,.,,,,,,nl of 2012 will ,>trike ' 

nlOS! nlH'iou,> sctup to a \ in, 

flation there eyer W:1S, except thar 

our nHlnetary mandarins. hJd no clue 

America's in 

1. There had been a rip-roaring inOa-

-in"k·(;l{\:'-. rSj\I:I' l'E\tBER; 4 

a means llftcmporar:- stimub· 

" wrote Sprague, "ultimate dis<!\[Cf 

is certain conscquC!K'C. P;'bt e:-.pcri-

(.·!h,'C shows that it is dangerou.., for 

efmncnts to Is.sue papcr money. 

15 a constant 

\\'hen confnmred 

s\,stcm 

public opinion ' lq!,j::,brl"c 

action will compel (,.'mp\oyment of 

its resources in <l \':11n emk:n'()f (() cure 

c\,il .. which are m;linl\' due w nedit <-11-

granted in cxcess." 

come" Chairnhm Bcrn3.nkc. ;l 

H,tnard man hilll,>clf, doing 

what Spmgue \\-mned and 

the ,>uprort of the 

nomics est<:l!)li\hmenr, 

ring on a new inO:ltion \yith a night of 

invcstable funds from the a'>sets rll:l( 

are wday deemed s,l/c 

cign debt) (0 

• 

imunce, 

Anyway, 
27 


76130.008

HEARING OF THE SUBCOMMITTEE ON 

DOMESTIC MONETARY POLICY & TECHNOLOGY 

Statement and Testimony of Lewis E. Lehrman 

Chairman, The Lehrman Institute 

Prepared for September 21, 2012 Hearing 

I. Preface: The Prohlem of Federal Reserve Manipulation of Interest Rates: 

What is the Solution? 

II. Oral Statement for the Record 

Ill. Full Statement for the Record: A Road to Prosperity 
28 


76130.009

I. Preface: The Problem of Federal Reserve Manipnlation of Interest Rates: 

What is the Solution'? 

The Federal Reserve System has in fact manipulated interest rates since the first year of Federal 

Reserve operations in 1914. Professor Allan Meltzer's magisterial, three-volume history of the 

Fed is the definitive witness to unrestrained Federal Reserve credit operations and their 

consequences. The problems created by Fed interest rate manipulation are very similar to the 

problems of government wage and price controls. 

During the 1920s the Federal Reserve collaborated with the Bank of England in suppressing 

interest rates, leading to the worldwide stock market boom and 1929 crash. Excessive Fed credit 

expansion and interest rate manipulation between 1996 and 1999 led to the wild tech-stock 

market boom during those years, and the subsequent collapse of the stock market between 2000 

and 2002. The Fed suppression of interest rates between 2002 and 2005 led to the stock market, 

commodity. and real estate boom during those years; then the rise of interest rates, engineered by 

thc Fed, causing an inverted yield curve; followed by the financial and economic collapse of 

2008. 

The extravagant and unprecedented Fed credit policy of Quantitative Easing, now intensified by 

QElIl announced Thursday, September 13, is one more extraordinary experiment in central bank 

interest rate and credit manipulation (money printing). These episodes of interest rate 

suppression and excessive Fed credit expansion -- with effects similar to wage and price controls 

-- have well-studied precedents in earlier economic and financial history. For example, the 

effects of the President Nixon-Arthur Burns (chairman of the Fed) credit expansion (1970-1973); 

and their wage and pricc controls of 1972 led to the collapse of financial markets in 1973 and 

1974, and the worst economic decade in American history since the Great Depression. Indeed. 

during the late 19705, the highest interest rates and inflation in American history were the 

ultimate result of previous Federal Reserve credit expansion, and government wage and price 

controls. The effects of substantial Fed interest rate suppression and credit expansion have. in 

the end, led to inflation of food prices -- or oil, or natural resources. or real estate, or equities; or 

in the 1970s consumer price inflation -- followed by a fali. 

The most important economic and monetary issue before the Congress is how, through 

institutional reform of the Fed and the monetary system, to solve this Fed-created monetary 

problem of cyclical booms and busts -- largely the results of unrestrained Fed interest rate 

manipulation and quantitative easing (money printing). 

In my oral testimony and statement, I shall briefly focus on the problems caused by Federal 

Reserve interest rate manipulation and quantitative casing -- moreso on the solution to the 

problem. 

Herewith, in my longer. written testimony, I shall concentrate on a detailed solution to the 

problem. 

Lewis E. Lehrman 

September 21,2012 
29 


76130.010

3 

II. Oral Statement for the Record 

Mr. Chairman: 

James Grant has described the consequences of Federal Reserve quantitative easing and interest 

rate suppression and manipulation. From Mr. Grant"s analysis, one concludes that the Fed's 

unlimited power to purchase Treasury debt and financial market securities not only funds the 

Treasury deficit with newly printed money; but the Fed's market intervention process also makes 

of the financial class, with special access to the Fed. privileged investors and speculators. A 

well-connected financial class. subsidized by the Federal Reserve, is a crucial cause of increasing 

inequality of wealth in America. In this regard. I cite only one f~\Ct for the Monctary 

Subcommittce to contemplate: .. Since the termination of dollar convertibility to gold in 1971. 

the financial sector has doubled in size as a share of the American economy; but the 

manufacturing sector has been cut in half. 

In 2002 Mr. Bernanke described the Fed's extraordinary power to create new money and credit 

in our present financial regime of inconvertible paper money and inconvertible bank deposit 

money. I quote Bernanke:-

"Under a fiat (that is, paper) money system, a government (in practice. the central bank in 

cooperation with other agencies) should always be able to generate increased nominal 

spending and inflation, even when the short-term nominal interest rate is at zero. The 

U.S. government has a technology, called a printing press (or. today. its electronic 

equivalent). that allows it to produce as many U.S. dollars as it wishes at essentially no 

cost." 

In effect. as James Grant wrote, the Fed is not only the American central hank but. with this 

exalted power to print money. the Fed is now the government's central planner. 

During the Voleker years from 1979 to 1987. Fed interest manipulation was justified as the 

means to end inflation. By 1994, employment as a Fed target had all but disappeared from the 

minutes of Fed meetings. Now in 2012, despite inflation being again on the rise, employment is, 

as a practical matter. the sole target of quantitative casing. The Fed and its apologists in the 

media and the academy. justify Quantitative Easing and its unlimited scope and duration. as the 

way to restore economic growth .. surely an extraconstitutional form of fiscal spending through 

Federal Reserve capital allocation. But so soon as one examines the Fed balance sheet. which 

few politicians do. one sees that the Fed primarily buys Treasury securities and mortgage-backed 

securities. in effect a suhsidy hy which to finance the government deficit and to refinance bank 

balance sheets. that is to say. the promotion of more financial and consumption-sector growth. 

The problem of the American economy is neither underconsumption. nor underbanking. The 

problem is the lack of rapidly growing investment in domestic production and manufacturing. 

Investment is the necessary means by which to enahle ollr producers to lead in both domestic and 

glohal markets. Rapidly increasing investment and production growth begets employment 

growth, and with it. healthy, unsubsidizcd consumption growth. 
30 


76130.011

It is a truth of economic theory and practice that rising personal and family real income grow 

from increasing per capita investment in innovative businesses, new plant, and equipment. So. 

the question is: in reforming the Fed, how can our runaway central bank be harnessed by the 

financial markets to target the goal of cconomic grow1h through increased productive 

investmcnt, not the promotion of consumption and Treasury deficit funding by means of 

quantitative easing? The answer is transparent: - the Congress of the United States has the 

exclusive constitutional power (under Article I, Sections 8 and 10) not only to establish the 

definition of the dollar; but Congress also has the power to define by statute the eligible 

col1ateralthat the Federal Reserve may buy and hold against the issue of new money and credit. 

Thus, a simple congressional statute -- defining sound commercial loans as the primary eligible 

collateral for discounts and new credit from the Fed -- would have two primary effects. 

4 

First, it should rule out Fed purchases of Treasuries, thus requiring the government to finance its 

deficits not with newly printed Fed money, but instead in the open market away from the banks. 

Second, the Fed would then become a grO\,1h-oriented central bank by which to finance 

productive business loans, encouraging thereby the commercial banks, themselves. to make loans 

to businesses in order to sustain economic and employment growth. Commercial banks would 

focus on production and commercial loans because solvent business loans could then be used by 

commercial banks as the primary eligible collateral by which to secure credit from the Fed as the 

lender of last resort. In a word, Treasury subsidies at the Fed should be replaced by productive 

business loans oriented toward economic and employment growth. 

Mr. Chairman, this simple, proposed reform of the Fed was the very monetary policy insisted 

upon by Carter Glass, a leading Democrat. who was the chief sponsor of the Federal Reserve Act 

of 1913. The congressional legislative leaders who created the Federal Reserve Act of 19 I 3 

designed the Fed to enable steady commercial investment and employment growth. The Federal 

Reserve Act was also designed explicitly to uphold and maintain a dollar convertible to gold in 

order to maintain a reasonably stable, general price level. Such a Fed reform today. consistent 

with the original Federal Reserve Act, would require no further legislative mandate to sustain 

employmcnt growth and to rule out systemic inflation and deflation. 

Today. the Fed reiterates at every meeting that the central bank must manage interest rates to 

fulfill a congressional mandate to maintain reasonable price stability and reasonably full 

employment. The best way to do this is remobilize the express intent and techniques of the 

original Federal Reserve Act, namely the statutory requirement that the Fed uphold the classical 

gold standard: and. as was intended by the original Federal Reserve Act. to substitute 

commercial market credit for Treasury debt as the primary eligible collateral for bank loans from 

the lender of last resort. the Federal Reserve System. 

May I say. with respect Mr. Chairman, Congress has defaulted to the Federal Reserve System, its 

sole constitutional authority to regulate the value of the dollar and to define the vital economic 

use of eligible collateral to obtain productive business credit ii'om the Federal Reserve System. 

It docs not have to be this way. 

Lewis E. Lehrman 

September 21. 2012 
31 


76130.012

5 

III. A Road to Prosperity: 

The Case for a Modernized Gold Standal'd 

nold, a fundamental, metallic elemenl of the earth's constitution, exhibits unique propertics that 

enabled it, during two millennia of market testing, to emerge as a universally accepted store of 

value and medium of exchange, not least because it could sustain purchasing power over the long 

run against a standard assortment of goods and services. Rarely considered in monetary debates, 

these natural properties of gold caused it to prevail as a stable monetary standard, the most 

marketable means by which trading peoples worldwide could make trustworthy direct and 

indirect exchanges for all other articles of wealth. 

The preference of tribal cultures, as well as ancient and modern civilizations, to usc gold as 

money was no mere accident of history. Nor has this natural. historical, and global preference 

for gold as a store of value and standard of measure been easily purged by academic theory and 

government fiat. 

Gold, by its intrinsic nature, is durable, homogenous, fungible. imperishable, indestructible, and 

malleable. It has a relatively low melting point, facilitating coined money. It is portable and can 

be readily transported from place to place. nold money can be safely stored at very low cost, 

and then exchanged for monetary certificates, bank deposits, and notes -- convertible bills of 

exchange that efficiently extended the gold standard worldwide. 

Like paper money, gold is almost infinitely divisible into smaller denominations. But paper 

money has a marginal production cost near zero. Producing gold money, like other articles of 

wealth. requires real labor and capital. 

This investment of real labor and capital gives gold an objectively grounded value on which to 

base proportional exchanges -- a value that can be compared to that invested in producing a unit 

of any product or service. Prices for goods and services always vary with subjective preferences. 

But the real costs of production persist as an underlying market-price regulator. Despite 

subjective preferences, a mutual exchange of real money -- a gold monetary unit -- for a good or 

service is a transparent, proportional, equitable exchange. grounded by real costs of production. 

namely labor, capital. and natural resources. 

In contrast, almost no marginal labor or capital is required to produce an additional unit of paper 

money. Thus. legal tender paper money is subject only to quantitative control and the discretion 

of political authorities. Historical evidence shows that inconvertible paper money is 

overproduced, tending always toward depreciation and inflation, interrupted by bouts of austerity 

and deflation. Over the long run, government-forced and spurious paper money has not 

maintained equitable exchanges between labor and capital. Market exchanges based on 

depreciating paper money and floating paper currencies issued through the banking system 

always lead to speculative privilege of insiders. generally the financial class. 

Because of its imperishability and density of value per weight unit, gold can be held and stored 

(saved) permanently at incidental carrying costs. Precious metal monetary tokens (gold and 

silver) survived millennia of experiments with inferior alternatives such as shells, grains. cattle. 

tobacco. base metals. and many others. These alternatives are either consumable, perishable, 
32 


76130.013

bulky, or of insufficient value for large-scale commercial exchange over long distances. For 

example. perishables like wheat or cattlc are not storable for long periods at very low cost; 

nor are they portable cheaply over long distances to exchange for other goods; nor are they 

useful and efficient to settle shott- and long-term debts promptly. 

6 

Through a process of long-term economic evolution in tribal. interregional, and national trading 

markets, gold's natural properties were discovered and utilized in almost all cultures. Gold thus 

became universally marketable and acceptable as the optimum long-term store of value. uniform 

standard of commercial measure. and durable medium of exchange. Universal marketability and 

acceptability is a hallmark of global money. Silver. with its much lower value per unit of weight, 

was the suboptimal monetary metal of modern civilization. exhibiting many but not all of the 

properties required for large-scale international exchange. 

Merchants, bankers. farmers. and laborers may not have consciously considered these facts, but 

over the long run, they behaved as if they did. Thus gold became an unimpeachable, universally 

accepted currency, to be held as reserves and passed on as a reliable store of future purchasing 

power. People, even hostile nations. freely accepted gold, a non-national currency. from one 

another in exchange for other goods, even as they rejected the sovereign risk of holding national 

currencies as their exclusive reserves. /\11 who cherished the value of their saved labor--

pensioners, working people, those on fixed incomes -- came to rely on the gold monetary 

standard as a stable. long-term proxy for goods and services to be purchased later. perhaps much 

later. 

Today's global stock of aboveground gold in all its forms is approximately 5 to 6 billion ounces, 

perhaps more -- close to one ounce per capita of the world population. Because of gold's lasting 

value from time immemorial, and the human incentive to conserve all scarce resources, these 5 

to 6 billion ounces represent most of the gold ever produced. Yet the aboveground gold stock 

today may be enclosed in a cube of approximately 70 feet on each side. Gold may be easily 

converted to substantial amounts of monetary coin to underwrite convertible paper money and 

bank deposits or convcnicnt exchange in the market. 

Moreover, the empirical data demonstrate that the stock of aboveground gold has grown for 

centuries in direct proportion to the growth of population and output per capita. The average, 

annual, long-run growth of the stock of gold in the modern world is approximately 1.5 percent. 

This remarkable fact accounts for the unique, long-run stability of its purchasing power. New 

output of gold money, joined to its rate of turnover, is sufficient for both economic growth and 

long-run stability of the general price level. as modest but regular output of gold does not affect 

the relative value of the large existing stock. 

This hidden but crucial commercial equation of the social order was a fundamental reason why 

the true gold standard. i.e., gold-based money, became the foundation of the monetary 

institutions of modern civilization. Gold-based money not only stabilized the long-tcrm price 

level. but its network effects also integrated and compounded the rapid growth of the advanced, 

competitive trading nations of the Western world during the Industrial Revolution. For the 

purpose of global trade. exchange and investment currencies convertible to the universally 

acceptable gold monetary standard had engirdlcd the earth by the beginning of the 20th ccntury. 
33 


76130.014

As the technology and productivity of the payments mechanism evolved, banknotes and 

checking account deposits (among other credit and transfer systems), came into modern 

circulation as substitutes for physical, monetary tokens. But these banknotes and checks derived 

and sustained their value from the fact that everyone knew they were credit instruments 

convertible to gold. Still, actual gold transfers were used to settle residual balance-of-payments 

deficits among nations, a necessary and efficient international adjustment mechanism by which 

to rebalance domestic and international trade and exchange. 

7 

Despite legal tender inconvertible paper money and the disahilities presently imposed on gold hy 

the pol itical authorities, gold retains the same inherent propel'ties that make it the least imperfect 

monetary standard. Indeed, all inconveltible paper money systems, based on contemporary 

fractional reserve banking, use the vestigial forms but not the substance of their original 

convertible currency systems. 

In sum, gold is natural currency, not least because it provides in a single, indestructible substance 

the primary functions of money -- i.c. a standard unit of account, a stable medium of exchange, a 

stahle store of value, and a stable deferred means ofpaymenL By reason of these facts, the 

market guided the authorities over time to bestow on gold coin the status of an official monetary 

standard. Gold money was, moreover, endowed by nature with profound but simple national and 

international networking effects, the digital standard by which free prices could be 

communicated worldwide. Thus, the gold standard exhibited natural economies of global 

information scale, a necessary virtue in the present electronic age. The adoption of the gold 

standard by the major trading nations in the 19th century led to a radical reduction in the 

settlement costs of international tradc and transactions, a crucial confidence and reliability factor 

stimulating an unparalleled boom in trade that was constantly and promptly rebalanced by 

residual deficit settlcments in gold. 

A Just Social Order and Economic Growth 

To choose or to reject the true gold standard is to decide between two fundamental options: on 

the one hand, a free,just, stable, and objective monetary order; and on the other, manipulated, 

inconvertible paper money, the fundamental cause of a casino culture of speculation and crony 

capitalism, and the incipient financial anarchy and inequality it engenders. 

Restoration of a dollar convertible to gold would rebuild a necessary financial incentive for real, 

long-term, economic growth by encouraging saving, investment, entrepreneurial innovation, and 

capital allocation in productive facilities. Thus would convertibility lead to rising employment 

and wages, Economic growth would be underwritten by a stable, long-term price leveL 

reinforced domestically by a rule-based, commercial and central banking system subject to 

convertibility, and internationally by exchange rates mutually convertible to gold. Consider the 

past decade of hyper-managed paper currencies and manipulated floating exchange rates wherein 

American annual economic growth fell to an anemic 1.7 percent. Under the classical gold 

standard (1879-1914), U.S. economic growth averaged 3 to 4 percent annually, the equal of any 

period in American history. 

Different growth rates arc not mere accidents of history. The gold dollar, or true gold standard, 

underwrites, among other things, just and lasting compensation and purchasing power for 
34 


76130.015

8 

workers, savers, investors, and entrepreneurs. It prevents massive. recurring distortions in 

relative prices created by manipulated paper currencies and floating exchange rates. which 

misallocate scarce resources. It suppresses the incentives for pure financial speculation. 

everywhere encouraged under manipulated paper currencies and floating exchange rates. It rules 

out the "exorbitant privilege" and insupportable burden of official reserve currencies. such as the 

dollar and the curo. It limits and regulates. along with bankruptcy rules, the abuse of fractional 

reserve banking that is commonplace under inconvertible paper-money systems. It minimizes 

the enormous premium exacted by the banker and broker establishment in the purchase and sale 

of volati Ie foreign exchange. 

Moreover, the lawfully defined gold content of a stable currency encourages long-term lending 

and investment. stimulating more reliance on equity, less on leverage and debt. With currencies 

convettible to gold, long-term lenders receive in turn, say after 30 years, similar purchasing 

power compared to the capital or credit they surrendered to the borrowers. (Convertibility thus 

encourages stable long-run domestic and international growth. not the austerity engendered by 

deficits.) 

;\ dollar legally convertible to gold, reinforced by effective bankruptcy law, sustains economic 

justice. regulating and disciplining speculative capital, and restraining political and banking 

authorities such that they cannot lawfully depreciate the present value or the long-term 

purchasing power of lagging dollar wages. savings, pensions. and fixed incomes. Nor under the 

sustained, legal restraint of convertibility can governments ignite major, long-run, credit and 

paper money inflations with their subsequent debt deflations. Under the gold standard. the 

penalty for excessive corporate and banking leverage is insolvency and bankruptcy. As the 

profits belong to the owners, so should the losses. Bankruptcy of insolvent firms shields the 

taxpayer from the burden of government bailouts. Under the rule-based gold standard in a freemarket order, managers, stockholders, and bondholders must bear the responsibility for 

insolvency. 

A stable dollar, convettible to gold. leads to increased saving not only from income. but also 

from dishoarding. a fact often neglected by economists. Dishoarding means releasing a vast 

reservoir of savings previously held in hedges such as commodities, antiques. mt.jewelry, 

farmland, or other items purchased to protect against the ravages of inflation. These trillions of 

savings. imprisoned in hedging vehicles by uncertainty and inflation, are induced out of hedges, 

and the capital is then supplied in the market to entrcpreneurs, business managers. and 

households who would create new income-generating investment in production facilities. thereby 

leading to increased employment and productivity. On the other hand. central bank subsidies to 

government and suhsidized consumption. both enabled by inconvertible paper and credit money, 

lead -- through deficit financing. transfer payments. paper money fiscal and monetary stimulation 

-- to disinvestment. debt financing. speculative privilege, and growing inequality of wealth. 

It is rarely considered by conventional academic opinion that the long-term stability of a rulebased currency convertible to gold brings about a major mutation in human behavior. In a free 

market every able-bodied person and fInn must first make a supply before making a demand. 

This principle effectively alters human conduct. It encourages production before consumption. 

balances supply and demand, rules out inflation, maintains balanced international trade, and 

upholds the framcwork for economic growth and stable money. In a free market and its banking 
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system, grounded by the rule of convertibility to gold, new money and credit may be prudently 

issued only against new production or additional supply for the market, thus maintaining 

equilibrium between total demand and total supply. Inflation is thereby ruled out. Moreover, 

worldwide hoarding of real assets, caused by government overissue of paper money, would come 

to an end. 

The irony of the gold standard and currency convertibility is that it ends speculation in gold. It 

restores the incentive to use and hold convenient, convertible paper currency and other goldconvertible cash balances. Thus can the road to economic growth, rising real wages, and 

growing employment be rebuilt on the durable foundation of a free monetary order -- that is, 

money free from government manipulation. 

Rebalancing the Global Economy 

The overall balance-of-payments of a country, or a currency area, is in deficit when more 

money is paid abroad than received; a surplus occurs when more money is received than paid 

abroad. The United States. because of the dollar's role as the reserve currency of the world, has 

experienced an overall balance-of-payments deficit most of the past half-century and, over that 

full period, systemic inflation. 

Under both (he Bretton Woods agreement (1944-71) and the subsequent floating, dollar-based, 

global reserve currency system, the U.S. budget and balance-of-payments deficits have been 

financed substantially by U.S. government trust funds, the Federal Reserve, and foreign 

purchases of dollars abroad. Since 2008, these deficits have been accompanied by 

unprecedented quantitative easing. a euphemism for large-scale central bank money and credit 

creation (or "money printing"). By this means the Fed finances not only the government budget 

and balance-of-payments deficits, but also overleveraged banks, insolvent debtors, and other 

wards of the state. The issue of new money by the central bank unaccompanied by the 

production of new goods and services leads ultimately to inflation because total demand in the 

market will exceed total supply. 

With the dollar as the reserve currency, the U .S. balance-ot~payments deficit causes Fed-created 

dollars to rush ahroad, directed there by relative price differences. In foreign countries, many of 

these excess dollars are monetized by foreign authorities and held as official foreign exchange 

reserves. But these reserves are not inert. They do not lie around in bank vaults. They are in 

fact reinvested in the U.S. dollar market -- especially in U.S. government securities sold to 

finance the federal budget deficit. In eftect, the United States exports its debt securities, thus 

receiving back the dollars it created and used to settle its balance-of-payments deficits abroad. 

Everything goes on as if the deficits didn't exist. No adjustment is required of the United States 

to settle its debts. or to rebalance the deficits with surpluses. Thus again, total demand is enabled 

to exceed total supply. In a \vord, the world dollar standard enables America to buy without 

really paying, a fundamental eause of inflation. But when the Federal Reserve slows or ends 

quantitative easing, or money printing, total monetary demand declines and deflation threatens. 

Rebalancing world trade is impossible under an official reserve currency system. (The 

International Monetary Fund and the central banks are pathetic shadows of "all the king's men" 

trying to put Humpty Dumpty that is. global rebalancing -- back together again.) This perverse 
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international monetary system, whereby the reserve currency country issues its own money to 

finance and refinancc its increasing deficits and debts, augments global purchasing power and 

potential worldwide inflation, because the newly issued central bank money is not associated 

with newly produced goods and services. Total demand has been divorced from supply. When 

total demand exceeds total supply, inflation usually occurs first in marketable, scarce 

commodities, equities, and inflation hedges (2009·2012); other more general price level effects 

may be deferred because of unemployed labor and other unutilized resources in excess supply. 

But ultimately. the general price level will rise as the economy approaches full employment. 

(The \vorldwidc panic demand for tbe dollar over the past two years, during the European crisis, 

has mitigated the general price level effect of quantitative casing. The desire to hold the dollar in 

cash equivalents rather than to spend or invest it defers inilation.) 

Under the rule-based gold standard, thc regular settlemcnt of balance-of-payments deficits 

eliminates a root cause of global imbalances, re-establishing equilibrium among trading nations. 

Under the true gold standard. residual payments deficits could no longer be settled in newly 

issued national paper and credit monies, such as the reserve currencies of the dollar or euro. 

Instead, these deficits would be settled with an impartial, non-national monetary standard: gold. 

The requirement to settle in gold rules out the exponential debt increases of flawed reserve 

currency systems. A famous example of this is the flawed gold-exehange-reserve currency 

system of the 1920s, the collapse of which turned a recession into the Great Depression. Another 

case is the financial bubhle and its collapse during the past decade (2002-20 J 2). 

Moreover, it is very much in the American national interest to terminate the reserve currency 

role of the dollar. This role is an insupportable burden borne by the United States since the end 

of World War II (even since the great powers' Genoa agreement of 1922). The U.S. taxpayer 

should no longer go further into debt in order to supply the world with dollar reserves 

denominated in U.S. debt. Terminating this burdensome "privilege," combined with the 

restoration of dollar convertibility to gold. will gradually end the long era of extreme global trade 

imbalances. secular debt accumulation and inflation, and currency depreciation. Furthermore. 

because the reserves of monetary authorities will be held only in gold and domestic currency 

claims, the exchange-rate risk will be eliminated in all national banking systems. 

The rule-based. true gold standard not only would end the official reserve currency role of the 

dollar. but also limit arbitrary Federal Reserve money issuance secured by spurious, defective. 

and illiquid collateral. Unstable mutations in the gold standard of the past -- including the failed 

reserve currency-based "gold-exchange" system of Bretton Woods and the collapse of its 

predecessor, the reserve currency-based "gold-exchange system" of the 1920s and J 930s -- must 

be ruled out. So. too. must floating exchange rates. For almost a century, policymakers, 

politicians, historians, and economists have confused the llawcd, interwar gold-exchange 

standard, based on official reserve currencies. with the true or classical gold standard. They have 

mistakenly blamed the Great Depression on the gold standard, instead of on the liquidation of the 

official reserve currencies underpinning the gold-exchange system established at Genoa in 1922. 

which. like Banquo's ghost. reappeared in 1944 in thc form of the Bretton Woods system. 

The Bretton Woods pegged exchange rate system, based on the official reserve currency role of 

the dollar. collapsed in 1971 because the United States had accumulated more short-term debt to 

foreigners than it was willing to redeem in gold. Its collapse ushered in the worst American 
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economic decade since the 1930s. The unemployment rate in 1982 was higher even than the 

unemployment rate occasioned by the collapse of the Fed-induced real estate bubble of 

2007-09. Similarly, the recession of 1929-30 became the Great Depression of the 1930s 

because of the collapse and liquidation of the interwar official reserve currency system, based as 

it was on the pound and the dollar. The liquidation of official sterling and dollar currency 

reserves deflated the world banking system: Without these foreign currency reserves the banks 

were forced to deleverage, call in loans, or go bankrupt. They did all three. 

Sincc 1971, the floating exchange rate system, or the world dollar standard, has been evcnmore 

perverse and crisis-prone than Bretton Woods and the Genoa interwar system. The dollar's role 

as the reserve currency has caused not only extreme inflation and the subsequent threat of 

deflation, but also industrial and manufacturing displacement in the United States. It has resulted 

in declining American competitiveness, one witness of which is the collapse of the international 

net investment position of the United States (essentially, U.S. assets held abroad, less foreign 

assets held in the United States). In 1980. the U.S. net international investment position was 10 

percent of GOP. In 2010 it was negative 20 percent of GOP. The difference was equal to the 

increase of foreign-held official dollar reserves, arising from continuous U.S. balance-ofpayments deficits under the dollar-based official reserve currency system. 

Under the present system, the perennial U.S. balance-of-payments deficit will, more often than 

not, continue to flood foreign financial systems and central banks with undesired dollars. 

followed by brief periods of dollar scarcity, the threat of deflation, and a cyclical rise of the 

dollar on foreign exchanges. Foreign authorities may continue to purchase excess dollars against 

the issue of new domestic money. This duplicates potential purchasing power unassociated with 

the production of new goods, causing total demand to exceed total supply -- thus tending to 

sustain worldwide inf1ation, generally followed by recession and the threat of deflation. Socalled sterilization techniques designed to neutralize central-bank money printing are not fully 

effective. Without monetary reform, the excess dollars purchased by foreign central banks, 

reinvested in U.S. government securities and other dollar debt, will continue to finance excess 

consumption and rising govemment spending in the United States. 

Today inflation of the general price level (or CPJ) proceeds gradually in the United States 

because of unemployed resources, combined with the panic demand worldwide to hold the dollar 

rather than spend it, or to repay debt with the money rather than to consume. At full 

employment. inflation will pick up. Because the reserve currency system generally leads to a 

rapid increase in global purchasing power, without a commensurate increase in the supply of 

goods and services. the systemic tendency of the reserve currency system is monetary expansion 

or inflation. Yet the process can work dangerously in reverse, causing deflation, especially when 

the Fed tightens. or there is panic out of foreign currencies into the dollar (the Asian crisis, 

1996-2002, and the euro crisis, 2012). Illiquidity abroad can cause foreign official dollar 

reserves to be resold or liquidated in very large quantities. reducing the global monetary base, as 

occurred in 1929-33 and recently in 2007-09. 

In the absence of government rules that favor inconvertible paper and credit money, the 

historical evidence shows that gold, or paper and credit money convctiiblc to gold, was preferred 

and accepted in trade and exchange from time immemorial. Until recent times the gold standard 

also underwrote, indeed required, global trade rebalancing, now the subject of empty 
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12 

exhortations by the International Monetary Fund and political authorities. But to desire a goal 

without the effective means to attain it namely, the true gold standard -- is to court political 

and financial disaster. In the absence of prompt balance-or-payments settlements in gold, the 

undisciplined official reserve currency systems have immobilized the international adjustment 

mechanism. The result has heen increasing trade imbalances, ever-rising debt, and credit 

leverage at home and abroad. Under the world dollar standard, other nations have gained desired 

dollar reserves only as the United States becomes an increasingly leveraged debtor through 

balance-of-payments deficits. Whereas under the gold standard, the global economy may 

actually attain balance-of~payments surplus as a whole vis-a-vis worldwide gold producers. 

Among its monetary virtues as the least impcrfect monetary system of civilization, the true gold 

standard, without official reserve currencies, is the sole rUle-based monetary order that reliably 

and systematically rebalances worldwide trade and cxchange among all participating nations. 

How to Get From Here to There 

Step I. The presidcnt announces unilateral resumption of the gold monetary standard on a date 

certain, not more than four years in the future. Unilateral resumption means that the U.S. dollar 

will be defined hy law as a certain weight unit of gold. The Treasury, the Federal Reserve. and 

the entire banking system will be obligated to maintain the gold value of the dollar. On the date 

of resumption, Federal Reserve banknotes and U.S. dollar bank demand deposits will be 

redeemable in gold on dcmand at the statutory gold parity. Further use by foreign governments 

of the dollar as an official reserve currency will entail no legal recognition by the United States. 

Step 2. The president issues an executive order eliminating all taxes imposed on the buying, 

selling, and circulating of gold. Another executive order provides for the issuance of Treasury 

bonds backed by a proportional weight of gold. Since Federal Rescrve notes and bank deposits 

(money) are not taxed by any jurisdiction, the executive order specifies that gold, being legal 

tender, is to be used as money and thus to go untaxed. Gold can be used to settle all debts, public 

and private. The Treasury and authorized private mints will provide for the creation and wide 

circulation of legal tender gold coin in appropriate denominations. tree of any and all taxation. 

Step 3. Shortly after annollncing the intent to go forward to a modernized gold standard, the 

United States calls for an international monetary conference of interested nations to provide for 

the deliberate wind-up of the dollar-based, olTicial reserve currency system and the consolidation 

and refunding of foreign official dollar reserves. The international agreement to be negotiated 

will inaugurate the reformed international monetary system of multilateral convertibility of 

major countries' currencies to the gold monetary standard. Stable exchange rates would be the 

result. The value of each participating currency would be a function of its stipulated gold parity. 

Step 4. The conference, attended by representatives of the Bank for International Settlements, 

International Monetary Fund, World Trade Organization, and the World Bank, would establish 

gold as the means by which nations would settle residual balance-of-payments deficits. The 

agreement would designate gold, in place of reserve currencies, as the rccognized international 

monetary reserve asset. Official foreign currency reserves, to a specified extent, would be 

consolidated and refunded. 
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Step 5. A multilateral, international gold standard -- the result of the conference converiibility 

Agreement -- would efTectivcly terminate floating and pegged-undervalued exchange rates. The 

reformed monetary system without official reserve currencies. the true international gold 

standard, would establish and uphold stable exchange rates and free and fair trade. based upon 

the mutual convertibility to gold of major national currencies. 

Now we are able to formulate an authentic. bipartisan program to restore 4 percent American 

economic growth over the long tenn. Tax rate reductions with an enlarged tax base. government 

spending restraint aimed at a balanced budget. simplification of business regulation designed to 

empower entrepreneurial innovation -- these reforms can be made effective for America and the 

world by a modernized gold standard and stable exchange rates. This is the very same platform 

which uplifted 13 impoverished colonies by the sea in 1789 to leadership of the world in little 

more than a century. 

o 

Lewis E. Lehnnan 

September 21, 2012