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Liberty Dollars

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    Liberty Dollars November 28, 2007 Alvaro Vargas Llosa http://www.independent.org/newsroom/article.asp?id=2075 WASHINGTON—Recently, The Washington Post
    Message 1 of 1 , Dec 4, 2007
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      Liberty Dollars
      November 28, 2007
      Alvaro Vargas Llosa
      http://www.independent.org/newsroom/article.asp?id=2075


      WASHINGTON—Recently, The Washington Post carried a front-page story
      about a federal raid on the headquarters of the National Organization
      for the Repeal of the Federal Reserve Act and Internal Revenue Code
      (Norfed). The Indiana-based company, which advocates "sound money,"
      has been selling coins and paper certificates backed by gold and
      silver for years, in effect trying to compete with the dollar.

      The government ignored Norfed's "Liberty Dollars" for a long
      time—until the group started selling thousands of coins with Ron
      Paul's likeness to show support for the Republican presidential
      candidate. Paul also wants to abolish the Federal Reserve.

      To the public at large, the activities of Norfed seem utopian, naive
      and even downright fraudulent. The idea that the world's greatest
      economy could be run without a central bank and private parties could
      replace the government as issuers of currency is one that many people
      will find scary. With the dollar in something of a free fall and the
      United States in the midst of a housing and credit crisis that has
      sent some of the nation's top CEOs packing, Americans will be looking
      for financial security, not monetary adventures.

      And yet it is precisely in such a financially wobbly environment that
      the actions of Norfed should invite a critical look at the way money
      is managed. Some of the country's greatest economists, including Nobel
      Prize winners, have been saying for years that the Federal Reserve has
      probably caused more problems than it has solved since its creation in
      1913. Its role in the last century's boom and bust cycles is a matter
      of record; it looks as though it played a similar role in the current
      housing market crisis too.

      While the creation of the Federal Reserve was essentially a response
      to a series of bank runs, those crises were mild compared to the ones
      that were to follow. In 1913, the United States was under the gold
      standard. Although the government issued currency, the fact that
      currency was tied to gold meant the authorities could not manipulate
      the money supply easily. The Fed's initial mission was to guarantee
      the convertibility of deposits into currency on demand. A few decades
      later, the United States abandoned the gold standard and the Federal
      Reserve became the country's most powerful economic institution,
      exercising its monopoly in issuing currency based on the discretionary
      power of its board of governors.

      All in all, financial instability has been far greater since the
      creation of the Federal Reserve. What did the Great Depression teach
      us? Essentially that even with the best of intentions, it is
      impossible for the authorities to manage the supply of money in
      accordance with the exact needs of the economy. A country's economy is
      the sum of millions of people making decisions that no single
      individual is in a position to anticipate. As economist Murray
      Rothbard showed in his book "America's Great Depression," in the 1920s
      the Federal Reserve pumped up the money supply, expanding credit by
      more than 60 percent. Because the economy was very productive, this
      monetary expansion did not show up in the regular inflation figures.
      But, as is always the case with inflation, many resources went to the
      wrong kind of investments—until the crisis hit. The late Milton
      Friedman showed how the Fed made things worse by not providing the
      system with enough liquidity once the Depression was obvious.

      The current housing market and debt market crises are in good part the
      children of the Federal Reserve. By cutting rates 13 times between
      2001 and 2003, and then keeping them very low for years, monetary
      policy contributed to the housing bubble. That is not to say other
      factors—including financial instruments that made it difficult to see
      that the underlying foundation was not as solid as it seemed—did not
      play a part too. But, once again, the Fed has turned out to be a
      factor of financial instability.

      In this context, Norfed's attempt to prove to the Fed that the market
      is ready to trust private currency backed by gold is a welcome
      occasion to take a second look at some of the economic institutions we
      take for granted. Naive and utopian? You bet. But that is probably
      because of how far the world has moved from the time when money was
      too important to be left to the politicians.



      Alvaro Vargas Llosa is Senior Fellow and Director of The Center on
      Global Prosperity at The Independent Institute. He is a native of Peru
      and received his B.S.C. in international history from the London
      School of Economics. He is widely published and has lectured on world
      economic and political issues including at the Mont Pelerin Society,
      Naumann Foundation (Germany), FAES Foundation (Spain), Brazilian
      Institute of Business Studies, Fundación Libertad (Argentina), CEDICE
      Foundation (Venezuela), Florida International University, and the
      Ecuadorian Chamber of Commerce. He is the author of the Independent
      Institute books The Che Guevara Myth and Liberty for Latin America.

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