End The Fed by Ron Paul

Monetary policy has been the primary focus of Ron Paul’s political career. While that career is coming to an end, the movement Congressman Paul started is bound to continue on with his son leading the charge. Whether Senator Rand Paul has success remains to be seen, but if you want an understanding of the Paul family’s most crucial political concern, Ron Paul’s book End The Fed (which I managed to get autographed at a campaign rally) is required reading.

The book argues the Federal Reserve is the primary culprit of the 2008 economic meltdown that we have yet to recover from. Alan Greenspan and Ben Bernanke are singled out for criticism. Greenspan’s tenure as chairman of the Fed “planted all the seeds of the financial calamity” by inflating the money stock (increasing the M3 money supply 41% between 1995 and 1999 is one example cited) and lowering interest rates to 1%. Bernanke exacerbated the problems post-meltdown by increasing the adjusted monetary base from $856 billion to $1.749 trillion in just a year’s time. This moral hazard is pumping up another bubble that will burst, and the consequences will be even more dire this time. If we don’t reverse course, Paul predicts hyperinflation, lost jobs, poverty, “possibly street violence” and “the greater chance a war will erupt.”

The book goes through the history of the Fed, starting in 1913. Due to its near-100 year history of inflationary policy, the dollar has been robbed of 95% of its value. Per Paul and the Austrian school, recessions and business cycles are wholly a side effect of the Fed’s central planning. Paul also makes a very strong case that our destructive wars were made possible by the Fed, and that the United States would have never been able to finance these conflicts by directly taxing the American people. For example, he cites World War I, with 56% of the financing coming from Fed-backed borrowing, and 23% coming from creating money out of thin air. The bailouts, corporate welfare, counter-productive “stimulus” spending and government dependency are also made possible by the Fed’s inflationary monetary policies. All this adds up to lost liberties and lost prosperity.

His ideal solutions: ending the Federal Reserve (obviously), returning to the gold standard, strict adherence to the Constitution and allowing for competing currencies. In light of that, he calls for an audit of the Fed’s activities.

Some points of contention I have with the book:

-I’m not sold on a return to the gold standard. Milton Friedman stated in Capitalism and Freedom that the gold standard is neither feasible or desirable. A more attainable approach would be what John B. Taylor advocates, which is to do away with the Fed’s dual mandate of “maximum employment” and “stable prices.” This dual mandate leads to the Fed taking discretionary actions like Paul stated Bernanke took. Proposed laws would change the Fed’s mandate to “long-term price stability,” which theoretically would rein in the Fed’s inflationary activities.

-Probably the biggest source of contention between Ron Paul’s Austrian school and the Friedman-monetarist school of economics is the cause of the Great Depression. On page 68, Paul cites Murray Rothbard in stating that during the 1920s, the average annual increase in the money stock ranged from 7.3% to 8.1%, thus creating a bubble that burst in the form of the Depression. This is highly debatable. According to research done by Richard Timberlake, the stock of common money (currency and checking account balances) grew on average 2.5% per year from 1921 to 1929. Furthermore, Timberlake quotes Friedman and Anna Schwartz from their Monetary History of the United States: “By 1923, wholesale prices had recovered only a sixth of their 1920–21 decline. From then until 1929, they fell on the average of 1 percent per year. . . . Far from being an inflationary decade, the twenties were the reverse.”

-Paul accuses Greenspan of pursuing inflationary policies from the get-go. Certainly Greenspan made mistakes. But was he guilty of discretionary/inflationary policies during his whole tenure? The facts seem to contradict this assertion.

-Paul states our trade deficits are “a very serious problem.” Cato’s Daniel Griswold debunks that notion.

-I wholeheartedly agree the Fed’s quantitative easing will result in considerable inflation if the banks stop holding onto this money. But considerable inflation is different from Paul’s prediction of “hyperinflation.” Germany suffered hyperinflation after WWI; per Friedman’s Free To Choose, hand-to-hand money grew at an average of 300% per MONTH for a year. I don’t see the United States reaching that level of inflation. Therefore, Paul’s predictions of “street violence” caused by Fed policy are overblown.

Despite these critiques, I think this is an important book. I’m usually of the mindset that when politicians and bureaucrats claim they need to “do something” to fix a problem in our country, watch out. More often than not, these proposed “solutions” are meant to fix government-manufactured problems, with the strong likelihood the “solutions” will compound the problems further. In this case, though, Paul is absolutely correct that our elected leaders need to reform the monetary system. The Fed should be held accountable for its action, so I wholeheartedly support any continued efforts to pass an “Audit the Fed” bill. While I don’t agree with all of his analysis, Paul is spurring a much-needed discussion. Historically, the soundness of our monetary policy determines our economic strength. When policies are sound, we prosper; when policies are reckless, we suffer. I hope Ron Paul’s successors continue to make monetary policy a forefront issue as the country debates the direction we take our economy.

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