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Ron
Paul and the Fed: A Rejoinder to David Frum
DIGG THIS
According to
David
Frum:
"Ron
Paul … is best known for his vehemently isolationist foreign policy
views. But his core supporters also thrill to his self-taught
monetary views, which amount to a rejection of everything taught
by modern economists from Alfred Marshall to Milton Friedman.
"…
Paul (has) not the faintest idea of what (he) is talking about.
The problem is not that (his) answers are wrong – that can happen
to anyone. The problem is that (he does not) understand the questions,
and (is) too lazy or too arrogant to learn."
There is more
wrong here than you can shake a stick at. Let us list the errors.
Congressman
Paul is not an isolationist; rather, he is a non-interventionist.
He has repeated this over and over again, but, evidently, Frum has
still not caught on. An isolationist wants to, well, isolate
our country from all others. Dr. Paul desires nothing of the sort.
Rather, he wants the U.S. to be fully involved in world affairs.
He seeks cultural, social and economic relationships with members
of all other nations. He only rejects the imposition of our values
on others at the point of a gun; that is, he opposes interventionism.
In this he may be out of step with the other candidates for
the Republican nomination, but not at all with our founding fathers:
"My
ardent desire is, and my aim has been...to comply strictly with
all our engagements foreign and domestic; but to keep the United
States free from political connections with every other Country.
To see that they may be independent of all, and under the influence
of none. In a word, I want an American character, that the
powers of Europe may be convinced we act for ourselves and not
for others; this, in my judgment, is the only way to be respected
abroad and happy at home." – George Washington (letter to Patrick
Henry, 9 October 1775) Reference:
The Writings of George Washington, Fitzpatrick, ed., vol.
34 (335)
"Peace, commerce
and honest friendship with all nations – entangling alliances
with none, I deem [one of] the essential principles of our government,
and consequently [one of] those which ought to shape its administration."
– Thomas Jefferson: 1st Inaugural
Address, 1801. ME 3:321
"But
[the United States] goes not abroad, in search of monsters to
destroy. She is the well-wisher to the freedom and independence
of all. She is the champion and vindicator only of her own.
"She
will commend the general cause by the countenance of her voice,
and the benignant sympathy of her example. She well knows that
by once enlisting under other banners than her own, were they
even the banners of foreign independence, she would involve herself
beyond the power of extrication, in all the wars of interest and
intrigue, of individual avarice, envy, and ambition, which assume
the colors and usurp the standard of freedom. The fundamental
maxims of her policy would insensibly change from liberty to force....
She might become the dictatress of the world. She would be no
longer the ruler of her own spirit...." When John Quincy
Adams served as U. S. Secretary of State, he delivered
this speech to the U.S. House of Representatives on July 4, 1821,
in celebration of American Independence Day.
Nor is Dr.
Paul opposed to our imperialist venture in Iraq merely "because
what we are doing in Iraq isn't working." He opposes this
since such policies are incompatible with the views of the founding
fathers, with the Constitution,
and because no one from On High has appointed us to be the policeman
of the world. In any case, whether something "works" or
not depends entirely upon one’s goal. The present debacle in that
tormented country is "working" just fine, thank you, for
the likes of Bechtel and Halliburton.
His monetary
views are not at all "self-taught." He readily admits
he stands on the shoulders of giants in this regard, members of
the Austrian School of Economics, preeminently, Ludwig von Mises
and Murray Rothbard. However, even if Frum was correct on this and
Paul’s economic views were self-taught, that at least implies he
has learned some of the dismal science, unlike many of his
fellow congressmen, and even some journalists (hint, hint, Frum).
Moreover he is actually a many times published
author on this subject.
Alfred Marshall
(1842–1924) is hardly a "modern economist."
"Lazy?"
"Arrogant?" Sounds more like the author of these words
than Ron Paul. The congressman from Texas, who is now crisscrossing
the country giving speeches at a rate that would exhaust a much
younger man, may be the most well-read member of the House of Representatives.
Okay, okay, to say that is to damn with faint praise. Let us put
it in these terms then; were he not a politician, and a doctor,
his published research in economics would alone falsify Frum’s
charge.
This "indictment"
constitutes nothing more than name-calling. Frum does not mention
even one specific error made by Paul. He contents himself
with the material quoted above.
Despite the
glee with which we have pointed out these errors, the main focus
of the present essay, however, concerns the oft made charge that
Mr. Paul is "kooky" in his criticism of the Fed. After
all, this monetary institution has been around since 1913, almost
100 years. Is it not irresponsible to advocate its demise?
Well, no.
Very much to the contrary, Ron Paul’s plan to abolish the Fed is
the essence of monetary soundness. And this for several reasons.
Under the control
of this "venerable" institution, inflation has soared.
According to
the inflation
calculator, "What cost $100.00 in 1913
would cost $2014.81 in 2006. Also, if you were
to buy exactly the same products in 2006 and 1913, they would cost
you $100.00 and $4.96 respectively."
In other words, under the aegis of the Fed, every $1.00 under its
control is now worth slightly less than $.05, or a nickel.
Let us compare
this with a similar 93-year time period before the creation of the
Fed. This calculation shows that "What cost $100.00
in 1820 would cost $63.02 in 1913. Also, if you
were to buy exactly the same products in 1913 and 1820, they would
cost you $100.00 and $158.69 respectively."
In other words, the dollar held its value to a far greater degree
under the relatively more free market situation before the advent
of the Fed. (Indeed, it was worth more at the end of that
period than at its beginning.) What is so "kooky" about
ridding ourselves of an institution that debauches the currency
to such a degree, particularly when the free enterprise system has
shown money not only need not lose its value but can actually increase
in purchasing power?
Far from "ironing
out" the business cycle, under the watch of the Fed it has
been exacerbated.
But is not
Frum correct in asserting that Paul is "out of touch"
with the respectable mainstream of the economics profession, as
represented by Milton Friedman. Yes, this cannot be denied. Just
as Dr. Paul is "out of touch" with the mainstream media,
so is this true in terms of what passes for the community of "expert"
economists.
Milton Friedman,
although linked in the public mind as the chief exemplar of free
enterprise, was actually no such thing. Rothbard
shows that his claim as a leading spokesman for liberty and the
marketplace is highly overblown. This is a conclusion that emerges
from this exchange as well: Friedman, Milton vs. Walter Block. 2006.
"Fanatical, Not Reasonable: A Short Correspondence Between
Walter Block and Milton Friedman." Journal of Libertarian
Studies, Vol. 20, No. 3, Summer, pp. 61–80. Further, Prof.
Friedman is particularly weak in the monetary
arena as an exemplar of capitalism.
Here is an
interesting quote
from Milton Friedman, which is very much apropos to our present
concerns:
Major
premise: Socialism is a failure. Even lifelong Communists
now accept this proposition. Wherever socialism has been tried,
it has proved unable to deliver the goods, either in the material
form of a high standard of living or in the immaterial form of
human freedom.
Minor
premise: Capitalism is a success. Economies that have used
capitalism – free private markets – as their principal means of
organizing economic activity have proved capable of combining
widely shared prosperity and a high measure of human freedom.
A private market system has proved to be a necessary though not
a sufficient condition for prosperity and freedom.
Conclusion:
The U.S. needs more socialism. An obvious non sequitur, yet
there is no denying that many apparently reasonable people – including
most members of Congress and of the Bush administration – accept
all three propositions simultaneously.
This, we readily
admit, is a brilliant way to put matters. It is not for nothing
that this economist has a wide reputation as a defender of private
property rights and free enterprise. The only problem with it is
that it applies to Friedman himself, certainly in the field of monetary
economics.
For the Fed
is to money as is the central planner to the entire economy. In
other words, unpalatable and uncharitable as it sounds, for much
of his career Milton Freidman was a monetary socialist. What, after
all, is the case in favor of governmental monopolization of the
money supply? It is no stronger for state control over education,
or retirement funds, or health or welfare, or the post office or,
indeed, much if anything else. And, a case can easily be made that
money is more important than any of these other things. After all,
it constitutes the very lifeblood of the entire economy, upon which
all of these other things intimately depend. That is, without an
economy, we need not "worry" about education, the post
office, food, etc. And without money, there is only barter; a modern
economic system is precluded.
There are those
who wish to consign this crucial institution to the tender mercies
of the government. Ron Paul, happily, is not one of them. For this
he is forced to bear the howls and outrage from economic illiterates
such as David Frum, and, yes, Milton Friedman, at least for long
stretches of his career. (At least the latter has written voluminously
on this matter; the former confines himself to sneers.)
The advantage
of the gold standard, vis-ŕ-vis fiat currency supplied by government
is that the state cannot inflate the former. Thus, it functions,
at least relatively, as a veritable Rock of Gibraltar. In fact,
had we remained on a gold standard we would have been far better
off than at present. Any example illustrating
this claim would be an underestimate of the benefits of free market
money for if we had remained on the gold standard, there would be
a lot more gold today than there now is. The extra demand for it
would have led to more exploration and development, better technologies
for extracting gold from ore, and more substitution from non-monetary
uses, and the complementary use of other commodities as money. Nevertheless,
we offer the following: 1 oz gold was worth approximately $20 in
1913 and today about $800, so it takes approximately 40 times more
dollars to buy an ounce of gold at present.
In this regard
states J.
H. Huebert: "And with the subprime mortgage meltdown and
the dollar's value collapsing, another of Dr. Paul's campaign issues
is gaining traction – his desire to abolish the Federal Reserve,
an unaccountable, privately owned bankers' bank that inflates the
money supply. This makes the dollars in your pocket, your savings,
and your investments worth less and less each year as the politically
favored recipients of the Fed's new money profit at ordinary Americans'
expense. The other candidates, who have benefited from the status
quo, ignore the issue, but Ron Paul has been fearless; clips of
him grilling Fed Chairman Ben Bernanke at congressional hearings
have been a surprise hit on YouTube."
But Frum’s
case is far worse than all this would indicate. We have mentioned
above that the Frumster was correct in at least one of his allegations:
for many years, Milton Friedman was indeed a bitter opponent of
the gold standard, in opposition to Ron Paul’s position on the matter.
However, Friedman was a "second thoughtster" on this matter,
as demonstrated by Richard
Ebeling. This economist demonstrates that toward the end of
his career, Friedman came to support, if not in full, and enthusiastically,
then at least in great part, Ron Paul’s views on monetary institutions.
Let us allow
Friedman to speak for himself on this matter, courtesy of Ebeling’s
research:
"Most of
my own work dealing with public policy has had the same character
of proceeding as if I were addressing governmental officials selflessly
dedicated to the public interest. I have attempted to persuade
the Federal Reserve System that it was doing the wrong thing and
it ought to adopt a different policy. This time was ill spent
because the public-interest characterization of government, is
basically flawed.... We do not regard a businessman as selflessly
devoted to the public interest. We think of a businessman as in
business to improve his own welfare, to serve his own interest....
Why should we regard government officials differently? They too
aim to serve their own interest, and in government as in business
we must try to set up institutions under which individuals who
intend only their own gain are led by an invisible hand to serve
the public interest. The Federal Reserve System puts a great deal
of power in the hands of a few people and it is so constructed
that it has been in their self-interest to pursue a policy which,
I believe, has been very harmful for the public rather than helpful....
Clearly, it was not in the self-interest of the Federal Reserve
hierarchy to follow the hypothetical policy [of a monetary rule].
It was therefore a waste of time to try to persuade them to do
so."
States Ebeling:
"But by the mid 1980s, Friedman had second thoughts about whether
government could be trusted ever to follow the necessary restraint
to provide this supposedly superior paper money system. He began
to regularly quote a sentence from Irving Fisher's 1911 book, The
Purchasing Power of Money: ‘Irredeemable paper money has
almost invariably proved a curse to the country employing it.’"
Here, again,
thanks to Ebeling, is another quote on this matter from Friedman
and his co-author Anna Schwartz from their publication: "Has Government
Any Role in Money?"
"The apparently
great value to the economy of having a single unit of account
linked with an (ultimate) medium of exchange does not mean that
government must play any role, or that there need be a single
producer of the medium of exchange. And indeed, historically,
governments have entered the picture after the event, after the
community had settled on a unit of account and private producers
had produced media of exchange.... Historically, producers of
money have established confidence by promising convertibility
into some dominant money, generally specie [e.g., gold or silver].
Many examples can be cited of fairly long-continued and successful
producers of private moneys convertible into specie. We do not
know, however, of any example of the private production of purely
inconvertible fiduciary moneys."
Friedman and
Schwartz continued:
"Our own
conclusion ... is that leaving monetary and banking arrangements
to the market would have produced a more satisfactory outcome
than was actually achieved through government involvement."
"Let me emphasize
that this note is not a plea for a return to a gold standard....
I regard a return to a gold standard as neither desirable nor
feasible – with the one exception that it might become feasible
if the doomsday predictions of hyperinflation under our present
system should prove correct."
In another
publication, "Has Gold Lost Its Monetary Role?" Friedman said, in
an almost direct refutation of Frum:
"If you could
re-establish a world in which government's budget accounted for
10 percent of the national income, in which laissez-faire
reigned, in which governments did not interfere with economic
activities and in which full employment policies had been relegated
to the dustbin, in such a world you might be able to restore a
real gold standard. A real honest-to-God gold standard is not
feasible because there is essentially no government in the world
that is willing to surrender control over its domestic monetary
policy."
In his "Real
and Pseudo Gold Standards," Friedman explained:
 "Under
such a real gold standard, private persons or government might
go into the business of offering storage facilities, and warehouse
receipts might be found more convenient than the gold itself for
transactions. If individuals find warehouse certificates for gold
more useful than literal gold, private enterprise can certainly
provide the service of storing the gold. Why should gold storage
and the issuance of warehouse certificates be a nationalized industry?
Finally, private persons or governments might issue promises to
pay gold either on demand or after a specific time interval which
were not warehouse receipts but nevertheless were widely acceptable
because of confidence that the promises would be redeemed. Such
promises to pay would still not alter the basic character of the
gold standard so long as the obligors were not retroactively relieved
from fulfilling their promises, and this would be true even if
such promises were not fulfilled on time, just as the default
of dollar bond issues does not alter the monetary standard. But,
of course, promises to pay that were in default or that were expected
to be defaulted would not sell at face value, just as bonds in
default trade at a discount.... Such a system might, and I believe
would, raise grave social problems and foster pressure for government
prohibition of or control over the issue of promises to pay gold
on demand. But that is beside my present point, which is that
it would be a real gold standard."
 Let
us consider yet another refutation of Frum’s position from Friedman’s
pen: "A real gold standard is thoroughly consistent with [classical]
liberal principles and I, for one, am entirely in favor of measures
promoting its development."
To conclude.
Frum attempts to prove that Congressman Paul is a monetary crank
because he differs with Milton Friedman. While it cannot be denied
that Dr. Ron Paul and Professor Milton Friedman have some differences
on this matter, Frum’s contention is nonsense. Paul’s critique of
the Fed, and support of a free market stateless money system is
hardly a "rejection of everything taught by modern economists
(such as) Milton Friedman."
December
21, 2007
Dr.
Block [send him mail] is a
professor of economics at Loyola University New Orleans, and a senior
fellow of the Ludwig von Mises Institute. He is the author of Defending
the Undefendable. William
Barnett II [send him mail]
is a professor of economics at Loyola University New Orleans, and
an adjunct scholar of the Ludwig von Mises Institute.
Copyright
© 2007 LewRockwell.com
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