Freedom Under Siege
by David Gordon
by David Gordon
Freedom Under Siege: The U.S. Constitution After 200-Plus Years. By Ron Paul. Ludwig von Mises Institute, 2007. xi + 157 pages.
Freedom Under Siege is even more important today than when it first appeared twenty years ago. America today is threatened with a severe economic crisis. The Federal Reserve Board, in an effort to prop up the stock market, has followed for a long time an "easy money" policy. As a result, the dollar's value has sharply fallen, threatening a key element in American financial world dominance. As if this were not enough, the housing market is in very poor shape. Why are we in such a bad position? Ron Paul has the answer, and, even better, knows how we can escape from trouble.
Paul, a close student of Ludwig von Mises and Murray Rothbard, explains clearly and cogently the Austrian theory of the business cycle: in this theory lies the explanation of our present plight. As Mises, F.A. Hayek, and Rothbard have pointed out, an expansion of bank credit that lowers the monetary rate of interest below the natural rate, determined by time preference, generates an artificial boom. Businesses, responding to the new credit available, lengthen the structure of production. When the credit expansion ceases, the monetary rate of interest rises to accord with the natural rate. The structure of production contracts. The ensuing liquidation of unsustainable investments is precisely the depression. "With credit injections, the Fed lowers interest rates causing businessmen to invest in new capital equipment. They produce goods that consumers can't afford, and eventually they find that their plans don't pan out. This process spreads throughout the economy and creates ever-growing waves of booms and busts." (p.116)
If a policy of credit expansion cannot in the long run be successful, why then do governments and central banks continually resort to it? As Paul makes clear, some people do benefit from this policy, however detrimental its overall effects. A "major reason we have a powerful central bank that maintains monopoly control over credit is that those in charge of policy are granted overwhelming political and economic power. The individuals who, behind the scenes, pull the monetary strings are very much aware of the power they have. . . .Economic benefits accrue to those knowledgeable about Federal Reserve policy. [Fed Chairman] Paul Volcker once admitted to me [Paul], to my surprise before a banking committee hearing, that leaks did occur regarding secret monetary policy." (pp.131—32). In addition, of course, banks earn considerable profits on the loans that a fractional reserve banking system makes possible.
Paul presents a detailed account of the genesis of the Federal Reserve System, using Austrian theory as an interpretive guideline. The notorious Jekyll Island Conference is of course a highlight of Paul's account. He sums up with a devastating quotation from the eminent historian Gabriel Kolko: "The entire banking reform movement, at all crucial stages, was centralized in the hands of a few men who for years were linked, ideologically and personally, with one another. . . the major function, inspiration, and direction of the measure [the Federal Reserve Act] was to serve the banking community in general, and large bankers specifically." (p.115)
The profits and power that go to the financial elite come at the expense of the general public. The expansionary policy inevitably collapses; and here, as Paul perceptively notes, the consequences may extend far beyond the narrowly economic. Sharp economic downturns may generate social unrest; and groups that the public, rightly or wrongly, blames for their financial straits may find themselves at considerable risk. "In periods of significant inflation, the people are not only disturbed by the untrustworthiness of the system, they become angry at certain groups that benefit or appear to benefit from inflation." (p.127)
How can we be rescued from this morass? Again following Mises and Rothbard, Paul defends a gold standard. Only if money is treated strictly as a commodity, immune from government manipulation, can we avoid the vagaries of the business cycle. "Money, according to Mises, must originate in the market as a useful commodity in order to function properly. The most acceptable liquid commodity always becomes money. The particular commodity has varied from culture to culture, but gold has been overwhelmingly chosen as the favorite with silver a close second." (p.117) With a gold standard, the government has no opportunity to expand monetary credit, since the supply of money is strictly limited to the stock of gold on hand.
When Paul talks about a gold standard, he means a genuine gold standard. In particular, the pseudo-gold standard favored by the supply-siders — fortunately less influential now than in 1987 — must be rejected. "The supply-siders, as led by Jack Kemp and Arthur Laffer, have advocated a type of gold standard, but in truth it is a pseudo-gold standard. It is actually a gold price rule whereby the Federal Reserve adjusts monetary policy dependent on the gold price." (p.140)
Paul, the foremost Misesian in politics, aptly brings out the importance of the gold standard for a free society. Lack of economic freedom leads a society to tyranny; and money free of government control is essential to a free economy: "When a society accepts irredeemable fiat money, one can be sure the fundamentals of freedom are being threatened, and it's only a matter of time before an abusive dictatorship emerges that controls all aspects of our lives if the concept of fiat money is not rejected." (p.118)
This is no mere theoretical speculation. According to Hayek, inflation, combined with rigid price control, was a principal component of Nazi economic policy: "There is something much worse than an open inflation and I'm [Hayek] afraid that's what you're headed for, a continued increase in the quantity of money with government prohibitions against price rises — ‘repressed inflation' as I like to call it. . .Hitler followed this practice throughout his regime. Despite the colossal monetary expansion, prices remained constant because people were shot if they raised prices." (p. 119)
Besides his expertise in Austrian economics, Paul has also studied closely the great political philosophers. He points out that John Locke emphasized the connection between individual freedom and sound money: "For Locke, the right to possess, use, and to store up money is fundamental. Like the ownership of property, it is not conferred on the individual by society, but rather civil society has been established to protect this right." (p. 123, quoting S. Herbert Frankel)
Paul assails fiat money with a formidable variety of weapons. Not only is fiat money economically unsound, it is also unconstitutional. Where does the Constitution grant the federal government the right to issue paper money unbacked by gold or silver? "Congress is explicitly given power to coin money in Article 1, Section A, but no similar power was given to print fiat money." (p.100)
Throughout his career in Congress, Ron Paul has trenchantly criticized America's interventionist foreign policy, assailing it as a gross departure from the wisdom of Washington and Jefferson. In particular, he has resolutely opposed the Bush Administration's disastrous and immoral Iraq War. If we had a sound monetary system, aggressive wars of this sort would be rendered difficult, if not outright impossible, to undertake. If the government wanted to launch an aggressive war, it would have to obtain the money to do so through tax increases or borrowing. It could not disguise the immense costs by the use of inflation, as it does now.
In his Foreword to Freedom Under Siege, Lew Rockwell aptly remarks: "We have not seen Ron Paul's like in Washington since the days of the Founding Fathers. . . .On the economy, civil liberties, the IRS, foreign policy, the draft, and the Power Elite, he takes the hardcore libertarian position. He is the 20th century's Thomas Jefferson." (p. x) Ron Paul's campaign for President offers us an unprecedented opportunity to promote freedom.
January 1, 2008
Copyright © 2008 LewRockwell.com