Ron Paul and the Fed

Ron Paul and the Fed: A Rejoinder to David Frum


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–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: u2018Irredeemable 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.”