"It profits me but little that a vigilant authority always protects the tranquillity of my pleasures and constantly averts all dangers from my path, without my care or concern, if this same authority is the absolute master of my liberty and my life."

--Alexis de Tocqueville, Democracy in America

Thursday, December 22, 2011

Ron Paul on the Federal Reserve System

I promised I would get back to Ron Paul's position on the Federal Reserve, which is central to his economic program.   Essentially, he wants to "End the Fed," as a section of his campaign website says.   Here's the rationale, from an article by Paul in the Wall Street Journal a few months ago:

To know what is wrong with the Federal Reserve, one must first understand the nature of money. Money is like any other good in our economy that emerges from the market to satisfy the needs and wants of consumers. Its particular usefulness is that it helps facilitate indirect exchange, making it easier for us to buy and sell goods because there is a common way of measuring their value. Money is not a government phenomenon, and it need not and should not be managed by government. When central banks like the Fed manage money they are engaging in price fixing, which leads not to prosperity but to disaster.

The Federal Reserve has caused every single boom and bust that has occurred in this country since the bank's creation in 1913. It pumps new money into the financial system to lower interest rates and spur the economy. Adding new money increases the supply of money, making the price of money over time-the interest rate-lower than the market would make it. These lower interest rates affect the allocation of resources, causing capital to be malinvested throughout the economy. So certain projects and ventures that appear profitable when funded at artificially low interest rates are not in fact the best use of those resources.

Eventually, the economic boom created by the Fed's actions is found to be unsustainable, and the bust ensues as this malinvested capital manifests itself in a surplus of capital goods, inventory overhangs, etc. Until these misdirected resources are put to a more productive use-the uses the free market actually desires-the economy stagnates.
The great contribution of the Austrian school of economics to economic theory was in its description of this business cycle: the process of booms and busts, and their origins in monetary intervention by the government in cooperation with the banking system. Yet policy makers at the Federal Reserve still fail to understand the causes of our most recent financial crisis. So they find themselves unable to come up with an adequate solution.
In many respects the governors of the Federal Reserve System and the members of the Federal Open Market Committee are like all other high-ranking powerful officials. Because they make decisions that profoundly affect the workings of the economy and because they have hundreds of bright economists working for them doing research and collecting data, they buy into the pretense of knowledge-the illusion that because they have all these resources at their fingertips they therefore have the ability to guide the economy as they see fit.
This is very strong, persuasive stuff, particularly as it is founded on what I believe to be deep and intelligent reading in the works of Ludwig von Mises and Friedrich von Hayek.   (The note on the "pretense of knowledge" comes straight out of Hayek, who, in my view, is the great economic thinker and philosopher of the 20th Century.)    I would still have concern that ending the Fed would cause severe dislocations in the short term that might keep us from getting the long-term benefits of a freer economy.   It would be a revolutionary act, and revolutions have a way of getting away from the people who start them and transforming into unpredicted monsters.   This is the lesson of Burke, the founding article of modern conservatism.   But the underlying premise  that we need much less, not more, government intervention in the economy, is sound and salutary, and we need more of that from Republican candidates.   And we're not getting it, at least not from Romney or Gingrich, the current front-runners.

Again, this is why the disqualifying oddities of Paul -- at least to me -- are so sad.   But for his past affiliations with the "crank" John Bircher right-wing through his newsletters, and his willingness to abandon Israel and befriend Iran, his ideas on the economy and energy, his stance on life issues, and his willingness to repeal Obamacare and protect our borders are powerful and important messages that any Republican should be willing to adopt.  

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