Book Review: End the Fed

by Elusive Wapiti on November 11, 2010

The Book: End the Fed, by Ron Paul. 210 pages.

The Gist: In this book, Representative Ron Paul details his case that the Federal Reserve Bank cartel causes more misery, suffering, and problems than it causes, and should thus be disbanded.  He claims that ending the Fed “would address the most vexing problems of politics of our time”, ending dollar depreciation, stripping the government of an easy ability to finance endless wars, curb attacks on civil liberties, halt debt accumulation, and arrest the expansion of the welfare state.  Moreover, Paul the Elder claims that doing away with the Fed would ends the government’s ability to use financial sleight of hand to underwrite its ability to expand without limit, would be a first step toward restoring constitutional government, would halt the business cycle, end inflation, would stymie the corrupt symbiotic relationship between government and “too big to fail” banks, and would end the abuse of monetary policy during political election cycles.

Key Quote: Paul cites Scripture: “You shall have just balances, just weights, a just ephah, and a just hin” (Lev 19:35-36).

On dollar depreciation, halting the business cycle, and ending inflation: Rather than be a mechanism for controlling and eliminating inflation, Paul asserts that the Fed is instead an agent of it.  Take history, for instance: Paul points out that $1 in 1913 is worth five cents today; such that what once cost $1 in 1913 costs $21 in 2010, with the result that the government and the banking cartel have sapped–Paul uses the word “stolen”–$.95 of every dollar over the span of the last century.  Paul also demonstrates that, when confronted with economic crisis, the very tool that administrators of the Fed use to keep the markets liquid and to keep prices up is to inflate the currency; thus, far from ending inflation, the Fed is the primary means by which inflation is injected into our economy.  In addition, rather than smoothing out the business cycle, Paul claims that the Fed ensures they continue to recur. For example, the assertion that the Fed makes smoother the boom-bust pattern of the business cycle requires one to focus solely on the bust phase, where the Fed does indeed provide liquidity to keep the banks lending and the credit markets functioning.  However,if one views the business cycle as one that begins during the boom phase–where easy money begats malinvestment and excess capacity–it becomes clear that the Fed creates the very problem that it later “solves”.

Paul’s book cites an interesting quote which I think illustrates this point quite well:

…[the banks] actually expanded the currency by extraordinary issues, whilst there was no existing check upon them, until its depreciation was so great that speculation and overtrading in all their disastrous forms involved the country in a scene of wretchedness, from which it did not recover in ten years

Source: Raguet, Condy, A Treatise on Currency and Banking, New York, Kelly Reprints, 1967, 1840, p 156.

On central banking as a catalyst for war: With an endless money machine that provides nearly limitless funding to finance expensive military adventurism, governments are free to build up forces and wage as much expensive military aggression as they can convince the polity is reasonable. On the other hand, those governments without this easy-money option to make their money for them are forced to economize and make guns-and-butter choices.  Mises in 1919:

…one can say without exaggeration that inflation is an indispensable means of militarism. Without it, the repercussions of war on welfare become obvious much more quickly and penetratingly; war weariness would set in much earlier

As further evidence of this central banking-warfare connection, Paul cites the case of WWI, where only 21% of WWI was financed through taxation, 56% was from Fed-backed borrowing, and 23% was outright money printing. And this is on the US side; one shudders to consider the impact of central bank lending on the ability or willingness of Germany or Britain or France to wage the War to End All Wars. Furthermore, WWI, while wiping out all the old monarchies, created the Imperial America and a globalized foreign policy mission. For Russia, it meant Communism, as the war machine spurred by easy money created shortages, price controls, devastation, and social unrest that resulted in the Bolshevik revolt of 1917. None of these calamities could have been possible had the USA or other countries not had the easy money of a central bank to underwrite their military campaigns, for opposition to direct taxation on wealth naturally limits governmental adventurism.

Paul also ties the lender of last resort to a more aggressive national foreign and domestic policy, creating what he calls the “welfare-warfare state”. With a central bank, countries can dream ad infinitum of ever more power, programs and ambitions.  America could and did become involved in countless full-scale wars, police actions, small invasions; after each political crisis, the answer is the same as after each economic crisis: more monetary expansion, the better to “prime” the economic pump. Thus guns or butter turned into both guns and butter…with a central bank, there is no longer a need to choose between the two, and the ability of the Fed to make money is what makes this crisis-response model possible. Conversely, as long as the funding stream remained limited to what could be extracted by force from the wallets of the population, there was a natural upper limit to the power and size and scope and ambitions of the State.

I pause to offer a personal observation that the easy monetary spigot supplied by the Fed may actually result in less American military effectiveness on the battlefield and therefore more protracted wars (and needless suffering).  This is because an un-mobilized society, where only the soldiers feel the pain of warfare, not the whole of the civilian population through privation and war rationing, is not as personally invested in the nation’s wars, and is therefore more prone to approve the committing of forces abroad.  Furthermore, such a population, thus disconnected from the ravages of warfare, is more susceptible to manipulation of public opinion by the media, a fact that Ho Chi Minh exploited during the Vietnam conflict.  I suspect the advent of the all-volunteer military in the 1970s aggravates this condition.

On civil liberties and the growth of the state: It is a sort of truism in libertarian circles that when government grows, liberty necessarily suffers in a zero-sum equation. Paul subscribes to this maxim in noting that central banking tends to aggregate power toward the central government and away from the people and the States. Citing the fifth plank of the Communist Manifesto,

centralization of credit in the banks of the State, by means of a national bank with state capital and an exclusive monopoly,

Paul contends that central banks serve as a type of “backdoor economic planning”, the sort of economic model which the world had the opportunity to fail spectacularly in the 1980s with the fall of the former Soviet Union.  We know from the warnings of von Mises and others that centrally planned economies fail primarily because they lack a  mechanism to make accurate supply and demand decisions across all points in the economy. Lacking this information, they die by suffocation, overcome by the weight of their own inefficiencies. In a similar manner, by setting interest rates low nationwide–so as to better fund the welfare-warfare state and monetize the national debt–rather than letting independent local banks set rates for local conditions, the Fed discourages savings while encouraging borrowing and consumption.  This serves to create both the boom-bust business cycle and its attendant inevitable banking panics and the pretext for government to swoop in and “fix” the problem with more centralization, either with (a) more regulation (read: more power to government and more corruption), or with (b) more governmental guarantees that the public won’t be harmed by institutional failures (read: more moral hazard, which leads to more crises).

In a further example of the socialist nature of central banking, Paul offers the following: with the Federal Reserve Act (FRA), Congress formed a cartel of the 12 largest banks and permitted them “to inflate the currency at will, providing for themselves and the financial system liquidity in times of need, while insulating themselves against the consequences of bad loans and overextension of credit…it was a form of financial socialism that benefitted the rich and the powerful”.  When things go badly, as they always will under a fractional reserve system, “they claim they provide an invaluable public service and deserve support from the public treasury”, not unlike the events here in the United States over the last two years with hyperventilating demands that the public bail out the banking institutions. Or else.

The stealthy and insidious effect of central banking makes locating and fixing a culprit for mysterious yet persistent economic fragility and boom-bust cycles difficult.  However, after each unnecessary yet inevitable crisis, “rogue capitalism” or the “wild west free market” is blamed for the failure.  This creates the window for opportunist politicians, either benevolent or malevolent, to grow government and curb civil liberties. “Just this once,” we’re told; however, history tells us the “just this once” excuse is repeated over and over again, as politicians trade liberties for security in a futile effort to prevent crises from recurring.  Paul notes that “pragmatism, urgency, benevolence, fairness, compromise, fear of the future, and the need for safety and security provide the moral cover for an authoritarian approach to rescuing and protecting the people” from the crises their very own government precipitated.  This crisis atmosphere feeds the natural urge to merge government and business interests through which, naturally, the merchant enriches himself with public money while “serving the public good”.  In addition, because there is such a large (and growing) pot of money at stake, businessmen lobby legislators and regulators intensely, in order to shape legislation or rules in their favor.  Quite often this hybrid public-private economy and the regulations and rules that accompany it fail to achieve their desired results; once again the “free market” is blamed (when this economy is anything but free), and the problems again become an excuse to further enlarge the government and enrich special interests. Wash. Rinse. Repeat.

On restoring constitutional government:  Paul claims the Founders were clear on their intent for a central bank and paper money, having thoroughly debated and defeated both in the framing of the Constitution. Paul is equally frank in his view that the Fed is unconstitutional.  In his view, the Constitution could not be more clear–no paper money, period, only gold and silver (Article 1, Section 10), and the Constitution furthermore did not and does not grant to the Federal government the power to create a central bank (those powers not specifically delegated to the Federal government are reserved for the people or the States by the Tenth Amendment).  Yet how does Paul account for this seemingly blatant infraction of law? He cites the Federal government’s (mis)use of the “necessary and proper” clause of the Constitution (Article 1, Section 8) and a ruling by the Marshall court–yes, that Marshall court–in McCullough v Maryland (1819), which basically means that the Fed Gov can pass and enforce any law it wants as long as it can justify it as necessary and proper in the performance of its duties.  According to Paul, this SCOTUS decision set the stage for the Federal Reserve Act of 1913.

On halting the abuse of monetary policy during election cycles: It is an open secret that the Fed, despite its supposedly apolitical nature, is often quite politically activist, and its decisions to increase or shrink the money supply can make or sink presidential candidates or political parties.  Furthermore, the presence of a central bank with unlimited ability to inflate becomes the central vehicle through which politicians buy votes, both of the people themselves (inflation yields the temporary illusion of prosperity…which translates into votes for the controlling faction) and for big business. “Big government breeds big corruption”, as Paul notes the records set in the 2008 presidential election because the size of government was so large and, because of the depression, was only forecasted to expand quickly.  There was money to be made and influence to be purchased. The central bank and its inflationary policies are also used to buy votes in another manner…from “zero liability voters” who are grateful for the bread a welfare-warfare state gives them, and from the rich, who benefit from government largesse and reap the income from usurious interest.  Thus, under a central bank, both of these populations act in their own best interests, and vote for policies that serve to eat the substance out of the middle class, which finds its wealth robbed by inflation and transferred to wealthy and the poor. Paul notes that a central bank is, well, central to this wealth transference, as “transferring wealth is limited when taxes and borrowing are the only tools” available to politicians to use in their fleecing of the middle class.

I enjoyed this book thoroughly, which should come as a surprise to anyone who has previously read Rothbard and Keynes. I long ago had convinced oneself that Rothbard’s Austrian conception of economics is the more correct one, even before I read his and Keynes’ works. I also concur on the moral case against the Fed, considering inflation to be no different from legalized theft.  The weakest part of Paul’s argument was, in my opinion, the Constitutional one, for he is clearly swimming upstream against the tide of Madison’s SCOTUS-approved Federalists and the very human tendency to pull power in toward the central government.

In the end, Paul sums up well the fecklessness of the Constitution in preventing the establishment and legalized larceny of the Fed, noting:

…the Constitution itself is incapable of achieving what we would like in limiting government power, no matter how well written. The morality of the people and wisdom of our elected officials are the only things that count

In other words, when the morality of the people shifts such that they view the taking of other people’s property as right and proper, no amount of legal chains will stop them.  Thus the argument for ending the Fed will win the day not when the Constitutional legal case is made, but when the people decide once again that sound money is the route to prosperity, to a limited government, and that robbing their neighbors to line their own wallets is immoral.

About the author: EW is a well-trained monkey charged with operating heavier-than-air machinery. His interests outside of being an opinionated rabble-rouser are hunting, working out, motorcycling, spending time with his family, and flying. He is a father to three, a husband to one, and is a sometime contributor here at Spearhead. More of his intolerable drivel is available at the blog The Elusive Wapiti.

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