Lux Lucet

End the Fed by Ron Paul.  212 pages. Grand Central. $21.99.

Ron Paul has always been something of a political misfit.  An eleven term Republican congressman from Texas, he’s labored most of his career in obscurity, only recently achieving national prominence on the strength of his 2008 bid for the Republican presidential nomination.  The reaction to Paul’s campaign by both voters and media alike was a curious mixture of perplexity, enthusiasm and scorn.  His pro-life, pro-gun positions certainly resonated with many values conservatives.  Fiscal conservatives  no doubt appreciated his small government rhetoric, accompanied as it was by a congressional voting record so hostile to new taxes and regulations that Paul, a physician by trade, earned himself the nickname Dr. No.   And yet during the campaign, Paul often found himself at odds with many of these same conservatives.  His denunciation of the Bush administration’s undeclared war in Iraq got him booed at the 2007 Values Voter Presidential Debate, and for the same reason he was openly rejected by major figures in the Republican party and conservative media.  How, people wondered, can Paul be so conservative and so liberal at the same time?  He appeared full of contradictions.  In reality, there was no contradiction among Paul’s positions, but instead a remarkable underlying consistency.  For Paul, as he says of himself on his congressional website, “never votes for proposed legislation unless the measure is expressly authorized by the Constitution.” Paul’s stand on abortion, guns and war is governed by what the Constitution says on these issues, not by the changing winds of popular opinion.  But public opion, even among self-described conservatives, has drifted so far from constitutional moorings that consistent arguments based on the Constitution sound strange to contemporary listeners.    

While his opposition to Bush’s War on Terror garnered Paul a great deal of attention and no little animosity during the campaign, it was not his sole, or even main focus.  Paul was and is one of the best informed members of Congress on a wide range of issues, but his area of speciality is monetary policy.  Considered a rather wonkish and eccentric subject by many, the Federal Reserve Bank’s (the Fed) monetary policy had long been an object of Paul’s criticism.  Paul, as his Constitutionalist philosophy demanded, was an advocate of hard, commodity money, a position often identified with the gold standard.  As a member of the House Financial Services Committee, Paul grilled Fed chairmen such as Alan Greenspan and Ben Bernanke for many years, asking pointed, informed questions of them while others were lobbing softballs.  And while Paul would question and criticize the Fed chairmen on this or that point, ultimately it was not individual Fed policies to which he objected, but the very existence of the Fed.  For long time Paul admirers such as myself, this always made his C-SPAN head to heads with Greenspan and Bernanke must see TV.  But aside from the entertainment value of watching Fed chairmen squirm under Paul’s questioning, these House Committee meetings were serious affairs.  For the power of those chairmen was awesome, and their decisions affected the lives of every single person in the country in ways few people understood.  But while they were no small matter, the Fed’s activities remained out of sight and out of mind for most Americans.  

All that changed in the fall of 2008.

The collapse of the stock market and bankruptcy or near bankruptcy of some of the most famous firms on Wall Street shook the financial world.  Fed chairman Ben Bernanke and Treasury secretary Hank Paulson become household names.  And a new word was on everyone’s lips: bailout.  This word was looked up so many times on the Merriam-Webster online dictionary that the publisher declared it the 2008 Word of the Year.  In the context of the financial crisis, the term bailout amounted to this: an enormous transfer of money from taxpayers to Wall Street in order to prop up companies that were said to be “too big to fail.” This action by the Fed, seemingly so unfair at a time when millions of Americans were losing their jobs and hard earned retirement savings, for the first time prompted many people to take a critical look at the Fed, what it did and whether it was right in its actions.  And there was no one better qualified to answer these questions than Congressman Ron Paul of Texas.   

One of the marks of a good book is that the author draws the proper conclusion from his premises. In End The Fed,  Paul does just that.  His object is not to regulate the Fed, not to reform the Fed, not to replace the Fed with a kinder, gentler central bank, but to altogether abolish the Fed and return the US economy to a system of sound, commodity backed money. This is a bold proposition.  And Paul backs it up with compelling arguments.  Paul begins his highly readable and brief book – it runs a compact 210 pages – with a chapter titled Why You Should Care.  Here, Paul makes a powerful case that everyone should care about money and the effect the Fed’s policies have had on the dollar.  He writes,

After all is said and done, the Fed has one power that is unique to it alone: it enables the creation of money out of thin air.  Sometimes it makes vast new amounts.  Sometimes it makes lesser amounts.  The money takes a variety of forms and enters the system in various ways.  And the Fed does this through techniques such as open-market operations changing reserve ratios, and manipulating interest rates, operations that all result in money creation. 

Given that money is one half of every commercial transaction and that whole civilizations literally rise and fall based on the quality of their money, we are talking about an awesome power, one that flies under the cover of night.  It is the power to weave illusions that appear real as long as they last.  That is the very core of the Fed’s power.  (p.2)

Paul continues,

Everyone should have an intense interest in what money is and how it’s manipulated by the few at the expense of the many.  Money is crucial for survival.  It is necessary for maintaining a free society.  A healthy economy depends on it.  Limiting political power is impossible without it.  Sound money is necessary for preventing unnecessary wars.  Prosperity and peace in the long run are impossible without it .

To understand money, one absolutely must understand what a central bank is all about.  In the United States, the central bank is the Federal Reserve, the instrument by which our money and credit are constantly manipulated for the benefit of a privileged class.  (p.3)

A careless or out of context reading of the last passage may cause one to suppose that Paul is some sort of populist class warrior in the mold of Michael Moore, but such is not the case.  Paul has no animus against the wealthy and is certainly no socialist.   Rather, his love of personal freedom is what motivates his opposition to the Fed.  In his words,

ending the Fed is the single greatest step we could take to restoring American prosperity and freedom and guaranteeing that they both have a future.  (p.5)

Paul speaks about the philosophical and historical origins of the Fed in chapter 2.  On its website, the Fed claims, “it was founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary system.”  To which Paul, in so many words, says “nonsense!” The purpose of the Fed, Paul tells us, is to protect the profits of the big banks and socialize their losses.  He writes,

The banking industry has always had trouble with the idea of a free market that provides opportunities for both profits and losses.  The first part the industry likes.  The second part is another issue.  That is the reason for the constatnt drive in American history toward the centralization of money and banking, a trend that not only benefits the largest banks with the most to lose from a sound money system, but also the government, which is able to use an elastic system as an alternate form of revenue support.  The coalition of government and big bankers provides the essential backbone of support for the centralization of money and credit. (p.15)

With this in mind, the actions of the Fed in the 2008 financial crisis make sense.  The job of the Fed from the beginning was to be a lender of last resort to big banks in need of a bailout. 

Another interesting point Paul makes in this chapter is that far from being a heroic bulwark against inflation, the Fed is, in fact, the very instrument of this subtle form of taxation.   “The Fed,” he tells us, “is in the business of generating inflation,” which he defines as, “an artificial increase in the supply of money and credit.”  “[T]he entire reason for the Fed’s existence,” Paul remarks, “is to generate more, not less, of it.” This is an important point.  Many times people focus on the latest CPI report and, if it doesn’t show that prices have gone up, conclude that there’s no inflation.  But if inflation is defined as an artificial increase in the supply of money, then the Fed’s recent doubling of the monetary base means we already have inflation in spades, even if that inflation hasn’t yet resulted in rapidly rising consumer prices.      

Why should we end the Fed?  Paul answers in his usual direct fashion,

The Federal Reserve should be abolished because it is immoral, unconstitutional, impractical, promotes bad economics, and undermines liberty.  Its destructive nature makes it a tool of tyrannical government.

Nothing good can come from the Federal Reserve.  It is the biggest taxer of them all.  Diluting the value of the dollar by increasing its supply is a vicious, sinister tax on the poor and middle class.  (p.141)

 Excuse me while I stand and cheer….

There.  That’s better.

Now then…Where was I?  Ah, I remember now.  As I was about to say, this is great stuff.  And what’s more, in four successive chapters Paul demonstrates the truth of his statement.  In chapter 11, The Philosophical Case, Paul argues against the Fed on moral grounds, emphasizing that it’s corrupt.  He writes,

Very simply, there can’t be a more immoral system of money than one based on a banking monopoly that can counterfeit money in secret with no oversight and protection of the people.  The moral argument against the Fed should be enough for decently well-informed people to dispense with it posthaste. (p.156)

Paul then drives home his argument by quoting Scripture, 

Even the Bible is clear that altering the quality of money is an immoral act.  We are instructed to follow the rules of “just weights and measures.”  “You shall do not injustice in judgment, in measurement of length, weight, or volume.  You shall have just balances, just weights, a just ephah, and a just hin” (Leviticus 19:35-36).  “Diverse weights are an abomination to the Lord, and a false balance is not good” (Proverbs 20:23).  The general principle can be summed up as “You shall not steal” (Exodus 20:15).

Precisely.  Stealing is immoral.  Inflation is stealing.  Therefore inflation is, not mere monetary policy, not the stuff of intellectual debate among Ph.D. economists, not the cure all for what ails a sick economy, but an immoral act.  And no lasting reform of the monetary and political system will occur until large numbers of Americans come to believe this.   

In the book’s final chapter, Paul argues that our current corrupt monetary system should be replaced with a dollar backed by gold.  But not content to stop there, Paul argues, correctly, that we should reconsider the notion of a government monopoly on money, 

The Founding Fathers never set out to create a single notional monetary system.  Money and banking were left to the states, with the proviso that the states themselves could only make gold and silver legal tender.  At the same time, there were no restrictions of private minters and private (free) banking.  We should embrace this system again, repealing legal tender laws and letting everyone get into the business of the production of money.  This would create a competitive market in which the best monies would emerge over time to compete directly with the federal government’s dollar. (p.205) 

For some, the notion of competing currencies and non-government issued money may be the most shocking of Paul’s suggestions.  But he’s on solid ground here.  Early in our nation’s history, the federal government published lists of various currencies that it would accept in payment of taxes.  Legal tender laws, imposed later, were unknown.  And private money, far from being a new idea, is as old as the Bible.  For Abraham, after agreeing to buy Sarah’s burial plot from Ephron the Hittite, “weighed out the silver for Ephron which he had named in the hearing of the sons of Heth, four hundred shekels of silver, currency of the merchants” (Gen.23:16).  Notice how the shekel is described.  It’s called,”the currency of the merchants.”  This is privately created money, not the issue of a government.   

Paul’s program may sound far fetched to many, but apart from reform based on sound economics and the Constitution, he warns,

we should be prepared for hyperinflation and a great deal of poverty with a depression and possible street violence as well. (p.208)

This is a sobering statement from a man who has demonstrated time and again his sound grasp of economics and politics, and he’s right to say this.  Unless enough Americans demand and end to our current larcenous monetary policies and a return to sound money, our financial system is headed for a crash.  One worse than that of 2008. 

Paul has written an extraordinary book.  Far from being another example lightweight demagoguery passed off as serious political discourse, this book is profound.  For in it, Paul lays the axe to the root of the current financial crisis:  our fiat monetary system run by the Federal Reserve.  But while profound, End the Fed is remarkablly readable and can be appreciated by the political novice as well as the policy wonk.  There’s simply no one else like Ron Paul in American politics.  It’s my hope that End the Fed book will serve to end that state of affairs as well.