Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Stock Market Investing LESSON - Buying Value - 27th Nov 21
Corsair MP600 NVME M.2 SSD 66% Performance Loss After 6 Months of Use - Benchmark Tests - 27th Nov 21
Stock Maket Trading Lesson - How to REALLY Trade Markets - 26th Nov 21
SILVER Price Trend Analysis - 26th Nov 21
Federal Reserve Asks Americans to Eat Soy “Meat” for Thanksgiving - 26th Nov 21
Is the S&P 500 Topping or Just Consolidating? - 26th Nov 21
Is a Bigger Drop in Gold Price Just Around the Corner? - 26th Nov 21
Financial Stocks ETF Sector XLF Pullback Sets Up A New $43.60 Upside Target - 26th Nov 21
A Couple of Things to Think About Before Buying Shares - 25th Nov 21
UK Best Fixed Rate Tariff Deal is to NOT FIX Gas and Electric Energy Tariffs During Winter 2021-22 - 25th Nov 21
Stock Market Begins it's Year End Seasonal Santa Rally - 24th Nov 21
How Silver Can Conquer $50+ in 2022 - 24th Nov 21
Stock Market Betting on Hawkish Fed - 24th Nov 21
Stock Market Elliott Wave Trend Forecast - 24th Nov 21
Your once-a-year All-Access Financial Markets Analysis Pass - 24th Nov 21
Did Zillow’s $300 million flop prove me wrong? - 24th Nov 21
Now Malaysian Drivers Renew Their Kurnia Car Insurance Online With - 24th Nov 21
Gold / Silver Ratio - 23rd Nov 21
Stock Market Sentiment Speaks: Can We Get To 5500SPX In 2022? But 4440SPX Comes First - 23rd Nov 21
A Month-to-month breakdown of how Much Money Individuals are Spending on Stocks - 23rd Nov 21
S&P 500: Rallying Tech Stocks vs. Plummeting Oil Stocks - 23rd Nov 21
Like the Latest Bond Flick, the US Dollar Has No Time to Die - 23rd Nov 21
Cannabis ETF MJ Basing & Volatility Patterns - 22nd Nov 21
The Most Important Lesson Learned from this COVID Pandemic - 22nd Nov 21
Dow Stock Market Trend Analysis - 22nd Nov 21
UK Covid-19 Booster Jabs Moderna, Pfizer Are They Worth the Risk of Side effects, Illness? - 22nd Nov 21
US Dollar vs Yields vs Stock Market Trends - 20th Nov 21
Inflation Risk: Milton Friedman Would Buy Gold Right Now - 20th Nov 21
How to Determine if It’s Time for You to Outsource Your Packaging Requirements to a Contract Packer - 20th Nov 21
2 easy ways to play Facebook’s Metaverse Spending Spree - 20th Nov 21
Stock Market Margin Debt WARNING! - 19th Nov 21
Gold Mid-Tier Stocks Q3’21 Fundamentals - 19th Nov 21
Protect Your Wealth From PERMANENT Transitory Inflation - 19th Nov 21
Investors Expect High Inflation. Golden Inquisition Ahead? - 19th Nov 21
Will the Senate Confirm a Marxist to Oversee the U.S. Currency System? - 19th Nov 21
When Even Stock Market Bears Act Bullishly (What It May Mean) - 19th Nov 21
Chinese People do NOT Eat Dogs Newspeak - 18th Nov 21
CHINOBLE! Evergrande Reality Exposes China Fiction! - 18th Nov 21
Kondratieff Full-Season Stock Market Sector Rotation - 18th Nov 21
What Stock Market Trends Will Drive Through To 2022? - 18th Nov 21
How to Jump Start Your Motherboard Without a Power Button With Just a Screwdriver - 18th Nov 21
Bitcoin & Ethereum 2021 Trend - 18th Nov 21
FREE TRADE How to Get 2 FREE SHARES Fractional Investing Platform and ISA Specs - 18th Nov 21
Inflation Ain’t Transitory – But the Fed’s Credibility Is - 18th Nov 21
The real reason Facebook just went “all in” on the metaverse - 18th Nov 21
Biden Signs a Bill to Revive Infrastructure… and Gold! - 18th Nov 21
Silver vs US Dollar - 17th Nov 21
Silver Supply and Demand Balance - 17th Nov 21
Sentiment Speaks: This Stock Market Makes Absolutely No Sense - 17th Nov 21
Biden Spending to Build Back Stagflation - 17th Nov 21
Meshing Cryptocurrency Wealth Generation With Global Fiat Money Demise - 17th Nov 21
Dow Stock Market Trend Forecast Into Mid 2022 - 16th Nov 21
Stock Market Minor Cycle Correcting - 16th Nov 21
The INFLATION MEGA-TREND - Ripples of Deflation on an Ocean of Inflation! - 16th Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Ron Paul's Battle for Financial Sanity

Politics / Central Banks Sep 16, 2009 - 06:17 AM GMT

By: David_Gordon


Best Financial Markets Analysis ArticleRon Paul has since the inception of his tenure in Congress waged a heroic battle for financial sanity, and in End the Fed he gives us insights from that struggle available nowhere else. Dr. Paul had from an early age an affinity for the free market. "In the 1960s," he tells us, "I discovered the writings of economists such as Ludwig von Mises, F.A. Hayek, Murray N. Rothbard, and Hans F. Sennholz. I gradually found the answers I had been searching for. Even for the experts, it literally took centuries to fully understand the nature of money and the business cycle." (p.43)

Dr. Paul during his service in the Air Force was able to hear Mises speak, and when in Congress met with Hayek. "I had the pleasure of hearing Hayek lecture in Washington, around 1980. Following that meeting, we had a private dinner together and spent several hours visiting." (p.51)

But the principal economist who influenced him was Murray Rothbard. "Of all the Austrian economic greats of the twentieth century, I got to know Murray Rothbard the best.. . . I recall his surprise when he found out I had read his essay ‘Gold and Freely Fluctuating Exchange Rates.’. . . If there’s one book that the Washington establishment should read now, it’s Rothbard’s book America’s Great Depression. In this book, he demonstrates that it was the Fed that created the late-1920s boom that led to bust, and Hoover’s interventions that prolonged the Great Depression." (pp.57–8)

The last remark begins to suggest a key reason that the Fed should be abolished. Far from being a means to maintain monetary stability, as its supporters falsely insist, the Fed through expansion of bank credit bears primary responsibility for the business cycle. The expansion temporarily lowers the money rate of interest below the true market rate, largely determined by people’s time preference, i.e., their preference for present over future goods. Businesses, with money available, expand; but the new projects cannot be sustained. When the monetary expansion ceases (if it doesn’t, we will have hyperinflation, with disastrous consequences), these new investments must be liquidated. The process of doing so is the depression.

As Dr. Paul aptly remarks, "The Fed can indeed provide liquidity in these times [of credit contraction] by a simple operation of printing more paper money to cover deposits. But if you think of the cycle as beginning in the boom phase – when money and credit are loose and lending soars to fund unsustainable projects – matters change substantially.. . .when central banks push down [interest] rates on a whim, the impression is created that savings are there when they are in fact completely absent. The resulting bust becomes inevitable as goods that come to production can’t be purchased, and reality sets in by waves. Businesses fail, homes are foreclosed upon, and people bail out of stocks or whatever is the fashionable investment of the day." (pp.29–30)

Instead of the Fed and its false claim that we need an "elastic" currency, we should instead remove the government entirely from the creation of money. In a free society, money would be a commodity; most likely that commodity would be gold. "In fact, I’m only observing reality: the idea of sound money in most of human history has been bound up with gold money. Can there be sound money without a gold standard? In principle, yes. And I’d be very happy for a system that would permit markets to once again choose the most suitable money, whatever that turns out to be. I’m not for government imposing any particular standard: no central bank, no legal tender, no privilege for any commodity chosen as a backing for the currency." (p.71)

Dr. Paul has presented the Austrian view of money in a succinct, accurate, and effective way; but what justifies the claim that he offers insights available nowhere else? Are there not many excellent books and articles that explain the views of Mises and Rothbard on money, not least the works of those two economists themselves? The answer arises from Dr. Paul’s many years of service in Congress. In that capacity, he has had conversations with several Fed Chairmen, and one of these conversations enables us to solve a mystery.

Alan Greenspan epitomizes the control of the money supply by the government that Dr. Paul opposes. But is this not at first sight surprising? Greenspan was a follower of Ayn Rand and shared her devotion to laissez-faire capitalism. In an essay written for the Objectivist newsletter, reprinted in Capitalism: The Unknown Ideal, Greenspan offered a strong defense of the gold standard. The vital advantage of the gold standard, Greenspan explained, is to prevent the government from manipulating the money supply: "in the absence of the gold standard, there is no way to protect savings from confiscation through inflation. . . The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves. This is the shabby secret of the welfare statists’ tirades against gold." (p.81)

Greenspan, amazingly, told Dr. Paul "that he had just recently reread it [the article] and wouldn’t change a word of it." (p.86). How could Greenspan say this, while presiding over a system that embodies the government control of money his article repudiated? Greenspan thought that he could conduct the financial system in the same way as the gold standard would operate. "I [Greenspan] think that you will find. . .that the most effective central banks in this fiat money period tend to be successful largely because we tend to replicate that which would have probably have occurred under a commodity standard in general." (p.88)

In other words, we need to remove government from the money supply, unless, of course, I and people like me are in control. Greenspan’s position brings to mind the Jewish tradition that King Solomon thought that the restrictions imposed in Deuteronomy (XVII: 16-17) on kings about wives and horses did not apply to him. Because, as the wisest of men, he knew the reasons for these restrictions, he could avoid the temptations these rules guarded against and take more wives and horses than allowed. His overweening arrogance led to disaster, and Greenspan has fallen victim to the same syndrome.

Dr. Paul does not regard Greenspan as the smartest of the Fed Chairmen he met. "I had the most interaction with [Paul] Volcker. He was more personable and smarter than the others, including the more recent board chairmen Alan Greenspan and Ben Bernanke" (p.48).

For Bernanke, it is clear that Dr. Paul has a deep distaste. He suspects that Bernanke has acted in secret to manipulate the price of gold, and he bristles at Bernanke’s refusal to disclose his operations to Congress. "So when Bernanke quickly refuses to give us information about the trillions of dollars of credit that he recently passed out in the bailout process because that would be ‘counterproductive,’ he is really saying, ‘It’s none of your business.’" (p.174)

The book recounts remarkable conversations with others besides Greenspan. When he served on the Gold Commission in Ronald Reagan’s administration, he on one occasion flew by helicopter with the president to Andrews Air Force Base. "‘Ron,’ the president told me, ‘no great nation that abandoned the gold standard has remained a great nation.’ He indeed was sympathetic, as he was to many libertarian constitutional ideas, but he was also swayed by staff pressure to be pragmatic on most issues." (p.74)

Reagan, it is apparent, could not break with the illusion that the government needs to be in control. That illusion is avidly propagated by those who profit from it. One such was the notorious George R. Brown, a longtime backer of Lyndon Johnson. Brown displayed interest in Dr. Paul’s campaign for Congress in 1976, and in one conversation told him, "‘Remember, for the economic system to work, business and government must be partners. I cringed and quickly scooted out the door. . . Once I was in office and after my votes and positions became known, the message was clear, and I never heard from him [Brown] again." (p.159)

Dr. Paul’s fight for freedom has not been confined to the issue of sound money. He has also led the struggle against an interventionist and imperialist foreign policy. But the fight for liberty is seamless, and he shows that an aggressive foreign policy depends on government control of the money supply: "it is no coincidence that the century of total war coincided with the century of central banking. When governments had to fund their own wars without a paper money machine to rely upon, they economized on resources. They found diplomatic solutions to prevent war, and after they started a war they ended it as soon as possible." (p.63)

The book contains an abundance of other arguments against our current monetary system, e.g., that it violates the Constitution. Dr. Paul brings to bear on his topic much learning, and readers will discover how monetary debasement helped bring the Byzantine Empire to ruin as well as Thomas Paine’s poor opinion of paper money. Those who have absorbed the book’s message will come to a clear conclusion: End the Fed.

September 16, 2009

David Gordon [send him mail] is a senior fellow at the Ludwig von Mises Institute and editor of its Mises Review. He is also the author of The Essential Rothbard. See also his Books on Liberty.

    © 2009 Copyright / David Gordon - All Rights Reserved
    Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in