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Wednesday, March 24, 2010

End the Fed

Of all the blunders in American history, perhaps the greatest was the decision to put control of money and banking in the hands of a cabal of big bankers operating under the highfalutin title “Federal Reserve System.” Unfortunately, few among us know anything about the Fed, much less have any inkling of how badly it has damaged the nation. Without it we’d have a smaller government and economic stability.

And yet the Fed enjoys almost sacred-cow status. Most Americans have been led to believe that modern nations absolutely must have some government institution to “manage” the economy, provide money and credit, and control interest rates. Blinded by that notion, they assume that if we didn’t have the Fed, we’d be stuck in the horse-and-buggy age, plagued by terrible boom-and-bust cycles.

Over the near-century since Congress established the Fed (in 1913), it has had many critics, but never one with the moral and political stature of Representative Ron Paul. The congressman from Texas is not a political hack who takes positions just to please constituents and get reelected. He has made a lengthy, serious study of economics, especially our monetary institutions, and his book End the Fed puts his knowledge on display. But it’s more than just a display of knowledge. The book shows Paul’s passionate commitment to the cause of establishing the honest, dependable monetary system the United States was supposed to have.

That’s why Paul wants to end the Fed. It gives us a dishonest and easily manipulated monetary system that we can only depend on for constant inflation. Abolishing the Fed, he writes, “would be the single greatest step we could take to restore American prosperity and freedom and guarantee that they have a future.”

The financial turmoil and prodigious deficits of recent years have people wondering about the future. For them, this book will be like finding an oasis when you’re desperate for water in the desert.

Paul begins by explaining how the Fed came to be. The United States survived without it for more than a century, although the nation suffered from periodic recessions and “panics.” Those episodes, Paul makes clear, weren’t due to any flaw in the free market, but were caused by bad government monetary policy and banking regulation. The Panic of 1907, however, was seized on by banking interests to push for the cartel they had long desired. Congress obligingly created the National Monetary Commission in 1908. It was dominated by big bankers who said that the country needed an “elastic” currency and a “lender of last resort” to backstop banks that got themselves into deep trouble. The legislation was drafted in 1910 at a secret meeting on Jekyll Island, Georgia, at a resort owned by the biggest banker of all, J. Pierpont Morgan. Congress passed it in 1913.

One thing most people have heard is that it is the Fed’s job to give us price stability. Paul shatters the idea that it does so by noting that goods costing one dollar in 1913 now cost $21. Nor does the Fed give us economic stability. Paul points to the numerous recessions we’ve had since it was established.

Drawing on his study of Austrian economic theory, Paul demonstrates that the boom-and-bust cycle is generated by the Fed’s penchant for tampering with interest rates. When it drives them artificially low, it stimulates a temporary boom that must eventually end in recession or depression, with high unemployment and many bankruptcies among overstretched firms.

Furthermore, the Fed makes it easy for the federal government to finance its extravagant (and usually unconstitutional) spending. It can purchase government bonds through “open market operations” and magically turn federal debt into new money. What a scam. Politicians get to spend without explicitly raising taxes and then blame the resulting depreciation of money on others.

So the Fed is a bad institution, but what alternative is there? We can’t go back to some antiquated system like gold, can we? Paul shows that a monetary system based on precious metal is both feasible and much to be desired, precisely because, unlike paper, government can’t manipulate gold.

The book ends with an excellent list of suggested readings. I predict that End the Fed will lead to quite a few knowledgeable and zealous opponents of government economic intervention, and not just regarding money.

Ron Paul’s book is a timely cry of the heart. With our economy in tatters, opportunistic scoundrels in Washington are calling for vast, freedom-killing expansions of government power. Paul stands athwart their plans. This brave book is a rallying point for Americans who know that we’re on a path to ruin.

  • George Leef is the former book review editor of The Freeman. He is director of research at the John W. Pope Center for Higher Education Policy.