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The Anti-Fed Revolution

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End the Fed by Ron Paul (New York: Grand Central Publishing, 2009), 212 pages.

Through his 2008 presidential campaign, Ron Paul managed to make monetary policy a national political issue. For nearly a century it had been a relatively obscure topic, and throughout my lifetime respectable opinion considered it a fringe inclination even to be interested in it. Certainly, those who questioned the necessity of even having a central bank had long been relegated to the kooky periphery of political discourse.

This all changed with Paul’s campaign, which put restoring sound money at the top of the 21st-century populist libertarian agenda, second only, perhaps, to ending the U.S. military empire. The financial crisis has made Americans from all walks of life dare to question the central banker behind the curtain. Recent polls show that the Federal Reserve is now among the least-trusted federal agencies, with a vast majority of the public supporting a thorough and independent audit. Paul’s efforts to bring about such an audit garnered more than two-thirds support in the House of Representatives, and for the first time, the Fed’s partisans are on the defensive, publishing articles vindicating its expansionary credit during the Bush years, which an increasing segment of the population, including some in the mainstream press, now blame for causing the housing bubble and consequent financial collapse.

Capitalizing upon this rising public distrust of the once-sacred central bank, Ron Paul has written End the Fed, a direct attack on the moral, economic, and legal foundations of the Federal Reserve. Although much of what can be found in the book can be learned elsewhere, no other popular treatment — concise, sharp, accessible, principled, and insightful — fills the niche that End the Fed serves to fill.

Of Paul’s many accomplishments in popularizing the ideals of liberty, his successful advancement of the Austrian school of economics deserves special recognition. End the Fed provides an accessible introduction to the economic thinking of Ludwig von Mises, F.A. Hayek, Murray Rothbard, and others of the Austrian tradition, whose focus on individual human action is arguably the most radical of all the economic disciplines, and the most compatible with principled libertarian political philosophy. They are not one and the same, for economics is a value-free, scientific study of cause and effect, and the use of resources by people pursuing their interests in a world of material scarcity, whereas libertarianism is a political philosophy centered on moral precepts of property rights, with a definitive normative focus.

But the two reinforce each other by employing methodological individualism — the study of human affairs in terms of individual choices and decisions — and together they show that we are not required to choose between a free society and a prosperous one. For helping to bring such a radical and yet intuitively comprehendible outlook to the general public, one that is not burdened by the mathematical esoterica and affinity to central planning that permeate mainstream economics, we owe Ron Paul a debt of gratitude.

Fiat money

Of course, what makes Austrian economics so particularly compelling and important these days is its explanation of the boom-and-bust business cycle. Ludwig von Mises and F.A. Hayek, the latter of whom won the Nobel Prize in 1974 for his work on this topic, explained unsustainable and systemic economic booms in terms of artificially easy credit, which leads to malinvestment in economic projects, especially long-term ones that cannot be justified by current savings. In a free market, interest rates are determined by the willingness of people to forgo spending and instead save their money. When the rates are lowered by the Fed, it discourages saving while simultaneously encouraging borrowing and investing. This leads to a cascade of high wages, massive construction, rising prices, and everything else we associate with booms such as those seen in the 1920s, the Nasdaq bubble, and the skyrocketing housing prices of the Bush era. But eventually, as economic projects must yield a return, the savings are shown not to have been there to justify the investment. Whereas a free market in interest rates harmonizes production and consumption over time, central bank distortions lead to the boom and bust.

The Fed was sold to the public partly on the basis that it would end the business cycle and financial panics forever. But “the data show otherwise,” writes Paul.

Recessions of the twentieth century as documented by the National Bureau of Economic Research include: 1918–1919, 1920–1921, 1923–1924, 1926–1927, 1929–1933, 1937–1938, 1945, 1948–1949, 1953–1954, 1957–1958, 1960–1961, 1969–1970, 1973–1975, 1980, 1981–1982, 1990–1991, 2001, and 2007, which is the current panic of which there is no end in sight.

As for the current panic, Paul explains that it follows the Austrian theory of the business cycle perfectly:

The massive inflation that was directed into housing was designed to make people feel better, and consumers once again were enticed to continue their spending spree by borrowing against their home equities, driven up at least nominally by inflationary expectations. Monetary policy was always hostile to savings. Savers were cheated with lower rates of interest….

But prosperity can never be achieved by cheap credit. If that were so, no one would have to work for a living. Inflated prices only deceive one into believing that real wealth has been created. But easy come, easy go. It is fun when the bubbles are forming and many can live beyond their means; it’s a different story when they’re forced to live beneath their means in order to pay for their extravagance….

Artificially low rates of interest orchestrated by the Fed induced investors, savers, borrowers, and consumers to misjudge what was going on. Multiple mistakes were made. The apparent prosperity based on the illusion of such wealth and savings led to misdirected and excessive use of capital.

This conversational and accessible prose is found on every page, explaining crucial economic principles in a way that neither dilutes the fundamentals nor comes off as patronizing or saturated with jargon.

In addition to discussing the credit expansion behind the boom and bust, Paul also addresses the lowered lending standards thanks to the Community Reinvestment Act, Fannie Mae and Freddie Mac, and the general bipartisan agenda of getting Americans into homes that they cannot really afford. He explains the moral hazard that arises when a government promise to bail out financial institutions is always hanging in the background. He rebuts the notion that more regulation could have prevented the crisis.

Gold as money

Also important is Paul’s defense of gold as money, drawing on the historical tendency of civilizations to gravitate toward gold as a natural, logical choice for money. Ever since Richard Nixon closed the gold window, preventing foreigners from redeeming their American dollars for gold, most of the world has been on an unprecedented pure fiat-money standard.

Most Americans are not accustomed to thinking about gold as a feasible currency, but Paul gives the historical case and turns arguments against gold on their head. In response to the notion that paper money is more “elastic” than a fixed gold supply, he notes that

gold adapts monetarily and can be ‘stretched’ to serve as money when prices drop as a consequence of high productivity. The purchasing power of gold goes up and is stretched to accommodate more transactions. There’s too much concern about an inadequate supply of gold.

Indeed, a general decline in prices is not a bad thing, as Paul argues, while explaining that inflation should be seen in terms of an increase in the money supply, not simply its most conspicuous consequence, the general rise in consumer prices.

Not just those sympathetic to Austrianism will find value in the book. End the Fed summarizes the history of money and banking in the United States, and notes that, since the creation of the Fed, the dollar “has fallen to less than $0.05 of its 1913 value.” Furthermore, the case against the Fed laid out is comprehensive, exploring the moral, practical, and political implications of central banking and government-manipulated fiat money. Non-Austrian libertarians can sympathize with most of his arguments, as can much of the general public.

For one thing, central-bank inflation allows the government to finance interventionist policies that could not be sustained with unpopular direct-tax increases. In a short chapter on central banking and war, Paul lays out the history of empire and central banking as being intimately intertwined. Those who seek peace and domestic liberty should favor a currency free from government manipulation, and indeed one that limits the power of the state to finance itself.

The ethics of sound money

Invoking the great moral traditions that guide most of us who seek a free society — the great religions of the world, as well as the heritage of American constitutionalism and the secular individualism of Ayn Rand — Paul makes a philosophical case against inflationism, turning a political issue into an ethical one, as is so rarely done these days, especially by politicians.

The Bible assumed that money was a precious metal and honest weight and measures were to be practiced. The words of Jesus even contain a germ of the Austrian theory of the business cycle, which addresses the problem of unsustainable investments. “For which one of you, when he wants to build a tower, does not first sit down and calculate the cost to see if he has enough to complete it? Otherwise, when he has laid a foundation and is not able to finish, all who observe it begin to ridicule him….” (Luke 14:28–29; New American Standard Bible).

No great religion advocates governmental fraud in money. All speak of fulfilling one’s promises and obligations and respecting other people’s persons and property.

Putting the moral issue front and center, Ron Paul does not shy away from the implications of the ethics of sound money:

The entire operation of the Fed is based on an immoral principle…. Members of Congress, when they knowingly endorse this system of fraud because of the benefits they receive, commit an immoral act.

And indeed this plays into the power relations and class warfare that inflationism produces. A connected group of politicians, banking elites, military-industrial complex beneficiaries, government contractors, and bureaucrats profit from the inflation that provides them with easy money, but at what cost? The rest of us foot the bill. Those on fixed incomes, those retired living off savings, those who do not work in politically connected careers see the value of their dollars decline. The new money eventually reaches the rest of the public, but not until after it gets to those with high-level political connections. They spend the new money before the prices rise to accommodate the larger money supply. By the time it trickles down, it has lost much of its value. This is an immoral hidden tax on the lower and middle classes, as Paul has stressed throughout his campaign and career.

There are a few chapters in End the Fed filled with information that won’t be found elsewhere. Paul reflects on his personal experiences, giving an account of how his childhood taught him the value of hard work, savings, and the virtue of an honestly earned dollar. He explains how he came to free-market principles and libertarianism through the intellectual influence of the Austrians and others. He tells of how Nixon’s betrayal of sound money and free-market principles inspired him, begrudgingly, to enter politics, not to gain power but to spread a message that is now much more popular than when he started his career. His reflections on reproduced passages of his exchanges with Fed chairmen Alan Greenspan and Ben Bernanke give the reader a glimpse of the mentality of those chief officials. They also reveal the ardent persistence of the author on an issue he recognized was crucial long before so much of America woke up to the fundamental instability of the U.S. financial system last year. For the Ron Paul buff, the autobiographical info is great reading and an important entry into the historical record of our movement of ideas.

The libertarian case, the economic case, the constitutional case, and the philosophical case are all here, as well as some ideas on how to return to a more sensible and morally defensible system of money, credit, and banking. The short list of recommended reading at the end is helpful: it is divided into levels of sophistication to aid all readers and will help to educate a new, larger generation of anti-Fed revolutionaries. Give this book to your skeptical friends and family and keep a copy in your personal libertarian library. In the battle against the rapacious leviathan, defeating the state’s counterfeit machine must be a high priority. This is a great addition to our intellectual ammo, and it couldn’t have come at a better time.

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    Anthony Gregory is research fellow at the Independent Institute, a policy adviser to the Future of Freedom Foundation, author of The Power of Habeas Corpus in America (Cambridge University Press, 2013), and a history PhD student at the University of California, Berkeley.