End the Fed

by Ron Paul

  What did Milton Friedman believe about money? He was a free-market economist who called himself a libertarian and contributed tremendously to an understanding of how the free market works. There was, however, strong disagreement between Milton Friedman and the hard-money camp of the Austrian school. Friedman believed that the money supply needed to expand in order to support economic growth. He despaired, from time to time, of the Fed’s incentive to do what was right, but he believed in the old monetarist principle that the money supply needed to expand by some amount.

  On occasion in the early 1980s, I debated Dr. Friedman on this issue. He was always courteous and many times complimentary toward my efforts. For a time in the early 1980s, I did a TV interview show for my congressional district and he appeared as a guest on that show. In 1996, when I reentered politics and was running for Congress, I talked to him and asked him if he would write a letter for me in support of the campaign, making the point that economic liberty and personal liberty were one and the same. I was running in a very conservative Bible-belt district, yet I took some civil libertarian positions that were challenging to many. He wrote a delightful little note explaining that these freedoms were one and the same and implied strongly that if you want personal liberty in your religious affairs and your home schooling affairs, you should endorse personal liberty across the board as well as economic liberty.

  The Friedman quote I used in my campaign stated:

  We very badly need to have more Representatives in the House who understand in a principled way the importance of property rights and religious freedom for the preservation and extension of human freedom in general… I wish you every success.

  I sometimes wonder if Friedman, when witnessing what Greenspan and Bernanke have done, might have come around. After all, Anna Schwartz, his coauthor on his history of monetary policy in the United States has been commenting freely on the pages of the Wall Street Journal: “There never would have been a sub-prime mortgage crisis if the Fed had been alert. This is something Alan Greenspan must answer for.” Further: “In general, it’s easier for a central bank to be accommodative, to be loose, to be promoting conditions that make everybody feel that things are going well.”

  CHAPTER 8

  CONGRESS’S INTEREST IN MONETARY POLICY

  I have for years sensed a total disinterest in monetary policy by members of Congress as well as members of the Financial Services Committee. An incident confirmed this skepticism. After I had brought up the subject of gold in a Financial Services hearing, in all seriousness, a member asked me in private whether the dollar was “backed” by gold, having up until then assumed that it was. I don’t think this is unusual. Many of the people who are supposedly in charge of monitoring the system are surprisingly ignorant about even the most basic aspects of how the system works.

  There has been little understanding of any economic policy in Washington. The idea that the government and the Fed should be completely out of the business of central economic planning is not even seen as worthy of discussion. And yet it is Congress that is put in an oversight role. It should exercise that role. But that means doing the work necessary to learn about the topic, and not merely deferring to the big shots in charge of the bureaucracies Congress supposedly oversees.

  Most members of Congress are not automatically hostile to gold or even to the abolition of the Fed. Their attitude is more one of surprise that anybody would even consider it. At the same time, I’ve never heard a member express support for paper money on grounds that it facilitates the expansion of the state. Most don’t see the connection at all. They aren’t even curious about the topic.

  What the Fed and paper money have done for Congress is lead legislators to believe that there are no limits on what they can spend, on what they can propose, and what they can accomplish. They really do behave like college students on spring break who are using their parents’ credit cards with no limit. They don’t think about the money. They don’t think about who or what is paying the bills. The ability to do what they want is just taken for granted. They aren’t even interested in looking at the accounting books. But they would hit the roof if the card were ever declined.

  The point is, unless one has a strong love of liberty, ignorance regarding money is not something that most members of Congress regret. This ignorance is what allows conservatives and liberals alike to spend, borrow, tax, and inflate to finance their various programs, both foreign and domestic.

  There is also the serious matter of the manner in which the Fed intervenes in politics, not just every once in a while but constantly. A famous example of this took place when Arthur Burns was chairman of the Fed (1970–1978). He tightened up on secrecy during his reign and ended the practice of keeping verbatim minutes during Federal Open Market Committee meetings. His intervention in politics is indisputable. Following the election of Jimmy Carter in 1976, he dearly wanted to be reappointed. He cut the discount rate and accelerated money growth. True, he was a Republican, but he wanted to go down in history as bipartisan.

  A memo from a staff aide, reported by William Greider, informed Burns that “Carter can be seduced… reappointment would make Carter out to be a high-minded statesman…. Carter will have to be assured that, if you are reappointed, you will not continue to publicly criticize everything that is near and dear to him.” 1

  Sadly for Burns, the courtship failed. Even more sadly for the country, the courtship wrecked the dollar further. It also wrecked the Carter presidency, as he dealt with the worst bout of price inflation in more than a century. Finally, the inflation backfired even against the Democrats and brought Ronald Reagan to power. Such is the lagging effect of shortsighted efforts to manipulate the political environment to benefit particular Fed governors and banking interests. Despite his sympathy for the gold standard, Reagan did nothing about the issue. His advisers successfully kept him quiet on this issue, fearing that he would be seen as crazy or kooky. Similarly, many people in Congress were privately sympathetic but not knowledgeable enough to take up the cause.

  In the meantime, the Fed’s involvement in the “political business cycle” is a well-documented fact. The Fed tends to loosen before elections and is far more likely to tolerate downturns between presidential elections and Fed appointments. This is an open secret in Washington. We all pretend that the Fed is not a political operation, and yet everyone knows that it is among the most political institutions in the entire government.

  As the years rolled on, it became more apparent to me that the leadership for a return to sound money would never come from the U.S. Congress. Of course, Congress could abolish the Fed tomorrow if it wanted to. The representatives’ ignorance of economics, as well as the benefits they enjoy from irresponsible spending, prevent this. Our leaders will only respond when the people of this country rise up and demand honesty in money.

  Of course, not every supporter of the Fed is somehow a participant in a conspiracy to control the world. Everyone who wants to control the world, however, whether for the benefits of gaining wealth or power, must have control of the monetary system. It’s been that way throughout history. The greater the degree of freedom the people enjoy, the sounder has been the money. Tyranny always goes hand in hand with government’s wrecking of the money system.

  The problem is not only a lust for power; ironically, benevolence and humanitarianism drive many to seek power over others. They believe for humanitarian reasons that the strong and wise have an obligation to subject the weak and ignorant to the whims of government control. As they gain more influence and power, they become more convinced that they are saviors of mankind, and if any resistance or obstacles appear that limit their power, they believe that brute force must be used to impose their “goodwill” on the stubborn few. The purpose of freedom vanishes from their minds.

  The French Jacobins in the eighteenth century were so convinced that their cause was right that even using the guillotine to enforce their will on others for their alleged own good was legiti
mate. Some who promoted the Iraq War were motivated in the same manner. They rationalized a humanitarian excuse for the war even as more than 4,000 Americans died and tens of thousands were wounded. The one million Iraqis who died, and hundreds of thousands who were injured, and the millions of refugees were all justified because of the “goodness” the instigators of the war brought to the world.

  No matter the true reason for wanting to control others, the tax and borrowing system never suffices. Control of money by government and central banking is always required.

  As long as there is wealth available, the people will not complain about the takeover of the monetary system. The day the Fed came into being in 1913 may have been the beginning of the end, but the powers it obtained and the mischief it caused took a long time to become a serious issue and a concern for average Americans.

  But now our wealth is drained. Our productivity is sharply diminished. Our freedoms are eroded. Our empire is fragile.

  And the scheme that long ago eventually gave us the Federal Reserve Act of 1913 is being challenged. The Fed’s inability to manage this admittedly unworkable system is more apparent every day. The question remains whether a new conspiracy on money and central banking can replace what we have, or will we choose a system of money compatible with a free society?

  The answer will come from an informed and enraged populace. Congress will then respond, but only when it is impossible not to.

  There is another force that cannot be ignored: the market. It can overrule even the power of central bankers and government agencies. If nothing else, once the system brought on by the central banks becomes dysfunctional, the underground (real) economy always grows. It existed in the Soviet system as well.

  I recall a fascinating trip during my days as an Air Force flight surgeon. After visiting Portugal, Italy, Greece, and Ethiopia, we stopped in Turkey and Iran and then went on to Pakistan, checking up on the outposts of our empire. The senior officers located at a base near Peshawar, Pakistan, took our crew up to the Khyber Pass for a shopping trip at the Afghan border—an area that is now likely serving as the home of our current nemesis, Osama bin Laden. I remember that as we traveled through the desolate, rugged mountains the commander explained to me that, despite the lack of apparent activity, plenty of tribal natives were present in the region.

  When we got to the border, we could not enter Afghanistan, which, at the time, was allied with the Soviets. But nearby there was a place of great importance where East met West. It was a huge cave set up as an exchange post with goods as numerous as a giant department store’s. Russian and Eastern goods were sold, as well as American and other Western goods. It was peaceful and rather quiet under the earth. Here the people were permitted to trade and converse (authorities on both sides knew of the underground market because it served the interests of both), while up above, the Cold War raged.

  Governments and central banks mess things up, but the market, if it is permitted to operate, is capable of sorting out the mess even under duress. There will always be the underground, smugglers, and the black market, as long as we allow our governments to plunder and control us by making voluntary exchanges and associations illegal. It is government controls themselves that give rise to a black market. By destroying money and fueling the growth of the state, the institution of a central bank is the biggest generator of underground criminal activity ever.

  Some of our political allies charge that the powerful elites who run things and are found repeatedly in the Fed, the Treasury, and the presidency, plan and purposely cause certain events like 9/11 and our current financial crisis. I don’t believe that. But I do believe that many members of the elite make the best they can out of certain events because they facilitate their efforts to achieve their goals. Rahm Emanuel, Obama’s chief of staff, said recently: “You never want a serious crisis to go to waste.” Obama concurred with Emanuel’s assessment.

  Whereas I see today’s crisis as a reason to make an argument for liberty and sound money, others use it to further expand the size and scope of government. Physical or economic fears cause many people to succumb to the offer of authoritarians to protect them at all costs. Many of the laws passed after 9/11 had already been proposed prior to the event, but rejected. Economic planners have many plans to socialize our economy and globalize the effort, if only the popular sentiment will accept it. And why? Socialization always and everywhere means more power to the state, more control to bureaucrats, more security for the elites, and always at the expense of the rest of us. Economic chaos assists in this effort.

  But to purposely bring on catastrophic economic events such as the current situation would be a bad move for anyone, because this level of calamity can pose danger even to the insiders. Wealth loss by deflation and inflation can affect everyone. Political chaos is not always beneficial to those in charge and may in fact be a danger to them. However, they will not hesitate for a minute to do whatever they think is necessary to maintain and expand their control. The insiders who work so hard to undermine sound money to serve their own interests are the same ones who are quite capable of accumulating gold as an ultimate protection against the economic chaos they created.

  Blowback, whether from a seriously flawed foreign policy or from a ridiculously flawed economic and monetary policy, comes as a surprise to many of the designers of this policy because of their own naive belief that they are all-wise. They believe they can always manage conditions that will pacify the people and secure their own economic and political power. But events like Vietnam, the Iraq War, 9/11, or the current economic crisis unify many average citizens against the power elites. The political insiders would just as soon not encourage a rebellion. That is not to say they oppose wars like Vietnam and Iraq, but the popular outcry after it’s become known that the wars were fought on false pretenses and have gone badly wrong is something they would prefer not to have to deal with. A “small” 9/11 they can manage, but not a huge one.

  In any case, I believe that concentrating too much on the Fed “conspiracy,” one that works hand in hand with Congress, gives the system more credit or blame than it deserves and distracts from the more important issue of bad ideology. Authoritarianism, supporting statism on moral grounds for whatever reason, is the real threat.

  These secret powers that the Fed and Treasury have usurped from Congress are the source of much evil. Let me be clear and realistic: elimination of the Fed—and the Exchange Stabilization Fund and all the other powers that go with it—will most likely not occur before the dollar crisis hits. In the meantime, due to the economic downturn we’re witnessing, a coalition of principled people across the political spectrum may well be able to force Congress to exert more oversight. The American people deserve the information.

  Better political decisions will be made when more people and members of Congress understand how all these backroom deals by the Federal Reserve only serve the interests of the elite and destroy the economy that average Americans depend on. Getting rid of the Fed will end the ability to control the people through monopoly on money and banking. While I do not endorse the views of people who write of the conspiracy to control the world through the Fed, I understand what it is that motivates such concerns. Central banks and their shenanigans fuel a kind of public paranoia that is not entirely based on myth. Getting rid of the Fed would help restore confidence in the system.

  CHAPTER 9

  THE CURRENT MESS

  In 2008, a shock hit the American people. The economy had been in the doldrums for some time, but in the fall, the house of cards really began to tumble. Government panicked and the American people woke up to the reality that they had been living in a bubble economy that was now completely popping. Government flew into action with the idea that it could stop the problem from getting worse and put us on the road to recovery. But after trillions spent, and unprecedented levels of intervention, the problems have only grown worse, contrary to all the promises of the political class.

  Many accusa
tions were made about who was responsible for the downturn. It was argued, and still is, that it’s a reflection of the shortcomings of free-market capitalism. Some say it is solely the result of not enough regulations by the banking authorities, especially of the derivatives market. Others suggest that consumers’ lack of enthusiasm to spend is to blame. Others say that all problems would be solved if banks would lend more—as if adding more poison to a poisoned patient amounts to a cure.

  Then-Secretary of the Treasury Henry Paulson simplified it by saying that the downturn in the housing market has caused all the trouble. He and others concluded that the government should stimulate new housing and do whatever’s possible to keep the prices of houses from falling. They contended that since house values were dropping, the mortgages and the many derivatives associated with securitization had become illiquid, and bailing out this market would reverse the deflationary process.

  But—and this is crucial—focusing on the housing market alone was just the last in a parade of claims about the root problem. There are other sectors that have suffered, in finance, car manufacturing, services, retails, and stocks. These are all merely symptoms of a deeper problem: the Fed and its role in sustaining an unsustainable paper money system.

  I was intrigued to see that even the Treasury secretary senses that, at some level, the crisis is connected to central banking. As current Treasury secretary Timothy Geithner said to PBS’s Charlie Rose: “But I would say there were three types of broad errors of policy, and policy both here and around the world. One was that monetary policy around the world was too loose too long. And that created this just huge boom in asset prices, money chasing risk. People trying to get a higher return. That was just overwhelmingly powerful.”