Bloomberg reviews End the Fed:
Can the Fed be fixed? Don’t bother, writes U.S. Congressman Ron Paul in “End the Fed,” a blistering libertarian broadside from a firm believer in Austrian economics.
Paul, a Republican from Texas, wants to abolish the Fed, freeze the money stock, and reintroduce a gold standard. His book lays out his arguments in blunt rhetoric pitched to the surly mood of an understandably disillusioned electorate. He attributes his title to a catchphrase he heard University of Michigan students chanting in October 2007.
“All around the country, people are gathering outside Federal Reserve buildings to protest against the power, secrecy and operations of the Fed, and chanting this great slogan,” he writes. “Their goal is not reform but revolution.”
Many of Paul’s assertions ring true. Inflation amounts to taxation, he says. Correct. Central bankers are central economic planners, he asserts. Absolutely. Wall Street likes “privatized profits and socialized losses.” No surprise there. He’s right, yet draws the wrong conclusions.
The review further criticizes Paul and cites the Panic of 1907. And yet Paul addresses this incident in some detail. This is not a work of science, such as Murray Rothbard wrote, but it is historically informed, economically sophisticated, and erudite in chapter after chapter. Ron Paul knows his stuff and it is on display here. Neither did I find it to be blistering or over-the-top in rhetoric. It is calm and explanatory, just as the author is in person. And highest praise goes to the sections of transcripts of his discussions with Fed governors over the years.
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Uhhhhh…. I don’t get it. I just read that review and the author just quotes people who say, “Yeah, you’re a tricky-dick, Paul, but you’re wrong”
When massive gold shipments drained into the U.S. from London after the San Francisco earthquake of 1906, the Bank of England moved to stanch the outflow by raising its benchmark interest rate to 6 percent from 3.5 percent, as Barry Ritholtz of research firm FusionIQ writes in “Bailout Nation†(Wiley). Other European banks followed suit.
To Ritholtz, the moral is clear:
“Unless all nations agree to do so simultaneously, the dissolving of a central bank amounts to the economic equivalent of unilateral disarmament.â€
What moral just got told? What lesson learned? Where is the explanation of what is wrong with gold flowing into the US due to shakey banking in England?
Is this the best Ron Paul’s critics can do?
In both his historical references and theoretical statements, I do not believe that the author of the Bloomberg review understands the implications of fractional reserve banking and how central banking institutionalizes, protects, and subsidizes this destabilizing and pernicious practice. Absent fractional reserve banking, or more generally absent the legal protection of banks’ creation of fiduciary media, the monetary system would be much more stable (and ethically just).
The point about “unilateral disarmament” isn’t silly.
If one small country were to end central banking it would find itself at the mercy of a cartel of the rest of the world’s central banks.
As Doug French writes, this is very similar to what happened during Tulipmania in the Netherlands. Other european states were busy debasing their coinage and wouldn’t allow new coinage. So, merchants from the new world went to Amsterdam where they could have their gold coined.
Unfortunately what is really needed is multi-lateral disarmament. An end to the Fed, ECB, BoJ, People’s Bank of China and BoE. Perhaps if 2 or 3 from that list were rubbed out the rest would follow, it’s hard to say.
This article is a complete misrepresentation and misunderstanding of the book:
“Hold on, though. Wasn’t America’s Fed-less 19th-century history punctuated with recurring booms, busts and banking panics? Paul dismisses such talk.”Most of the tales of 19th-century banking are mythical,†he says, blaming the upheavals on government meddling.”
It’s a bit more detailed than that: the first 11 years of the19th century (and the last 9 of the 18th) saw the 1st bank of the US. After it was not renewed in 1811, a war broke out which had to be financed. Then from 1816-1836 the Second bank of the US existed. That’s already 31 years of the first 40 (with a War between) which saw central banking. Then there was the Civil War, and Green backs. In 1865, congress began taxing any issue of state bank notes 10%, encouraging many state banks to become national banks.
But the Utopian Paul is simply blaming “government meddling” as if it were some last resort jab at explaining the failure of free-market banking. No there wasn’t a Fed, but there were still the same tactics of the Fed. The Fed only helped government and corporate bankers to better organize and concentrate this manipulation of money that was already taking place, as well as provide a central system easier to back through propaganda. Panic’s used to be a lot shorter; post-Federal Reserve Act, they last years or decades. The moral: it’s Fed-like actions–false money created out of thin air and commercial bank manipulation–that Paul wants to end. It’s a banking system used to dilute money and fund wars, government welfare projects, and favored groups that Paul wants to end. None of this is addressed in an even remotely satisfactory way. Nice try
What an absolutely paltry rebuttal to the totally correct analysis that Ron Paul presents.
Yeah it’s a tax. Yeah it is central planning. Yes it rewards incumbents by privatizing their profits and socializing their losses. BUT THAT DOESN”T MEAN WE SHOULD GET RID OF IT!!
What a fat load. He also makes huge logical leapes when he looks to “The myth of rational markets” and when he quotes Adam Smith.
Let us assume for a moment that free markets are not that rational (which is a totally absurd notion on its face since market actors make choices to maximize their profits and curb their losses thereby showing an inherent act or rationalization, it is more accurate to say that actors are not always CORRECT in their valuations). Even if it is so that they are not rational it is a tremendous logical leap to assert that we should then leave in the hands of state-enforced bureaucrats WHO HAVE NO BASIS TO BE RATIONAL AT ALL.
Same thing with Adam Smith. I have not read the full passage so I cannot speak for it particularly, but he does not seem to be specifically stating that there should be a central bank. He was merely elucidating the fact that banks hold a special degree of power in an economy. I would totally disagree with the notion that they are “custodians of wealth”. Money is not wealth, only accumulated stuff can be wealth. Money is just the medium of exchange so party A can exchange his stuff with parties B-Z and beyond. The money must have actual stuff behind it though, otherwise it is useless.
Current:
I’ve read Doug French’s tulip mania article and my conclusion is that the sudden discovery of vast amounts of gold in the Indies was the equivalent of a solid gold meteorite hitting the Earth: whether or not it can be considered “inflation”, its effects are just the same, albeit more limited. It was beneficial for the early takers of the new gold, to the detriment of others. IIRC, prices and wages went up in the Netherlands, both in absolute terms and relative to other countries (at least that’s what Austrian theory would predict, right?), so the average Dutch ended up richer than his foreign neighbors. I’d bet that only the most risk-insensitive entrepreneurs malinvested their surplus gold in tulip bulbs, then they went crying to the government, who voided their contracts with the tulip growers, who were unfairly made to pay for other people’s mistakes.
What I’m getting at is that a strong currency is always good for the economy of a country, even when its neighbors debase their currencies, as Mises explained in Human Action.
Current,
Doug French is clear when he also places blame on the Dutch government’s decision to accept foreign gold and mint coins free of cost. The inflation of the money supply had a lot to do with the government’s fiscal policy at the time.
Martin OB,
You may be right. I think it’s difficult to say today, there aren’t many recent examples of countries that use the gold standard while others use fiat money. Most of the examples from history are very difficult to interpret.
I’m not certain that there is a good argument that says that sound money is always beneficial in an international setting. What you must remember is that if sound money is successful then funds will flow to that countries banks from elsewhere, and then flow out as investment. This happened in Britain under the 19th century gold standard, and in other european countries.
This would be very difficult for a small country to deal with. The political implications could be catostrophic too.
Jonathan Finegold Catalán,
I don’t know if they did mint them free of cost, they may have done. But, the situation wouldn’t have been changed much if they didn’t. The point is that the other european countries of them time didn’t have free coinage. It wasn’t just that you had to pay a fee for coinage rather the other countries mints only took in gold for coining when it suited them.
It is a rule of the universe that any alleged critic of Austrian Economics will not understand ANY of the central concepts of the theory.
1. The critic never understands that free market prices convey essential information, a process which is impossible under various statist regimes;
2. The critic never understands that monetary dilution involves the theft of purchasing power from those holding the existing money to those receiving the new money (while screwing up the price information system); and
3. The critic never understands that the processes of 1 and 2 supra royally screw up the long term capital and investment structure resulting in unsustainable malinvestments leading to the boom and bust.
The critic never bothers to refute any of these points. Further, it is always clear that no aspect of these points has ever made it into the critic’s little brain. Finally, the critic has no idea that Keynesianism simply does not address capital structure at all or that no one has ever bothered to the refute the Austrians. But the critic sure knows that Austrians are crazy. (I wonder how much of this attitude is derived from the Fed owning the souls of the entire economics profession.)
Challenge them. They will usually just start spitting venom and calling you names. It will soon be clear enough that they have no understanding whatsoever of Austrian Economics. Or economics at all.
Current:
Doug French on Tulipmania:
“The bank was highly profitable for the city of Amsterdam. Besides the aforementioned warehouse rent and sale of bank money for the agio, each new depositor paid a fee of ten guilders to open an account. Any subsequent account opened by that depositor would be subject to a fee of three guilders. Transfers were subject to a fee of two guilders, except when the transfer was for less than 600 guilders. Then the fee was six guilders (to discourage small transfers). Depositors were required to balance their accounts twice a year. If the depositor failed to do this, he incurred a 25 guilder penalty. A fee of 3 percent was charged if a depositor ordered a transfer for more than the amount of his account (Smith 1965, p. 454).”
In the beginning, the Bank of Amsterdam did not perform a credit function; it was strictly a deposit bank, with all bank money backed 100 percent by specie. The administration of the Bank of Amsterdam was the charge of a small committee of city government officials. This committee kept the affairs of the bank secret. Because of the secretive nature of its administration, it was not generally known that individual depositors had been allowed to overdraw their accounts as early as 1657. In later years, the Bank also began to make large loans to the Dutch East India Company and the Municipality of Amsterdam. By 1790 word of these loans became public and the premium on the bank money (usually 4 percent, but sometimes as high as 6 and 1/4) disappeared and fell to a 2 percent discount. By the end of that year the Bank virtually admitted insolvency by issuing a notice that silver would be sold to holders of bank money at a 10 percent discount. The City of Amsterdam took the Bank over in 1791, and eventually closed it for good in December of 1819 (Conant 1969, p. 289).”
Doug French quotes Alexander Del Mar on Tulipmania:
“Under the stimulus of “free†coinage, an immense quantity of the precious metals now found their way to Holland, and a rise of prices ensued, which
found one form of expression in the curious mania of buying tulips at prices often exceeding that of the ground on which they were grown.
In 1648, when the Peace of Westphalia acknowledged the independence of the Dutch republic, the latter stopped the “free†coinage of silver florins and only permitted it for gold ducats, which in Holland had no legal value. This legislation discouraged the imports of silver bullion, checked the rise of prices, and put an end to the tulip mania.”
Doug French’s conclusion:
“The end result was a large increase in the supply of coin and bullion in 1630s Amsterdam. Free coinage laws then served to create more money from this increased supply of coin and bullion, than what the market demanded. This acute increase in the supply of money served to foster an atmosphere
that was ripe for speculation and malinvestment, which manifested itself in the intense trading of tulips.”
Doug French does, indeed, bring up the topic of currency debasement in foreign countries. But, that was not the main reason behind Tulipmania. The first episode he mentions was Charles V’s decision to raise the price of gold and then subsequently debase silver, as to drive gold off the market. The second episode was the high circulation of foreign debased currency, which led to the Bank of Amsterdam’s decision to monopolize the trading of specie, exchanging certificates for coins based on the weight of the coin. This ensued between the late 16th century and ~1609, according to Doug French (1609 being the year that law was introduced). This led to the bank’s prosperity, and later to its role as a provider of credit.
Tulipmania occured during the 1630s, almost 100 years after the reign of Charles V.
I submit that Bloomberg reviewer James Pressley has not read the book. In his review, he claims:
Ron Paul clearly addressed this issue on page 15 of “End the Fed”:
The entire Chapter 3 of the Huerta de Soto book concerns the various problems caused by fractional reserve banking.
“End the Fed†continues:
Thus, early in “End the Fedâ€, Ron Paul clearly explains that a major impetus towards the creation of the Fed was to protect banks from their own folly in employing fractional reserve banking. The repeated allegation that either Ron Paul or Austrians “conveniently ignore†pre-Fed banking problems is simply another unsupportable lie.
Current,
I am inclined to agree with you – but what if instead of re-instating a gold standard, the local national bank decides to increase the money supply by a fixed percentage annually (a.k.a. Friedman’s rule)?
So would you say that the full abandonment of the gold coverage of the Swiss Franc was a wise decision?
I think the understanding is that the job of a central bank is to match the supply and demand for money. This is a tremendously difficult, if not impossible task (akin to central planning) – a gold standard, despite its imperfections, would act as an automatic mechanism.
From the Great Depression data, countries which rigidly adhered to the gold standard (France, Switzerland) experienced greater economic difficulties – all of them eventually devalued. I was wondering if anyone could shed light on this.
Jonathan Finegold Catalán,
“Doug French does, indeed, bring up the topic of currency debasement in foreign countries. But, that was not the main reason behind Tulipmania. The first episode he mentions was Charles V’s decision to raise the price of gold and then subsequently debase silver, as to drive gold off the market. The second episode was the high circulation of foreign debased currency, which led to the Bank of Amsterdam’s decision to monopolize the trading of specie, exchanging certificates for coins based on the weight of the coin. This ensued between the late 16th century and ~1609, according to Doug French (1609 being the year that law was introduced). This led to the bank’s prosperity, and later to its role as a provider of credit.”
These aren’t the only events he mentions. He also quote Violet Barbour and Del Mare and how large amounts of gold were minted in Amsterdam. He gives a chart for it in figure 2 and in figure 3 he shows what happened in the Bank of Amsterdam due to these changes.
Now, it’s certainly true that if there had been no legal tender laws, freer banking, and no requirement for merchants to use the Bank of Amsterdam then things would have been better.
But, I’m not sure the problem would have been solved. Where is it the bit of Mises you mention?
sheridan,
I think that the gold standard is (and was) a good international system. But, perhaps it would be unwise to move from what we have now straight to the gold standard
Suppose Ireland went on the gold standard today. Investors may recognize this as the soundest form of money. So they may send huge amounts of gold to Irish banks in order to gain balances. Now, the Irish banks would end up banking for all the investors who are using the currency. This would be very troublesome, especially in terms of international relations. Fiat currency countries would probably try to suppress the use of the Irish currency since it would threaten their seigniourage. If another fiat country switched to the gold standard then there could be a crisis as depositors move deposits from one country to another. (I think this would be the case even in a full-reserve standard).
Buchanan suggested a “brick standard”, he did that for different reasons, but perhaps it’s wise. Let’s say Ireland goes onto the brick standard. Banks redeem notes in housebricks of a certain quality in Dublin. Now, investors may recognize that as the soundest currency in the world.
They will not however transport ships full of housebricks to Dublin in order to gain balances of it. The cost would be vastly prohibitive. The only way to practically obtain a balance would be through trading, as we do with currencies now. That would lessen the chances of an inflow causing a shock. It would also make the policy more palatable internationally. Even if it were very sound many investors would not like money backed by tons of bricks in a foreign city.
After a few countries are levered into species standards this way the gold standard could be resurrected.
Another option would be to back money with drugs. This is the “I promise to pay the bearer on demand 1 gram of cannabis”. It would be illegal (or at least disreputable) for foreign agents to own such banknotes or balances.
Bob Roddis and Martin OB:
You both see the situation more clearly than anyone else but are apparently no “further along” than Dr. Paul.
Paul is correct but does not go far enough! The “root” of the problem is not the Fed at all (it’s merely the visible excrescence) but, rather, the problems inhering in the former structure (which the controllers hoped to remedy through institution of the Fed system).
The Constitution cannot be of aid; it is an abettor of the problems we seek to address. It’s not the fault of the Founders–they, in their economic thinking were no “further along” than the leading economists of their day (and Adam Smith, himself, was entirely ignorant–and 75 years too early–of the mental revolution to be ushered in with subjective value theory, without whose marginal analysis “teasing out” by Menger, Bohm, and then Mises, we in the present could understand no more clearly than they. And Dr. Paul, himself, has yet to make the necessary leap to correct the REAL problem.
What needs throwing out is the entire idea that the state need or should, by right, have any sovereign
authority or standing with which to interfere in what are called “monetary affairs” (and many other aspects of ordinary commerce as well). All “legal tender” legislation (which conveys a special favor on “money” of the state’s creation) is but tyranny masquerading as a sort of “consumer protection.”
The only enforceable legal tender law that might serve some purpose would be one obliging the state itself to fully honor its own issue in payment of sums due under the law, whether taxes, fees, etc. No law must prevent monetary competition ad libitum (nor competition in banking–in which area all practice not fraudulent must be permitted). There is no need whatever for a Gold Standard on a legal basis; I, myself, am certain it will become the de facto basis of the most successful currency.
The divorce can only be accomplished by the amendment of the Constitution; the good news is that polls are reporting about 80% in favor of ending the Fed–perhaps, with discussion in public and in legislative halls, the widened scope I’ve suggested may be seen as the necessary move toward a more solid basis for both monetary sanity, economic stability, and freedom.
Current,
Thanks for your input. I too think it is impossible to return to a gold standard from our current system – the volatility created would be immense, so from a short-medium term perspective it is undesirable in that sense.
Any good resources which you can recommend on such issues?
sheridan,
I expect there is literature on this subject, but I don’t really know about it.
As Gene points out what we should advocate is free-banking without any sort of legal tender laws. In that case there would be a market decision making process. Rival banks would be able to advertise on the basis of (amongst other things) how their money is backed. They would be able to advertise on the basis of “we have the soundest strategy to avoid being the victim of international monetary problems”.
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