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     Jun 30, '14


Ron Paul on 'End the Fed'
By Noureddine Krichene

Ron Paul, a former Congressman, was a medical doctor; yet, his writings treated true economics in an ocean of falsehood. It is a miracle to have a non-economist write about the true economic science when this science has become totally corrupted by demagogues. It has become a science of government intervention and disorder.

Most disquieting, some Nobel Prize winners are staunch advocates of anti-market forces and preach total money


destruction by the government. Practically, there is no university that teaches the true nature of money, banking, and markets as displayed in Ron Paul's writings. You feel sorry for students who spend US$60,000 a year at elite universities and learn anti-market Stalinism.

For Ron Paul, money is a market commodity, like a car, produced at a real cost in labor and capital, and is exchanged against other real commodities. A bit of paper has zero-cost in labor and capital, it can never be money. It is so by state coercion. The state outlaws gold, which it cannot print, in favor of paper, which it can print with no limit. It has therefore no check on its spending and despotism.

For Ron Paul, paper is the money of war, noting that the United States, with unlimited paper money, has become the first warrior of the world, unhesitantly waging wars in every corner of the world.

Among Paul's writings is his excellent book End the Fed (2009) where he held it as of utmost vital interest of the United States to end the Federal Reserve (Fed). He contended that the Fed has been destabilizing the US economy, inflicting recurrent catastrophes ever since it was created.

Did the United States need a central bank? For Ron Paul, the answer was positively no. The US economy was growing by leaps and bounds before 1914, making discoveries in communications, cars, radios, photography, airplanes, heavy machinery, with no central bank.

A central bank would be a fifth wheel in a coach. The US Treasury emitted notes against gold prior to 1913, and therefore had no need for a central bank for circulating money. It was vested-interest financial groups that forced the Fed on government for bailout purposes; under the guise that it was necessary for the US economy, this was a poisoned gift.

For Ron Paul, financial crises, an inherent feature of fractional banking, were brief and self-liquidating prior to 1913. A crisis on the scale of the Great Depression had never occurred and would never have occurred had it not been for the Fed. The stock index could not have gone up threefold from 1926 to 1929 without very low interest rates and unending liquidity from the Fed. It was the very design of the authors of the Fed to provide an infinitely elastic money supply, as much money as speculators and debtors wished to have.

Likewise, stock prices could never increase by 25% per year, as they did during 2009-2014, without the Fed's money floods.

Speculative prices became interminably inflated by the Fed, allowing an amazing free real wealth to speculators. The Fed has turned the stock market into a true casino; it is no longer an investment vehicle.

For Ron Paul, the Fed should have ended promptly in 1929 with the stock crash. Confronted with a grandiose disaster, politicians of the time should have realized that nothing good would come out of the Fed, or more generally, from a central bank, a truth discovered long ago by France, which promptly abolished John Law's bank in 1720 when stocks crashed dramatically, then by Thomas Jefferson (1811), Andrew Jackson (1832), Charles Holt Carroll (1850s), and Amasa Walker (1873).

In 1933, a group of economic professors at the University of Chicago elaborated the "Chicago Plan", urging two-tier banking: (i) 100% reserve banking that strictly emits no money; and (ii) investment banking that strictly receives no deposits; it only buys and sells bonds and equities.

This Plan wanted to end central banking, establish a banking system fully immune to crises with no unemployment (except frictional), and end government inflation of the stock markets. The conviction of ending central banking was shared by Ludwig von Mises, Friedrich Hayek, Murray Rothbard, and Maurice Allais.

Yet, instead of abolishing the Fed, politicians confiscated all the gold of the citizens in 1934 and further empowered the Fed, adding to government despotism.

Ron Paul considered "the creation of the Fed the most tragic blunder ever committed by Congress. The day [the existence of the Federal Reserve] it was passed [into law], old America died and a new era began. A new institution was born that was to cause the unprecedented economic instability in the decades to come. The longer we delay a conversion to sound money and away from central banking, the worse our crises will grow and the more the government will expand at the expense of our liberties. Our wealth is drained, our productivity is sharply diminished. Our freedoms are eroded.

"We have been through nearly a hundred years of this same repeating pattern, so it is time to wise up and learn something. When the printing presses are available to the government and the banking cartel, they will use them rather than do the right thing. Manipulating interest rates is an immoral act. It is economically destructive. A central bank setting interest rates is price-fixing and is a form of central economic planning. Price-fixing is a tool of socialism and destroys production. Artificially low rates of interest orchestrated by the Fed induced investors, savers, borrowers, and consumers to misjudge what was going on. Multiple mistakes are made. Prosperity can never be achieved by cheap credit. If that were so, no one would have to work for a living."

Ron Paul stated that the Fed should be abolished because it is an immoral, unconstitutional, and unpractical interest-group institution; it promotes bad economics and undermines liberty. Its destructive nature makes it a tool of tyrannical government. Nothing good can come from the Fed. Diluting the value of the dollar by increasing its supply is a vicious, sinister tax on the poor and the middle class. The Fed's monetary policy has brought us to where we are today. The evidence is abundant that the Fed is at fault and should be abolished.

Ron Paul considered that the entire operation of the Fed was based on an immoral principle. Transferring wealth is limited when taxes and borrowing are the only tools the politicians can use. The cooperation of the politicians and the counterfeiters at the Fed is based on the immorality of fraud and deceit. Morality of money is related to morality in politics. The system is morally corrupt. Few understand or decry the immorality of the redistribution of wealth through government force.

Prodded by the politicians, vested-financial interest, and academics, the Fed went on its worst money rampage during 2009-2014, creating seven times the amount of money it created during 1913-2008.

Poverty is spreading and money chaos has never been as pervasive as now. A sheer plundering is under way: debt is pushed on the top of already intoxicated debt at near-zero interest rates. The Fed's elite believe that their mandate is full-employment and economic prosperity. This mandate was never thought of in the 1913 Fed Act; not by omission, but simply because mass-unemployment never existed in the United States before 1929.

The irony is that the Fed causes structural mass-unemployment, and at the same it believes that it can restore full-employment. There can be no delusion greater than this one. The Fed is a roadblock to employment; if removed, employment will be restored naturally.

Generations had to suffer from the anti-constitutional scheme in 1913 that repealed the Constitution's fundamental money law.

No government in any country should bail out any bank or any company. A just government protects no vested-interest group, be it unions, farmers, or bankers. More specifically, a bank should never be bailed out, simply because it emits fictitious debt which it requires to be paid in real capital.

Assume a bank has a reserve of $100 in gold; eager to earn interest and commissions, it issues fictitious loans for $1,000 in gold. Evidently, $100 in gold cannot pay a fictitious amount of $1,000 in gold. The government would never bail out the bank with $900 in gold. The bank sinks. With paper money, the government prints $900 and bails out the bank. This is the essence of a central bank as a bailout institution with paper money. Workers and poor people should suffer a $900 loss in real capital (food, clothing, energy) to pay the bank or its debtors for a fictitious capital the bank had emitted at the stroke of the pen.

Ron Paul's message was never understood. Politicians and "experts" on money do not understand even the basic principles of money. Former Fed chairman Ben Bernanke did know what the dollar was; however, he maintained that the relation of zero-interest, printing money, and full-employment was as accurate as the law of gravity.

The ideology of abolishing unemployment and restoring prosperity by printing trillions of dollars and forcing zero interest rates is stronger now than ever. Debt is being forced at near zero-interest rates regardless of creditworthiness. Huge capital is being destroyed and people's agony deepens.

The Fed has charted a course between a Scylla of hyperinflation and a Charybdis of debt collapse as in 1933 and 2008. The Fed is second to none in money anarchy and economic destruction: more debt, more speculation, more inflation, more poverty, and more injustice. Some are made overly rich for free; others are totally denuded.

Noureddine Krichene has a PhD in economics from UCLA.

(Copyright 2014 Noureddine Krichene)








 

 

 
 



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