A Preventable Crisis

Ron Paul blames the Federal Reserve for financial meltdown

By Christopher L. Oppermann

What do unending wars, inflation, relentless expansion of government, depreciation of the dollar, astronomical deficits, the current financial meltdown, bank runs, massive corporate bailouts, and booms and busts of the business cycle have in common? They are caused, argues Congressman Ron Paul in his new best-selling book entitled End the Fed, by the Federal Reserve. Weaving together moral, economic, and constitutional arguments, as well as history surrounding the creation of the Fed and its operations during the last century, this outspoken Texas Republican presents a clear and compelling case for abolishing America’s central bank. Doing so, he argues, would restore caution and sanity to our government’s policies and provide a crucial check on the expansion of federal power.

End the Fed describes how the blueprints of the Federal Reserve system were drafted in a weeklong secret gathering of a handful of the nation’s economic power-brokers in 1913. The seven-man composition of this shady affair, including two representatives of John D. Rockefeller, two affiliates of J.P. Morgan, and an assistant Treasury Secretary, perfectly characterizes the people and institutions that have benefited from the creation of this system. Whereas governments find it politically difficult to raise taxes to pay for wars, bailouts, and social welfare programs, the Fed facilitates the production of new money “out of thin air,” which allows elected officers to deliver benefits to constituents without the political costs of tax hikes. Banks are equally susceptible to this moral hazard: the Fed provides them with a public “lender of last resort,” which allows them to extend credit more recklessly than would occur in a free market. Executives at powerful banks reap greater profits, making risky loans with the knowledge that the government will not permit them to fail.

This ability to create money and credit arbitrarily amounts, according to Dr. Paul, to legalized counterfeiting, which surreptitiously redistributes wealth away from the poor to the wealthy. Increasing the money supply causes prices to rise, meaning the poor and those without political and elite financial connections must pay higher prices before any of the newly created money trickles down to them. In effect, inflation is a regressive tax that benefits the elites, robbing the lower and middle classes without their knowing it.

Dr. Paul contends that the Federal Reserve is responsible for the current economic crisis, and blames government intervention in the banking industry in general for every major economic and monetary crisis in our nation’s history. The Congressman, who subscribes to the Austrian School of economics, is a proponent of the theory of the business cycle, which the economist Ludwig von Mises used in the early 1920s to predict the economic collapse of the following decade. The theory holds that the initiation of new enterprises is regulated by interest rates. Since any loans and investments must be based on real saving, interest rates predict consumer preferences in the future: a higher savings rate (and a lower interest rate) means consumers are saving money to purchase goods and services further in the future; lower savings (and higher interest rates) mean consumers wish to consume more in the present. But when the Fed pushes rates below their market level, entrepreneurs are deceived into undertaking projects geared toward future consumption. These distorted market signals misdirect resources to industries that will not actually be profitable. Eventually, the market seeks to correct these misallocations, and a recession follows as a necessary adjustment. Painful recessions could be eliminated were it not for the interventions of the central bank and the government in the determination of interest rates. Dr. Paul applies this business cycle theory to the current economic crisis, arguing that our present situation is a textbook example of the theory: a painful bust has inevitably followed an era of cheap credit and loose money.

Dr. Paul also makes a constitutional and libertarian appeal against the existence of the Fed. Though one could argue—and he does—that a central bank is unconstitutional since it is not explicitly enumerated in the Constitution, a government with the power to force upon its citizens a currency of its own arbitrary making, regulated by unelected officials, is contrary to the most basic American ideals of freedom. A government monopoly on money allows the authorities to finance nearly any program they want—all they need is a printing press.

Though End the Fed is pessimistic about America’s short-term economic future, Dr. Paul, as always, ends with a message of hope. Though his thirty-year political career has been something of an historical footnote, his libertarian agenda has made more progress in the last two years than in all the rest of his political life. The title of the book was a slogan invented by a few dozen University of Michigan college students, just a handful of the thousands of young people the maverick congressman inspired during his 2008 presidential run. The ideas of Ron Paul are now carried on by college students and young professionals, a hopeful promise of their continued influence. Libertarian principles are here to stay.