On Ron Paul's "End the Fed"

Libertarianism scratches at my core values
Ron Paul got a lot of traction this last Presidential election and I suppose it had to do with his anti-war stance and with his supporters’ limited understanding of his Libertarian views. To his credit he stands out amongst members of the House as one of the few with lots of integrity. I read his book because a good friend, David, asked me to and wanted to know what I thought of “End the Fed.”

Ron Paul and I must have some things in common. We both think that wars are mostly fought for the benefit a few greedy men and we try to have an in depth if layman’s understanding of the economy. And apparently we both think that there is something terribly wrong with our financial system starting with the Federal Reserve Board.

Ron Paul’s Libertarian view is that all people need to provide for themselves and live with the consequences of their actions. I am no Libertarian. I’m for a more-perfect-union for the benefit of the general welfare sort of guy. I reside somewhere on the left fringes of the Democratic Party. Big government is the people’s business formed to protect us from the tyranny of governments and large corporations alike and from the most terrible consequences of our own mistakes.

Monetary Verses Fiscal Policy
Being a small government sort of fellow, Ron Paul concentrates on what is called monetary policy, the control of the money supply. This is the stuff of the Fed. Another policy arena that government engages in is called fiscal policy. That would be the taxing and spending part of securing the blessings of liberty that our government is organized to do. Libertarians think this second realm of government is essentially theft of citizens’ private property and is immoral. But the point of his book is that government control of the money supply, monetary policy, is the most powerful and effective means that the government uses to do its stealing. Ron Paul’s views don’t allow him to comment much on fiscal policy other than to say, don’t do it. Not much of a book there.

Free Market Religion
He treats the market place, the “Free Market”, as if it sprang into being just after god stole a rib from Adam to create Eve. To him the marketplace is a priori of all commerce. Except those under the sway of the Libertarian ideology know the marketplace is neither free nor did it exist prior to the collective labor that brought it into existence. Libertarian ideology requires immutable market forces to be inviolate for anything good to come from the human condition. According to his views all attempts by human society to set rules by which we engage in commerce are flawed solely on the grounds that they modify these free market forces. He believes that all regulations on the market place should be limited to fraud prosecution and contract enforcement, and limiting currency to gold.

Good as Gold?
This Libertarian position that gold should be our currency is based on the belief that there would then be no need for governmental regulations i.e. no need for the Federal Reserve Board. Gold is not subject to inflationary pressure, there is a limited quantity that cannot be increased by changing its price. Governments can’t print more of it whenever they want. I will agree with Ron Paul that monetary policy can also be used to concentrate the wealth of a nation into the hands of a powerful few and to facilitate the waging of wars. But monetary policies -inflation or contraction of the money supply- can be used to distribute the wealth of a community and create capital reserves so that its economy can function for the benefit of the citizens. There are also beneficial fiscal policies such as minimum wages, government provided universal healthcare and even fire and police departments, and social security payments, that provide for the general welfare. These are all socialistic statism in Ron Paul’s terms.

Real Values
The commodity based currency argument in “End the Fed” chooses gold because of its historical use. Generally for commodities to be used as currency they need to bear intrinsic value, be durable, easy to use, and not easily duplicated. Oil has some of these qualities and functions in our economy in a similar fashion with similar effects. Economists from Karl Marx to Ron Paul and in the middle Paul Samuelson, Nobel Laureate of neo-Keynesian economics, agree that real value resides in products of human endeavor including precious metals. Simply put, economic value resides in physical objects that arrive in the market place.

There are many other forms of value such as the intrinsic value of nature. Some have even attempted to place economic value on undisturbed nature, such as forests, for their protection. The Bretton Woods agreements of 1944 did not consider this form of value in its deliberations on formulating economic activity to the great harm of the environment, less developed countries, and especially to non-monetized indigenous cultures. We have values at the core of our belief systems that are much more powerful than any reasoned argument. If David hadn’t asked me what I thought of “End the Fed” I would not have been able to read it. Libertarianism scratches at my core values too deeply.

The Case Against the Federal Reserve Board
Yet I can agree with Ron Paul that there are good reasons to want to end the Fed. I think that it needs to be overhauled or a new agency needs to be created to replace it. The Fed operates in secrecy and rebuffs all attempts at oversight by congress. It was set up to be free of political pressure. In reality it is free from view of democratic oversight. It operates for the benefit of the powerful few. My problem with the very rich is not that they can buy lots of toys; it is that they buy lots of politicians. They use their wealth as a political tool to subvert the democratic process.

Citigroup, a Federal Reserve member, produced a 2005 memo stating that the US of A is not a democracy any more but a plutonomy, a society governed by the very rich. It states that the top one percent owns more productive wealth than the lower 95 percent. The richest ten percent account for 47 percent of all income and 57 percent of all wealth. It praised this condition to its investor class. It bemoaned the fact that the rich still only had one vote each. Our country now has a greater concentration of wealth in the hands of a few then what caused the Great Depression. The founders of this country and subsequently following presidents including Lincoln, both Roosevelts, and Eisenhower agree that democracy cannot survive in such a situation. The last forty years have seen the destruction or non-enforcement of our labor and anti-trust laws. The Reagan revolution cut taxes on the wealthy by 50 percent and raised them on the working poor by doubling the Social Security and Medicare withholdings. We have allowed the wealthy to concentrate their wealth and political power so that we are now all serfs of corporate masters. And the current Fed sustains this system. Its secrecy ensures the continuation of the powerful. It refused to allow this closely held corporate structure to die of its own weight in September 2008. Alan Greenspan and Ben Bernanke, the previous and current Fed Heads, are followers of the libertarian school of thought. As much as Ron Paul decries their actions at the top of the Fed he praises their earlier writings.

Limits to Monetarism
There are plenty of good reasons for Ron Paul’s outrage at the government’s shifting of wealth into the hands of very few and powerful people. He struggles to attribute this solely to government manipulation of the money supply. I agree that monetary policy is available to be abused for these ends. We lost the fight for a democratically organized economy long before these monetarists took over the Fed. We are now two years into the worst financial crisis in the last 70 years and all congress has accomplished was to give nearly a trillion tax payers dollars to their corporate donors. The Fed has admitted contributing an additional couple trillion to the pot, but refuses any audit by congress. Some estimates place the Fed and Treasury guaranties to financial institutions at over 20 trillion dollars. I understand the fury of the TEA party crowd and their love of Ron Paul. They rail against strong unapproachable forces that control their lives in secrecy. But they are misguided to believe that a society without rules of conduct to promote the general welfare would be better. Bad government not big government is the problem. Ron Paul uses their ignorance as do the large corporations and their lobbyist friends. The TEA partiers are in the grasp of their predators. When Milton Friedman tried these monetarist policies in actual countries, Chile and Russia, they failed miserably at creating an economy that served the people’s general welfare.

You Can Bank on It
Ron Paul mentions the evils of fractional reserve banking that arise when paper money is used but fails to explain what that means. Feudal society and outright slavery were once the norm of human existence. Barter was the means of trading. Even taxes were paid to the manor master by giving over the actual product of labor. Few people had gold; it was scarce. The aristocracy and wealthy merchant class developed a method of storing their gold in armored warehouses. Instead of paying for their wants by removing the gold from these safe banks they would sign over a certificate for a portion of their holdings to another. The banking industry and paper money were born from these beginnings. Early bankers realized that their depositors were not likely to concurrently remove their gold. These banks were a safe haven for this precious commodity. People began to rely on the paper certificates of deposit, backed by the gold reserves for their financial dealings.

Let Me Loan Your Money
Fractional reserve banking is simply making loans with depositors’ money, while holding a fraction in reserve to cover what some depositors might want at any given time. Its effects on the supply of money can be explained by an example. We can use a metaphor of a small isolated community to represent the whole. This isolationist view represented our economy fairly well until the effects of globalization outsourced our work and factories to countries with lower standards of living.

In a village reside 100 folks, and it is a very democratic society. They all have savings of $10 that they have deposit in the one bank. The bank has $1,000 on deposit. The village weaver, baker, and candlestick maker each employ two people. In order to buy materials from other villagers to make their products and to pay their employees they borrow money from the bank. The banker knows that she can lend out $900 of her $1,000 deposits because everyone in the village is hard at work and has no reason to remove their $10. She keeps 10 percent in reserve. The shepherd, the farmer, and the beekeeper are each paid $200 for their wool and grain and wax respectively. They deposit this income into the bank which now has deposits valued at $1,600. And the six employees are each paid $50, which is automatically deposited and brings the banker’s total value of deposits to $1,900. To keep this banking system metaphor simple each of the three material suppliers and the six employees deposit all of their income back into the bank. No one moved out of the village with their $10, nor did the banker take any salary for her efforts.

This is the expansion of the money supply that Ron Paul decries as immoral theft of value from the original depositors. His outrage is not at the villagers going without food, or warmth, or from the light that was produced. This borrowing and re-depositing cycle can continue many times, comparatively devaluing each of the $10 deposits but creating a vast array of products in the process.

Historical Expansion of the Gold Supply
Furthermore paper money is not always the culprit. Changes in the supply of the commodity currency are also in play. The Fed was set up to regulate how much of their deposits a bank could lend and what fraction must be held in reserve. The Fed was put in place ostensibly to maintain calm in our financial markets so that capital would be reliably available to the candlestick makers of the world.

In Ron Paul’s view banks could only loan stockholders’ investments and not the deposits of savers. His reserve rate would be 100 percent. The amount of money would always stay the same. Well, there were times in history when gold rushes occurred and inflation was caused and the lives of many hard working folks were improved. Those times were also marked by the destruction of the indigenous cultures that resided on top of the gold. The Spanish Monarchy lost power from the inflation caused by the discovery of gold in the Americas; and the mercantile English rose to dominance. Some economists have pointed out that spikes in the price of another commodity, oil, have directly preceded all recessions of the last fifty years. Too much capital is pulled from the system, creating a deficit of money for production; it takes time for the economy to adjust. The Fed was caught in a bind during the late 1970’s. Volker was trying to stem the tide of the Johnson-Nixon inflation by limiting credit at the same time that more money in the system would have eased the price increases on oil. Energy is a commodity currency of industry.

Community Currency
Ben Bernanke believes that there needs to be an end to fractional reserve regulation. I believe there needs to be an end of Bernanke at the Fed. Our village banker is using a 10 percent fractional reserve rate. She held $100 dollars of the $1,000 on deposit in reserve. Regulating this fractional reserve system controls the supply of money. The village bank’s deposits grew $900, an increase backed by the notes of credit from the weaver, baker, and candlestick maker. She can now lend on this $900 increase in deposits. The village house builder and electronic supplier can now borrow $810 from the bank, leaving another $90 in reserve. The house builder got $500 and the electronic supplier got $310. The TV man got less because the community banker felt that the village needed a new house more than it needed a TV, and because the electronic supplies had to be purchased outside of the village. Local and state run banks can make these types of decisions. Part of those funds, the $110 for electronic parts, would not be deposited into the bank but would leak out of the system. The bank got another $700 in deposits this time from the lumberman and the employees of the builder and the TV guy. This cycle can continue, and if it does so fifty times without leakages the money supply increases to nearly $10,000. The US of A economy has for the last 30 years been experiencing not a leak but a flood.

Ron Paul looks at this and claims that the depositor’s money is now only equal to what was $1 when the money supply was $1,000. He claims this inflation of the money supply that allows for production and reduces the value of the savers’ accounts is theft. Are all those employees with jobs and all that bread to eat and those warm blankets and homes that provide comfort really just victims of robbery? You can’t eat paper money but you can eat bread.

Money, Wars, and Theft
Ron Paul’s argument gets a lot of support when he stands against war. I applaud him for that. But he is wrong to suggest that wars are the result of inflation of the money supply. The evil does not reside in the money supply but in the intentions of those who wish to wage war. And this being a democracy it resides in all of us who do not prevent the warmongers. The traditional trade-off, guns or butter, is obviated by governments’ ability to print money, that is true. Waging the Vietnam War and the Great Society’s War on Poverty simultaneously drove an inflationary wave that knocked out Presidents Ford and Carter from second terms. Just so Bush’s wars and tremendous tax giveaways to the wealthy might well doom Obama’s hopes at a second term. Wars are always immoral and driven by greed. We the People are stoked with fear and sated into acquiescence with cheap products into complicity.

Ron Paul is right that all government expenditures require expansion of the money supply for war or for welfare. Real wars and real poverty are the true evils and an immoral distribution of wealth is their cause. Without controls the wealthy become so powerful they use the nation’s resources for their own benefit. If the money supply is not managed properly crises do occur. We can attribute our current crisis to the Bush administrations unfair regulations of the economy. But this unfairness was not all monetary policy but fiscal policy as well. It started long before Bush-43. Regan, Bush-41, and Clinton all contributed to this process. Unfair taxation, not enforcing labor laws, anti-corruption laws, and anti-trust laws, and tax giveaways to the uberwealthy were also to blame. Indeed the Bush administration so desired to transfer more wealth to the wealthy it waged real wars on the people of Iraq and Afghanistan. Bush demonstrated that he only needed to frighten a 268 people, 218 House members and 50 Senators, to wage war in this world and steal our country’s wealth. In “Capitalism- A Love Story” Michael Moore suggests that Goldman Sachs, from both inside and out of government, engineered this recent crisis to become the dominant world financial power. Naomi Klein’s book, “The Shock Doctrine,” which I have not read, explains the utility of crises for taking power, liberties, and wealth from people. Thom Hartman’s book “Screwed, The Undeclared War Against the Middle Class,” explains in simple language how our economy has been hi-jacked.

Jimmy Steward to the Rescue
Ron Paul decries borrowing and spending if it increases the money supply. He believes people should only spend what they can save. The character Potter in Frank Capra’s “It’s a Wonderful Life,” personifies this position. This is a story about a small building and lending company threatened by a run by its depositors. Jimmy Steward’s character, George Bailey, says about his father who started the company, ”But he did help a few people get out of your slums, Mr. Potter, and what's wrong with that? … You - you said - what'd you say a minute ago? They had to wait and save their money before they even ought to think of a decent home. Wait? Wait for what? Until their children grow up and leave them? Until they're so old and broken down that they... Do you know how long it takes a working man to save five thousand dollars? Just remember this, Mr. Potter, that this rabble you're talking about... they do most of the working and paying and living and dying in this community. Well, is it too much to have them work and pay and live and die in a couple of decent rooms and a bath?”

Inflating the Bubble Until It Bursts
Our village banker kept her reserve rate at a conservative but standard 10 percent and the money supply could have grown from $1,000 to $10,000. If she had chosen 5 percent the money supply could have grown to $18,000. A few years ago I worked with a man who told me that the fractional reserve rate was below 1 percent. That rate would have allowed our village’s money supply to surpass $40,000. Derivatives, especially securitized mortgage loans, that we have heard were the cause of this crisis, inflated the money supply. These instruments turned mortgages into certificates traded in a similar fashion as stocks, bonds, and treasury bills. This provided more capital to the banks allowing them to make even more loans. A sort of double dipping in the amounts held in reserve. I have heard that the total value of derivatives amounts to 100 times the size of the world’ s real economic activity. Has our Fed guaranteed that amount? We won’t know because it operates without oversight or congressional direction. But you can bet we will be the ones required to make good on this guarantee.

Our village banker, unlike our current government, managed the money supply to keep folks employed and kept controls on the flow of money outside the system. The paper itself has no intrinsic wealth except for wallpaper. But it represents the collective value of the economic activity of the village. The last four administrations, in cahoots with the Fed, allowed for the movement of value away from commodity production. Indeed they encouraged the export of jobs. This globalization has impoverished the American worker much more than inflation. Consequently, economic growth in this country has been limited to the financial sector on Wall Street not on our main streets.

A Call to Action
On the January 26, 2010 Daily Show, bailout watchdog and financial reform advocate Elizabeth Warren told Jon Stewart that "this is really the moment" that will determine the future of America's middle class -- the system must be fixed or "the game really is over." Warren, who chairs the Congressional Oversight Panel created to monitor TARP, said: "It is simple. This is America's middle class. We've hacked at it and chipped at it and pulled on it for 30 years now. And now there's no more to do. Either we fix this problem going forward or the game really is over." Huffington Post 1-27-2010


Quotes from “It’s a wonderful Life” were found on Wikipedia.
Ron Paul’s concepts are taken from his message in “End the Fed.”
Citigroup Research, Equity Strategy, Revisiting Plutonomy: The Rich Getting Richer. You can google this.
Bernanke, end reserve regulation Rawstory Stephen C Webster 3-18-2010. You can google this.