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David Andolfatto, Vice President in the Research Division of the Federal Reserve Bank of St. Louis, makes one of the most ludicrous arguments against Ron Paul’s attack on the Fed that one could make. I mean even for a Fed apologist, it is off the wall.

He attacks this paragraph in Ron Paul’s book End the Fed:

One only needs to reflect on the dramatic decline in the value of the dollar that has taken place since the Fed was established in 1913. The goods and services you could buy for $1.00 in 1913 now cost nearly $21.00. Another way to look at this is from the perspective of the purchasing power of the dollar itself. It has fallen to less than $0.05 of its 1913 value. We might say that the government and its banking cartel have together stolen $0.95 of every dollar as they have pursued a relentlessly inflationary policy.

What are the details of the attack?

He starts out this way:

The guy can be a real pinhead at times. And this is never so evident as in his persistent attacks against the Fed…Now, of course, I work at the Fed, so maybe you think Im just complaining for the sake of defending my employer. If you think that, I can understand why you do. It is because you do not know me.

There are legitimate arguments one could make against the Fed as an institution and/or about the conduct of Fed policy. And then there are the stupid arguments, for example, the one contained on pg. 25 of his book End the Fed.

So what is at the heart of Andolfatto’s defense of the Fed destroying 95% of the value of the dollar and calling Ron Paul’s argument stupid? Here it is:

There is this old idea in monetary theory called money neutrality. Money neutrality means that larger quantities of money ultimately manifest themselves in the form of higher nominal prices (and wages), and not on real quantities. No serious economist disputes the idea of long-run money neutrality.

Yes, what cost $1 in 1913 now costs $20. But so what? Money neutrality states that if you were earning $1 per hour in 1913, you are now earning $20 per hour (and even more, if labor productivity is higher).

Read the rest of the article

2011 Economic Policy Journal

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