After being urging to do so by several readers, I finally read Ron Paul’s End the Fed. I was about to buy it for the Kindle I got for Christmas, but when I got to work Monday morning there was a package in my mailbox from Gary Howard at Paul’s Campaign for Liberty with two copies of the book. I gave one to my colleague Stephen Gandel, and started reading the other. I had told Hunter Lewis that I was going to read his Where Keynes Went Wrong first, but when I saw how short End the Fed was (and how few words per page it contained) I figured I could finish it in a couple of hours. It took about three, and it was worth the time and effort. I didn’t learn anything new about monetary economics or the Federal Reserve, but I did learn a lot about the thinking of Ron Paul. It turns out to be a curious mix of the sensible and the delusional. To put it differently, Paul has wrapped a mostly cogent critique of central banking in general and the Fed in particular inside a decidedly utopian view of what a world without central banks would look like. At one point in the first chapter he warns that “ending the Fed is not a magic pill to usher in Utopia.” Then, throughout the rest of that chapter and the rest of the book he describes how ending the Fed would usher in a state of affairs that sounds an awful lot like, well, Utopia.

Here’s the list of happy consequences that Paul says ending the Fed would bring, with my annotations in italics:

1. “It would bring an end to dollar depreciation.” You betcha. Paul wants to replace the Fed with a return to a strict gold standard—in which dollars would be redeemable in gold. If that happened, and we stuck to it, the dollar would indeed maintain its value better than it has since the Federal Reserve was created in 1913. (More on this in item 4.)



2. “It would take away from government the means to fund its endless wars” and its “massive expansions of the welfare state that has turned us into a nation of dependents.” Paul is right that governments in the U.S. and elsewhere have often printed money to pay for major wars. They’ve done that even without the help of central banks (as the U.S. did during both the Revolution and the Civil War), but having a central bank institutionalizes the mechanism for money-printing and thus presumably makes it easier to get away with. As for his welfare state argument, there’s surely something to it, but not nearly as much as Paul seems to think. In the post World War II era, Germany has followed much more of a hard-money (that is, Ron-Paulish) line than the U.S., yet it has a much bigger welfare state. So the growth of government can be a political choice, not just the result of the machinations of central bankers.

3. It would “stop the business cycle.” Really? Paul utterly fails to back this claim up in the book, because he can’t. We’ve had recessions and depressions in the U.S. both with central banks (the Fed and its two predecessors, the First and Second Banks of the United States) and without them. It’s true that Fed backers have repeatedly claimed through the decades that wise central bankers had figured out how to stop the business cycle, and repeatedly been wrong about that. There’s also an argument to be made—although the evidence is mixed at best—that central banks exacerbate the business cycle. But saying that we would have no more economic ups and downs if the Fed were shut down is utopian fantasizing.

4. It would “end inflation.” Correct. If we returned to a gold standard and stuck to it, there would be periods of inflation and periods of deflation, but over the long run prices would hold more or less steady. Unless we discovered that alchemy worked or the moon was made of gold, in which case we would get raging inflation. Paul also completely ignores all the economic problems that deflation, especially sharp deflation as we had in the early 1930s, can bring with it. He’s apparently been too busy with his beloved Austrian economists to ever read any Irving Fisher (pdf!).

5. It would “build prosperity for all Americans.” Paul does a pretty good job of explaining why the Fed’s money-printing can’t build prosperity, but in general this country’s record of building prosperity has been about as good in the Fed era as in the pre-Fed era. Which leads me to think that monetary policy may not be the key variable in determining prosperity over time.

6. It would “end … the corrupt collaboration between government and banks that virtually defines the operations of public policy in the post-meltdown era.” He’s onto something about the corrupt collaboration, of course, but he’s also being either naive or disingenuous. Does he think there wasn’t any corrupt collaboration between government and banks in the 19th and early 20th centuries, before there was a Fed?

7. It would “put the American banking system on solid financial footing” and “customers’ deposits would be safer than they are today.” The argument here is that if banks didn’t have a government safety net, they’d be more careful and their customers would be too. Jim Grant makes this case far more exhaustively in his wonderfully cranky book Money of the Mind: Borrowing and Lending in America from the Civil War to Michael Milken. The flip side is that lots of banks failed and lots of depositors lost most or all of their money in the pre-safety-net days. That’s what made the survivors careful. The bank-failure solutions offered up by Washington—the Fed and the FDIC, mainly—have created new problems of their own. But banks are naturally unstable, because they borrow on a short-term basis from depositors and turn around and hand most of that money back out as longer-term loans. Paul nods to this in a brief discussion of the evils of fractional-reserve banking, but fails to acknowledge that fractional-reserve banking predated the Fed and is both a product of and enabler of free-market capitalism. Banning it would thus represent a pretty severe encroachment on the economic liberty he so cherishes. It would probably also be a serious economic downer.



8. It would “end the way in which our electoral cycles have been corrupted by monetary manipulation.” There’s no hard evidence of such corruption since Arthur Burns’ tenure as Fed chairman in the 1970s, but Paul is right that the risk is always there. Then again, a Fed that was more closely controlled by Congress—which Paul advocates as an intermediate step before the Fed is completely abolished—might be even more prone to election-year shenanigans.

9. “The national wealth would no longer be hostage to the whims of a handful of appointed bureaucrats whose interests are equally divided between serving the banking cartel and serving the most powerful politicians in Washington.” Instead, it would be hostage to the ups and downs of the gold-mining industry, because under a gold standard the supply of money is determined by the supply of gold. The economic argument for central banks was that wise technocrats could do a better job of managing the money supply than gold miners could. That faith may have been misplaced, and a lot of people more hard-headed than Ron Paul have been calling lately for at least a partial return of gold to the global monetary system. But returning to gold almost certainly wouldn’t be the silver (gold?) bullet that Paul makes it out to be.

There’s lots of wisdom in Paul’s Fed critique, and his espousal of the virtues of prudence and saving and hard work. But in this book, at least, he succumbs to the temptation of promising an easy way out. Guess he’s more of a typical politician than I’d been led to think.