Ron Paul says the Federal Reserve system is ‘dishonest, immoral, and unconstitutional’ [GALLO/GETTY]

Amherst, MA – At a debate in New Hampshire in January, the Republican presidential candidates were asked what they’d be doing if they weren’t standing behind the podia. Most said they’d be watching sports.

But not Texas congressman Ron Paul. “I’d be home with my family,” Paul said. “But if they all went to bed, I’d probably read an economic textbook.”

Ron Paul gets plenty of media attention for his non-interventionist foreign policy and his staunch opposition to the War on Drugs – positions that are not shared by his Republican opponents.

His greatest interest, however, seems to be economics: Since 1981, he’s authored five books on the subject. Paul identifies with the libertarian-leaning Austrian school of economics. “I’m waiting for the day when we can say we’re all Austrians now” he proclaimed, after finishing in third place in the Iowa caucuses.

Like many politicians across the ideological spectrum, Paul has called for an audit of the Federal Reserve, the United States’ central banking system, which is tasked with maintaining stable prices and promoting maximum employment.

Paul, however, wants to go one step further: He’s the only major Republican candidate who says he wants to eventually abolish the system, which he calls “dishonest, immoral, and unconstitutional”.

To replace the Federal Reserve – colloquially referred to as “the Fed” – Paul has advocated that the United States return to the gold standard. Although Gingrich also recently expressed interest in the idea, Paul is the most forceful advocate of what he calls “sound money”.

And, although all Republican candidates are calling for cuts to the federal budget, Paul has called for the biggest cuts of all: His goal is to reduce spending by $1tn in his first year in office. On the revenue side, Paul – unlike the other candidates – supports a constitutional amendment to do away with income tax.

Like many other Republican candidates, Paul’s platform also calls for more oil drilling, both offshore and in the Alaska National Wildlife Refuge (ANWR), to lower the price of fuel.

Al Jazeera talks to five professional economists about where they stand on Paul’s economic stances.

Allan Meltzer,

Federal Reserve historian and professor of political economy at Carnegie Mellon University

On the Federal Reserve:

“If you abolish the Fed, you have to put something in its place, and it isn’t at all clear what [Paul] would put in its place. Knowing him for many years, I expect he would like to go back on the gold standard.

“That’s a very bad idea, because no other country would do it, so we would be on a unilateral gold standard. All the shocks in the world would come here. If there’s an earthquake in Japan or a crisis in the Middle East and people reach for gold … we have to sell it.

“It doesn’t make much sense, because that’s a deflationary policy for the United States.

“I used to debate [with] Congressman Paul in the 1970s, on radio. And I would usually end up saying to him: ‘Look, the reason we don’t have the gold standard is not because we don’t know about the gold standard. It’s because we do.’

“The United States, in my opinion – and the opinion of most other people – has a responsibility. It may have taken the responsibility too seriously and too far, but the world needs someone who provides political and military stability, and the United States is the primary place where that’s going to occur.” – Allan Meltzer

“What does that mean? It means that in almost any civilised country, people are going to be more concerned about employment than they are about exchange rates. The gold standard tells them what you have to give primary attention to is the exchange rate. That isn’t something that meets the political test.

“I do believe that he is correct in criticising the Fed. I have long been a critic of the Fed, not because I think it should be replaced, but because I think there is too much discretion at the Fed. It makes large errors … everything is dominated by the staff and the chairman, and they don’t take responsibility. If they make an error, it’s the politicians who take responsibility – and not the Fed. They have too much discretion, and it needs to be reined in.

“The chairman and the Fed should tell the administration and the Congress what they intend to achieve over the next two to three years … we need to have them say: ‘Look, we’re going to get two per cent inflation two years from now, and if we don’t get it, we will give you two things: our resignations and an explanation.’ And the administration can accept one or the other. That closes the gap between responsibility and authority.”

On ending the income tax:

“What would take its place? The United States, in my opinion – and the opinion of most other people – has a responsibility. It may have taken the responsibility too seriously and too far, but the world needs someone who provides political and military stability, and the United States is the primary place where that’s going to occur. So it needs a big military, and a big military requires taxation. So I think ideas like eliminating the income tax just aren’t going to sit with the public.”

Dean Baker,

Co-founder of the Center for Economic and Policy Research and Beat The Press blogger

On the Federal Reserve:

“I’m a big fan of increased Fed transparency, and Ron Paul’s played a great role in promoting that. I see the audit as part of that. We’ve gotten most of what I think he’s asked for [in the Dodd-Frank bill, signed into law in July 2010]. I’m generally for more disclosure rather than less.

“As to wanting to get rid of the Fed … it’s hard for me to imagine a modern economy without a central bank. I don’t think we would’ve been better off if we hadn’t had the Fed in the [2008 financial] crisis. Again, [I have] all sorts of criticisms: I’d like to change the governance of the Fed. I don’t see any basis for banks having direct input into the running of the Fed. But do we just get rid of it and have no central bank? It’s hard for me to see that being a step forward.

“With no sort of central regulator you’re prone to crises, and there’s no one there to step in. That was the famous story in 1907 with the panic: JP Morgan basically stepped in. I don’t really want to have to rely on the JP Morgan of the day to save the financial system from collapse. That was the context in which they created the Fed … Having a central bank to act as the lender of last resort in a crisis, I think, is tremendously valuable.”

On oil drilling in the Alaska National Wildlife Refuge and off-shore:

“We have a world market, so how much are we talking about increasing supply? The analyses I’ve seen from ANWR is that peak production – and we’re typically talking about ten years or so until we get there – would be about a million barrels per day (bpd), and this is in the context of a world market of around 90 million bpd. So you’re talking about lowering the price of oil maybe one or two per cent if you’re lucky.

“And the amount that you can get from additional offshore drilling – because it’s not as if we’re drilling not at all now – that’s typically put at around 200,000 – 300,000 bpd, so the impact is even less. To my mind, you’re talking about risking a lot of environmental damage – these are also places where people fish, and it’s also a big tourism destination – you don’t want to go to a beach that’s covered in oil. So you’re talking about a lot of risk both to the environment and the economy for really very little gain.”

John Garen,

Professor of economics at the University of Kentucky and Mercatus Center expert

On the Federal Reserve:

“I don’t think auditing [the Fed] is a bad idea. We had a pretty good run under [former Fed chairman Paul] Volcker, and mostly the [former Fed Chairman Alan] Greenspan years were pretty good. But I think there’s still an underlying problem that the Fed has a lot of power. And when it doesn’t use it correctly, we get problems.

“I think that’s the reason why a lot of economists advocate … price stability as the only role of the Fed. The whole idea that you can somehow jigger around employment in any permanent sense with changes in money supply doesn’t make any sense. I think it gives the Fed a license to try to fine-tune the economy.

“I think sometimes the way [Paul] portrays it, or the way he is portrayed … is more harsh than other folks put it. But a lot of his ideas are what market-leaning economists have talked about for quite a while.” – John Garen



“Ron Paul seems to be taking a step further, but I do think that the idea that the Fed has problems and needs to have some tighter reins, so to speak – there’s a big part of the mainstream that I think would agree with that.”

On cutting federal spending by $1tn:

“I think in terms of the level of spending that the federal government ought to be doing … that’s not a crazy number. If you think about federal spending … in 2007 it was about $2.7tn. And we’re about at $3.8tn right now. So a trillion – that’s not a crazy number to think about turning out.

“Any time you have dramatic changes in the economy … if you try to force that to happen quickly, then there’s going to be some significant disruptions. But I think if you plan it out, say we’re going to do this over the course of several years, people can anticipate that, and it would not be particularly disruptive.

“The other issue would be [to ask]: ‘What are we getting out of government spending?’ If we’re not really getting much of anything, then it would make sense to turn it over to the private sector.”

On ending the income tax:

“Having a consumption tax instead of an income tax is actually pretty easy in some ways … There are a lot of folks in the mainstream of economics who think a consumption tax, a fairly flat consumption tax, is a pretty good idea.

“A lot of it [Paul’s ideas on economics] is within the mainstream. Within economics there are gradations of people who are more market-leaning, and people who are less market-leaning. I think sometimes the way [Paul] portrays it, or the way he is portrayed … is more harsh than other folks put it. But a lot of his ideas are what market-leaning economists have talked about for quite a while.”

Steven Horwitz,

Austrian school economist at St Lawrence University

On the Federal Reserve:

“I’m glad that Ron Paul is talking about the role of the Federal Reserve System in creating the current crisis, and perhaps making matters worse.

“I think there are ways in which we could get rid of the central bank and have a more competitive system for producing money … We’ve seen examples throughout history of countries that did not have central banks, where they did allow individual banks to competitively produce both checking account balances (which we already do) and currency, and didn’t have the lender-of-last-resort functions that we think of the central bank as having. And those countries actually did very well … Canada before the 1930s, Scotland in the early 19th century, and others as well.

“The ‘audit the Fed’ part, to me, is somewhat less important, although it would be a good thing to do, I think – just to figure out what it’s been doing. [The Fed] should have some more transparency than it does; it should be more responsible to the public than it’s been.”

On the gold standard:

“For me, the emphasis is not so much the gold standard, but competitive money production and getting the Fed out of the position of monopolising the production of currency and reserves.

“The key for me is that you allow banks to decide what they want their money to be redeemable in. No one’s going to accept just plain pieces of paper from a private bank. Central banks can do that, because they monopolise it and they have the power of the government behind them. But if [private banks] are going to produce currency … ultimately those have to be redeemable in something that the public values. Would gold work in that? Yeah, I think it would. But it’s not the only thing that could conceivably work.”

On the Austrian school of economics:

“Austrians tend to emphasise … that when the rules and institutions are right, markets can’t be planned and don’t need to be planned; that individuals pursuing their self-interest will use the signals from prices, and will make use of things like private property and contracts to coordinate their behaviour well.

“The Austrian business cycle theory focuses on the way in which inflation … distorts interest rates and therefore leads entrepreneurs to have false expectations about the future.

“The recent boom-and-bust we are living through is a pretty good example of this. When you have a central bank that expands credit and lowers interest rates … entrepreneurs think that long-term investment and long-term projects – like, say, houses – look more profitable … and the lower interest rate seems to signal that consumers are more patient, that they want to wait to the future to buy things.

“But it turns out that the low interest rate is not a signal of consumers being more patient; rather, it’s an artificial result of what the central bank has done.”

Julie Matthaei,

Professor of economics at Wellesley College, and author on the economic history of women in the US

On the Federal Reserve:

“I agree with [Paul] that it’s been very problematic in the way it’s been functioning … I think the Federal Reserve System really needs to be changed, but I do think we need to have some kind of federal monetary oversight board; we can’t just get rid of it. The Fed isn’t democratic now, and I think that’s a problem. And I think it didn’t do well at all in terms of preventing the financial crisis.

“Before the financial crisis they should’ve pushed for financial regulation, and I think they should’ve realised how unstable the markets were … They’re supposed to keep an eye on the financial system; it’s part of their job.

“From the Marxist perspective, we agree with Paul that the government is corrupt and it’s problematic. But again, we don’t need to get rid of government, we need to transform it and make it really democratic.” – Julie Matthaei

“From the Marxist perspective, we agree with Paul that the government is corrupt and it’s problematic. But again, we don’t need to get rid of government, we need to transform it and make it really democratic – whereas now, it’s bought off by the moneyed interests … If the current Congress controlled the Fed, it wouldn’t be that much better. That’s the problem.”

On cutting federal spending by $1tn:

“I don’t think it would be good for the economy, both because the programmes he wants to cut are needed, and secondly because of the Keynesian effects, which he denies. He and Austrians deny the fact that if you leave an economy alone, you can have crises of underspending.

“If you cut spending drastically like that, you’re going to worsen the crisis. If you spend appropriately and you really create jobs that are productive, then you have more income for the government [from tax revenue].

“Not only for issues of macroeconomics should we not cut government spending drastically, but also in terms of justice and equity. There’s all these unemployed people; it’s not their fault that they’re unemployed. They’ve been affected by the behaviour of the very rich and the banks. And they’re paying – terribly.

“If you read his [Paul’s] writings, he wants to restrict any support to people who are poor or unemployed. Then you really have incredible poverty and incredible injustice.”

On the Austrian school of economics:

“I think that they’re really off. This idea that if you leave capitalism alone that it will function efficiently and productively and relatively fairly – it’s just totally off.

“The biggest point I see with him vis-à-vis radical economics, which is where I come from, is that he has a similar critique of the current economic system. It’s not 100 per cent the same. But he talks about lobbyists, and political corruption, and inefficient government … It’s just that his solution is very different.”

Follow Sam Bollier on Twitter: @SamBollier