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End the Fed?

BY WILL MATTESSICH | NOVEMBER 05, 2010 7:20 AM

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If platitudes are a disease, American politics is experiencing an epidemic. Politicians on both sides of the aisle are infected, some more severely than others. And who can blame them? It seems most Americans will always get behind vague, constitutional-sounding things like "personal freedom" and "protecting liberty," so why shouldn't candidates pepper their speeches with such phrases?

It's not that these concepts aren't important. But trying to back up every argument with rhetoric that sounds as if it was lifted from Patrick Henry trivializes the ideals that are being invoked and misinforms the electorate. This is especially true with a subject as complex as the United States' $13 trillion economy.

An acute case of the disease was on display at Rep. Ron Paul's speech in the IMU last week. The Texas Republican is a rare politician in many ways. He actually sticks to his principles, has delivered thousands of babies, and believes in a drastic overhaul of the U.S. economy. Paul wants to end the Federal Reserve and put the United States back on a form of the gold standard. So it is important for people to understand the consequences of those plans before they buy a "Paul 2012" bumper sticker.

Anyone who went to Paul's speech expecting a coherent articulation of his economic positions would have left unsatisfied. Beyond his general talking points, Paul did not discuss his reasoning very thoroughly. The libertarian said Americans need to know more about Austrian economics (a heterodox school of economic thought), but didn't mention which tenets of the school he agreed with or why.

He did talk frequently, however, about eliminating the Federal Reserve (prompting raucous chants of "End the Fed") and putting the United States back on the gold standard.

Paul believes the Fed is the root of inflation. He argues that in the Fed's efforts to stabilize or stimulate the economy, it actually ends up making things worse. He relates this to his common theme of "liberty" by saying that the government is imposing an implicit tax on everyone, because inflation lowers the value of everyone's money. His solution to this problem? Abolish the Federal Reserve and back up the dollar with gold.

Under the gold standard, every dollar of U.S. currency would be backed by gold, meaning you could redeem a dollar bill for a set amount of gold whenever you wanted. Proponents argue the benefits of the system would include less severe inflation and a more stable international-exchange rate.

"Under the gold standard, currency values were pretty much fixed, so the global-exchange rates rarely changed," said University of Iowa political-science Professor John Conybeare, who specializes in international relations and political economy. That was the way it worked in the 19th century. However, now there is far less gold in the world by value, and the exchange-rate stability would not exist today if the United States were to move to the gold standard.

Paul has stated in past interviews that he doesn't want the United States to go back to the 19th-century version of the gold standard. Instead, he wants to make currency redeemable in gold and silver, known as "hard currency." If the United States decided to strictly adhere to the gold standard — so that $1 of currency was redeemable for $1 in gold — the total money supply would shrink by 70 to 80 percent, Conybeare said.

Hopefully, most of Paul's supporters understand the policies they vociferously advocate. His preferred policies would have a huge effect on the life of every American. And it is not a decision voters should make if they are basing their opinions solely on vague pronouncements of "freedom" and "liberty."


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