End the Fed Part 1

End the Fed interpretation

So I have followed Ron Paul and the libertarian cause for the last couple years. Paul wrote book called End the Fed, which is a very catchy title, and I decided to spend part of my summer finally reading it.

As I started reading it, I realized that there was a lot of ideas and concepts that I have never heard of before. He mentions lots of economists and professionals. (anyone who knows Ron Paul knows that epitomizes the term “intellectual”). I figured one way to help me through this book was to create a discussion about it with my friends and colleagues. Hopefully these explanations and interpretations make you think and question the deeply held notions of what is considered typical and necessary governmental power.

I think the easiest way to think of this idea is to think ones own finances. You know that when you go to Best Buy to buy a TV, you have to make a decision that is based on many factors. Now, if you had an infinite check book, then your choices would probably be one way versus if your check book had a limit (as in reality). I think that that is his thesis. But, lets explore...

Ron Paul begins the book with describing how we all use money but rarely think about its true nature and function. I think that this is true. Most seem to basically earn and spend (including myself). He also says that taking away the fed would eliminate the governments endless accumulation of debt that will be paid for by future generations and “arrest its massive expansions of the welfare state that has turned us into a nation of dependents”.

In times like these it may sound harsh to speak like this, but his words reminded me of another book that I read, My Grandfather’s Son, by Clarence Thomas. In that book Myers Anderson, Thomas’ grandfather, said that he could get government assistance, but he would then only be under the control of the government and he wanted to be free. He said that he was a man who answer to none if he made his own income, even if it was small. He was able to be proud of what he earned. He explain that if he was reliant on the government, then he wouldn’t be a free man at all.

This made me think of what welfare does to the psyche of people.

Paul argues that the soundness of the dollar is dependent on the infinite copies of the printed dollar to be relinquished from government control. He also describes the hubris of the government to print trillions of dollars and then not have to explain its actions. Here is a quote from Bernanke: “The US government has the technology, called a printing press, that allows it to produce as many US dollars as it wishes at essentially no cost...We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.” (National Economists Club 11-21-2002)

It sounds to me that their solution to having people spend more, is to make things more expensive and have the value of the dollar decrease.

Paul shows a graph of the value the dollar from 1913. Why is 1913 so important? The Federal Reserve System was created in 1913.

This is not the exact graph, but it is one that I found on the internet. It shows how one could get a hamburger for $0.05 back in the day, which now costs $2.00! The hamburger didn’t change, the dollar did.

Paul goes into how a penny used to be made of copper and how he, as a kid, could go to the store and get a bag of candy. Well, copper is too expensive compared to the dollar. See, the resources’ value doesn’t change, we can’t create more copper, only more paper, so the value of the penny decrease relative to the amount of copper. The US’s response was to switch to zinc. Now that may be too expensive, so the penny may either be made of steel or removed from circulation.

The graph really shocked me because I always though things got more expensive with time, but actually the goods and services don’t change value, just the amount of dollars changes. This really made me think about what wealth means. For a person to have more money, what does that mean? I wonder if things will get better and if the ones who make decisions are capable to make those decisions?

You may ask how this came about. Paul recounts a story, in 1909, during Taft’s administration, of who was in charge of creating the central bank infrastructure. There was a secret meeting at the Jekyll Island Club, which was co-owned by JP Morgan. Present at this meeting/ duck hunting expedition was: John D. Rockefeller (senator), Nelson Aldrich, Henry Davison (Morgan senior partner), Paul Warburg (central banking advocate), Frank Vanderbuilt (VP of National City Bank), and A. Piatt Andrew (Taft Treasury secretary). So basically the infrastructure for the Fed was created by 2 Morgans, 2 Rockefellers, 1 central bank advocate, and 1 economist. This is the group that help draft the bill for the Federal Reserve Act.

The way I looked at this was that this group was supposed to generate a monetary system that would benefit everyone in America. I don’t think this particular group of individuals in the early 20th century ever put the benefits of civic duty over their own myopic views. If my history is correct, they were labeled “robber barons” and had monopolized their respective industries. Hardly the idealized notion of a typical American.

The government explains that the fed is a necessary government entity, but in actually was born out of the Progressive era, where many new policies were generated. The complaint from the banks was that they lacked the “elasticity” to generate wealth. Paul explains that the fed was created to basically protect profits and socialize losses.

We know this because bank owners and other large CEOs keep all their profits, but when they fail, they come to the government for assistance. I am not an economist, so that is the way I see it and welcome what actually occurs. I figure that private companies wanted more money to use and a bailout if their risk failed. If a business can only profit ad not have to worry about losses, then that is a great deal!

Paul describe the Fed as having the worst traits of both private and governmental entities.

Paul frequently refers to the Austrian economists. The Austrian Economists are a group of economists that argue for the value of a free market economy and its necessity in the maintenance of a good money policy. One of the main economist of the group, Ludwig von Mises, explained in 1919 that “one can say without exaggeration that inflation is the indispensable means of militarism. Without it, the repercussions of war on welfare become obvious much more quickly and penetratingly; war weariness would set in much earlier.”

Paul goes on to describe how with an endless check book, the congress and government spend and spend without thought and consequence. He likens it to “an irresponsible teenager with an unlimited line of credit. The parents, teachers, pastors, and authorities in his life are virtually powerless to change his habits. Now, imagine that teenager armed to the teeth and immune from the rule of law. This is what we have with a government backed by a central bank.”

I am sure everyone knows what it is like to economize. Usually we have to choose between guns or butter, but with unlimited resources, you can have both.

I am working through the book and feel I should share the thoughts and notions described. This was part 1 and only 4 chapters. I plan on writing more as a I read more. There are many other note worthy parts of this book (that I don’t understand), but I tried to get the main concepts down to share them. I welcome your thoughts and insights.