Rep. Ron Paul of Texas, the new Republican chairman of the House Subcommittee on Domestic Monetary Policy, makes no bones about what he would like to do with the Federal Reserve: abolish it.
While the Fed isn't popular with the new Republican majority in the House, particularly with the Tea Party advocates, Paul isn’t likely to achieve his heart's desire.
The unpopular bank bailouts are done, financial markets are more or less operating normally, the flap over the Fed's purchases of longer-term securities has faded with the strengthening of the dollar, and the central bank has a leading role among regulators in fleshing out details of the Dodd-Frank financial reform legislation.
Equally important, economic growth appears to have accelerated and the unemployment rate, still high at 9.4 percent, fell by four-tenths of a percentage point last month to its lowest level since May 2009. Meanwhile, inflation remains extremely low while the Fed holds its target for the overnight lending rate just above zero.
In other words, the risk that Paul and other Fed critics can sharply curtail the central bank's independence and strip away most of its regulatory powers has receded significantly. He might, however, renew his push for an "audit" of the Fed's monetary policy process and decisions, or he could join Republican lawmakers who would like to eliminate the central bank's mandate to foster maximum employment so its only focus would be maintaining price stability.
monetary expansion posed great risks for the
American economy and our standard of living."
In any event, with his new platform, Paul will be pressing his decades-long argument with Fed officials more forcefully than he could do as just one member of the large House Financial Services Committee. “I first ran for Congress in the 1970s because I was concerned about inflation and the dollar," Paul, now in his eighth term, said in a statement last month. "I believed then — as I do now — that unchecked monetary expansion posed great risks for the American economy and our standard of living."
The 75-year-old congressman, whose district runs from Galveston southwest along the Gulf of Mexico, is a libertarian who views the very existence of the Fed as a threat to the American people. In "End the Fed," a book published in 2009, the year after he sought the Republican presidential nomination, Paul writes that getting rid of the central bank "would take away from the government the means to fund its endless wars. It would curb the government's attack on the civil liberties of Americans, stop its vast debt accumulation that will be paid by future generations, and arrest its massive expansions of the welfare state that has turned us into a nation of dependents."
Paul, whose office did not respond to an interview request, has a vision of returning to the mid-19th century, when "sound money" — gold coins — circulated and international currency values were fixed in terms of gold. He has a nostalgic view of a time when anyone who wished could start a bank and issue currency — with little regulation of banks and no such thing as insurance to protect depositors.
"Depositors would become intensely aware of which banks are sound and which are not," he wrote. "We no more need to worry about banking in a post-Fed era than we worry about groceries, shoes or software now … Markets are self-regulating, responding to the wishes of consumers. It would be the same in banking."
forthwith and the money stock frozen in place."
As for the power of a central bank to add money to the financial system either routinely — or in times of serious stress, such as when world markets seized failed up after Lehman Brothers in September 2008 — that's never necessary, Paul claims.
"In an ideal world, the Fed would be abolished forthwith and the money stock frozen in place," he says. "Any quantity of money will do, so long as the quality of the money is sound." Fed officials declined to comment.
Paul’s view of history glosses over the economic realities of days past, when financial "panics" occurred repeatedly in the United States as banks ran out of money without a central bank to serve as a lender of last resort. The Fed wasn't created until 1913, in the aftermath of such a panic in 1907.
Barry Eichengreen, an economic historian at the University of California at Berkeley, says in "Golden Fetters," a history of the gold standard, that in its heyday in the late 19th century the standard worked in large part because of constant cooperation among the central banks of Britain, France and Germany. After World War I, the strictures of the gold standard were a contributing factor to the Depression of the 1930s, he says.
Paul maintains in "End the Fed" that falling prices — deflation — were not a problem then and would not be now. But he doesn't discuss the impact of deflation on people who borrow money and then have to repay their debts with dollars that become steadily more valuable. That's what happened to farmers in this country with mortgages in the 1890s.
In such a situation, "something has to give," Eichengreen said in an interview. "Slow but steady deflation of even one percent a year is like one percent inflation. Some people can protect themselves and others cannot." Farmers with mortgages could not, and the notion that deflation did not matter is "hard to swallow," he said.
So is Paul's idea that you don't need the government or a central bank to provide certain "core" financial functions, such as a payments system to settle safely the huge volume of transactions among banks, or to accommodate large seasonal variations in the demand for money. Without a central bank, during each year's harvest season, for instance, money became tight and interest rates rose, again particularly hurting farmers.
What would have happened two years ago after Lehman Brothers failed?
"If the Fed had not been able to provide liquidity to the financial system, we would have had a total meltdown," Eichengreen said. "You have to be in a kind of parallel universe to imagine there are no financial emergencies that arise from time to time."
Ron Paul seems to live in such a universe.