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End the Fed

Ron Paul (2009)


In fact, the title of this book is not my own but rather comes from a slogan that can be heard at rallies all around the country. I first heard it at the University of Michigan in October 2007, after the Republican primary debate in Dearborn. It was a frustrating evening; all my opponents denied there was anything at all wrong with the economy or Bush administration policies. But afterward, I was able to speak to more than 4,000 students in the quad at Ann Arbor.
I'm told that was a big turnout for a candidate. And it was a very friendly crowd, applauding my comments on government spending and deficits and on wars and foreign policy. But when I mentioned monetary policy, the kids started cheering. Then a small group chanted, "End the Fed! End the Fed!" The whole crowd took up the call. Many held up burning dollar bills, as if to say to the central bank, you have done enough damage to the American people, our future, and to the world: your time is up. (4)

One might say that this is a populist cause. It is also a libertarian cause, one that would be cheered by Thomas Jefferson, a dedicated opponent of the Fed's predecessor, the Bank of the United States, and by Thomas Paine, who saw paper money as the enemy of individual liberty on grounds that it always gives rise to despotism.
Paine, the same writer who inspired the American Revolution with his pamphlet Common Sense, also said this: "As to the assumed authority of any assembly in making paper money, or paper of any kind, a legal tender, or in other language, a compulsive payment, it is a most presumptuous attempt at arbitrary power. There can be no such power in a republican government: the people have no freedom—and property no security—where this practice can be acted." (5-6)

The Fed's activities since the market meltdown of 2008 have been dangerous in the extreme. The Fed is using all its power to drive the monetary base to unprecedented heights, creating trillions in new money out of thin air. From April 2008 to April 2009, the adjusted monetary base shot up from $856 billion to an unbelievable $1.749 trillion. Was there any new wealth created? New production? No, this was the Ben Bernanke printing press at work. If you and I did anything similar, we would be called counterfeiters and be sent away for a lifetime in prison. We would be scorned and hated by everyone as scam artists and racketeers. But when the Fed does it—complete with a scientific gloss—it is seen as the perfectly legal and responsible conduct of monetary policy. (8)

Back on November 21, 2002, Ben Bernanke explained precisely what his views are, so perhaps there should have been no surprise.
"The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation."
I'm not sure that the Fed governor has ever been so frank about the Fed's power. To be sure, he was not condemning it. He was explaining it. He believes in it. Like the eighteenth-century money crank, John Law, whose antics fueled the Mississippi Bubble, Bernanke believes he has discovered the magic means to generate prosperity. (10-11)

The core of the problem is the conglomeration of two distinct functions of a bank. The first is the warehousing function, the most traditional function of a bank. The bank keeps your money safe and provides services such as checking, ATM access, record keeping, and online payment methods. These are all part of the warehousing services of the bank, and they are services for which the consumer is traditionally asked to pay (unless costs can be recouped through some other means). The second service the bank provides is a loan service. It seeks out investments such as commercial ventures and real estate and puts money at risk in search of a rate of return. People who want their money put into such ventures are choosing to accept risk and hoping for a return, understanding that if the investments do not work out, they lose money in the process.
The institution of fractional reserves mixes these two functions, such that warehousing becomes a source for lending. The bank loans out money that has been warehoused and stands ready to use in checking accounts or other forms of checkable deposits, and that newly loaned money is deposited yet again in checkable deposits. It is loaned out again and deposited, with each depositor treating the loan money as an asset on the books. In this way, fractional reserves create new money, pyramiding it on top of a fraction of old deposits. Depending on reserve ratios and banking practices, an initial deposit of $1,000, thanks to this "money multiplier," turns into deposits of $10,000. The Fed depends heavily on this system of fractional reserves, using the banking system as the engine through which new money is injected into the economy as a whole. It adds reserves to the balances of member banks in the hope of inspiring ever more lending.
From the depositor point of view, this system has created certain illusions. As customers of the bank, we tend to believe that we can have both perfect security for our money, drawing on it whenever we want and never expecting it not to be there, while still earning a regular rate of return on that same money. In a true free market, however, there tends to be a tradeoff: you can enjoy the service of a money warehouse or you can loan your money to the bank and hope for a return on your investment. You can't usually have both. The Fed, however, by backing up this fractional-reserve system with a promise of endless bailouts and money creation, attempts to keep the illusion going.
Even with a government-guaranteed system of fractional reserves, the system is always vulnerable to collapse at the right moments, namely, when all depositors come asking for their money in the course of a run (think of the scene in It's a Wonderful Life). The whole history of modern banking legislation and reform can be seen as an elaborate attempt to patch the holes in this leaking boat. Thus have we created deposit insurance, established the "too big to fail" doctrine, created schemes for emergency injections, and all the rest, so as to keep afloat a system that is inherently unstable.
What I've described is a telescoped version of several hundreds of developments, but it accurately explains the continued drive to push forward with money that is infinitely elastic and with banking institutions that are guaranteed through. government legislation not to fail, that is, central banking as we know it. Just so that we are clear: the modern system of money and banking is not a free-market system. It is a system that is half socialized—propped up by government—and one that could never be sustained as it is in a clean market environment. And this is the core of the problem. (16-18)

Finally, the inevitable downturn occurred with the Panic of 1819. This panic ended peacefully precisely because nothing was done to stop it. Jefferson pointed out that, in any case, the panic was only wiping out wealth that was entirely fictitious to begin with. Today this panic is but a footnote in the history books. (19-20)

FDR . . . confiscated gold from the American people and made it illegal for American citizens to own gold. Roosevelt took the gold at $20 an ounce and promptly revalued it at $35. The citizens lost, the government profited. (45)

Before gold became legal to own in 1975, many gold bugs were buying it. I purchased my first gold shortly after the breakdown of the Bretton Woods Agreement. The law was circumvented by buying numismatic coins (any coin dated 1947 or older was considered a numismatic coin). Mexico accommodated American citizens by minting the beautiful Mexican 50 peso, weighing 1.2 ounces, and placing the date 1947 on it. (55)

So we see that the damage that the Fed wrought came rather quickly after its creation. Compared with today, its power was limited then. But the goal of creating a lender of last resort had a devastating effect on our public policy. It inspired the government to dream of ever more power, ever more programs, ever more ambitions. So long as the funding was there, there would be no restraining the state, even when people with fiscally conservative impulses entered into leadership roles. (66)

Whenever I talk of a gold standard, there are always people ready to accuse me of having some obsession or fixation. Fetish is a word thrown around. In fact, I'm only observing reality: the idea of sound money in most of human history has been bound up with gold money. Can there be sound money without a gold standard? In principle, yes. And I'd be very happy for a system that would permit markets to once again choose the most suitable money, whatever that turns out to be. I'm not for government imposing any particular standard: no central bank, no legal tender, no privilege for any commodity chosen as a backing for the currency. (71)

Henry Reuss, chairman of the House Banking Committee, attended one meeting and left in a rage. He couldn't stand one minute of serious consideration of the importance of gold. Before ownership of gold was made legal once again in the United States, which occurred in 1975, Reuss predicted that if it were to occur, gold would drop to $5 an ounce and the "gold bugs" should be happy with the government propping the price up at $35 an ounce. He, of course, had it wrong; it was the artificially low price of gold that was propping up the value of the dollar—at least temporarily. (72)

BEN BERNANKE: The Federal Reserve is committed to maintaining low and stable inflation and I'm very confident that we'll be able to do that.
RON PAUL: You're not answering whether or not you anticipate a problem.
BEN BERNANKE: I'm not anticipating a problem like '79-'80.
RON PAUL: With your fingers crossed, I guess. Okay. Thank you.
Apparently, the finger crossing didn't work. Several times in the above exchange, Bernanke says that he expects a bright future of a growing economy with no apparent problems on the way. Keep in mind that this was two weeks before the collapse of the Bear Stearns hedge funds, and one year ahead of the wholesale crumbling of the American financial system. All problems, he says, will he cured about our liquid financial markets. Why anyone takes his view seriously today is a mystery. Finally, he confesses his belief that government spending is a source of economic growth, a superstition of the old-line Keynesians that you can rob some people and give to other people and somehow magically create prosperity. (103)

There is something fishy about the head of the world's most powerful government bureaucracy, one that is involved in a full-time counterfeiting operation to sustain monopolistic financial cartels, and the world's most powerful central planner who sets the price of money worldwide, proclaiming the glories of capitalism. Even when faced with the dreadful consequences of the hazards created by his own institution, he refused to face reality, or at least refused to admit it. (109)

Some people have been surprised by Bernanke's irresponsible conduct of monetary policy. There was no reason to be surprised. He was on record promising unlimited amounts of inflation should the need arise. If Greenspan was cocky about the genius of central bankers, Bernanke is even more so.
His comment to Milton Friedman at a dinner honoring Professor Friedman's ninetieth birthday on November 8, 2002, reveals it all. He apologized to Professor Friedman and said: Friedman was absolutely right—the Depression was the fault of the Federal Reserve. It wasn't the fault of the central bank managing a fiat currency or participating in credit expansion or debt monetization; the problem lay only with the Federal Reserve's inability or unwillingness to inflate the currency early and massively starting in 1929.
Bernanke closed his remarks by directly addressing Friedman: ''You're right, we did it. We're very sorry. But thanks to you, we won't do it again."
The fault indeed does lie with the Federal Reserve—but obviously for opposite reasons. It was the credit expansion of the 1920s causing the stock market bubble that was the real cause of the crash. The crash was then compounded by the necessary corrections being interfered with by both Hoover and FDR and the concurrent Congresses. (110-11)

I have for years sensed a total disinterest in monetary policy by members of Congress as well as members of the Financial Services Committee. An incident confirmed this skepticism. After I had brought up the subject of gold in a Financial Services hearing, in all seriousness, a member asked me in private whether the dollar was "backed" by gold, having up until then assumed that it was. I don't think this is unusual. Many of the people who are supposedly in charge of monitoring the system are surprisingly ignorant about even the most basic aspects of how the system works. (114)

The problem is not only a lust for power; ironically, benevolence and humanitarianism drive many to seek power over others. They believe for humanitarian reasons that the strong and wise have an obligation to subject the weak and ignorant to the whims of government control. As they gain more influence and power, they become more convinced that they are saviors of mankind, and if any resistance or obstacles appear that limit their power, they believe that brute force must be used to impose their "goodwill" on the stubborn few. The purpose of freedom vanishes from their minds. (117)

Just as Henry Hazlitt and other Austrian economists knew, in 1944, when the Bretton Woods system was established, that it would not last, many others knew from the beginning that the current system started on April 15 , 1971, would also fail. The date may not have been known, but its demise was predictable. (125)

By way of review, when the Fed lowers interest rates below their natural level on a market, it has the effect of expanding investment beyond a sustainable level. Businesses begin investing as if consumers had the savings to back up the signals that the interest rates are sending. But real resources are not in fact available. There is no new wealth available to make good on investments. The lower interest rates are creating no new capital; they are merely distorting the signals borrowers use to assess risk. (126)

The Federal Reserve should be abolished because it is immoral, unconstitutional, impractical, promotes bad economics, and undermines liberty. Its destructive nature makes it a tool of tyrannical government.
Nothing good can come from the Federal Reserve. It is the biggest taxer of them all. Diluting the value of the dollar by increasing its supply is a vicious, sinister tax on the poor and middle class. (141)

Karl Marx's Fifth Plank of the Communist Manifesto is clear: "Centralization of credit in the banks of the State, by means of a national bank with state capital and an exclusive monopoly." This does not mean that everyone who advocates a powerful central bank is a communist. It does mean that if one is inclined toward authoritarian rule, a central bank is of the utmost benefit.
A central bank by its very nature is the opposite of a commodity standard of money. A gold standard does not require an authority to run it. If a central bank comes into being when a gold standard is in place, the purpose is to circumvent or eliminate the restrictions the gold standard places on those who want to enlarge the government over the opposition of the people. The only government involvement needed for a gold standard to work is to enforce antifraud laws and contracts. (142)

The great immorality is the system of government that condones transfer of wealth through force. It's only considered immoral if one is caught passing out the loot. It's relatively easy to see the transfer of wealth through the tax system from on group to another. But we have been conditioned that morality is on the side of the redistributionists who grab the moral high ground by arguing that they alone care for the unfortunate and are merely making the system fair. They argue that, without this system, economic suffering would be overwhelming and unfair. Of course, an understanding of how freedom provides for the needs of the greatest number of people totally refutes this notion. (154)

The Constitution is clear about no paper money. Only gold and silver were to be legal tender. Since the states caused themselves harm when they issued their own paper money, the states were prohibited as well from issuing paper currency under the Constitution. Article I, Section 10: "No state shall . . . make anything but gold and silver coin a tender in payment of debts." So there you have it, plain and simple: paper money is unconstitutional, period.
The Constitution is silent on the issue of a central bank, but for anyone who cares about its intent, the Tenth Amendment is quite clear. If a power is not "delegated to the United State by the Constitution," it doesn't exist. There is no mention whatsoever of a central bank being authorized. Even if a central bank were permissible, it could not legally repeal the legal tender mandate for gold and silver coins.
A central bank, theoretically, could exist with a gold standard, but a gold standard doesn't need a central bank to manage it. Without this need, the motivation for having a central bank has to be questioned. It's not difficult to come to the conclusion that the purpose of a central bank, when a gold standard exists, is to get rid of it. (165-6)

Economist John Maynard Keynes, before he became the champion of inflation, wrote quite correctly of the grave danger of inflation. Like Greenspan, he changed his tune as the years moved on. Keynes stated in his book The Economic Consequences of the Peace:
"Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."
His Tract on Monetary Reform from 1923 is also clear:
"A government can live for a long time . . . by print[ing] paper money. That is to say, it can by this means secure the command over real resources—resources just as real as those obtained by taxation. . . . A government can live by this means when it can live by no other. It is the form of taxation which the public finds hardest to evade and even the weakest government can enforce, when it can enforce nothing else." (171-2)

Ludwig von Mises had it right many years ago when he predicted the downfall of all socialist economies, including the Soviet system, for a precise reason. Without a free market pricing system, there's no way to make proper economic decisions regarding supply and demand of products and services. Free market choices under socialism aren't permitted; the government sets the price and plans production. Government bureaucrats can't know what only markets can determine. Vital in the decision process is the profit-loss mechanism that rewards success and punishes failure. Government ownership of the means of production eliminates the benefits of bad decisions by business managers being punished. Under the socialism and interventionism that we have today, the successful are punished by being forced to bail out the unsuccessful.
We don't have socialism of our markets yet. When we do place wage and price controls on our economy, the market economy teeters or collapses, but generally in the past they have been removed and the economy recovers. Where we do have socialism is in money and credit and setting interest rates. This has been especially true since 1971 when the Bretton Woods Agreement ended and the dollar was delinked from gold.
By manipulating the supply of money and setting interest rates, the Fed has practiced backdoor economic planning. The fed essentially keeps interest rates lower than they otherwise would be. In a free market, low rates would indicate adequate savings and signal the businessperson that it's an opportune time to invest in capital projects. But the system the Fed operates discourages savings, and the credit created out of thin air serves as the signal for investors to spend, invest, and borrow excessively, compared to a system where interest rates are set by the market. (180-1)

Most economists and politicians insist on defining inflation as a rising price level. Rising prices are a consequence of monetary inflation and are harmful. Mises claimed that this confusion over defining inflation was deliberate and mischievous. If it's only a price problem, then blame can be placed on profiteers, speculators, labor unions, oil companies, and price gougers. This deflects attention from the real source of the problem, the Federal Reserve and its money machine. It's because so many are convinced that consumer and producer price increases are caused by these extraneous reasons that wage and price controls are resorted to, while the Fed's role in the inflation is ignored. (182)

People worry what would happen in a world without the Federal Reserve. My answer is that you would enjoy all the privileges of modern economic life without the downside of business cycles, bubbles, inflation, unsustainable trade imbalances, and the explosive growth of government that the Fed has fostered. You would also disempower the secretive cartel of powerful money managers who exercise disproportionate influence over the conduct of public policy. Without the Fed, Keynesian-style macroeconomic planning that has done so much harm would be no more. (189-90)

Terrorism is a serious problem, but if it's not seen as blowback from our unwise foreign interventions, then the only solution offered will be more government control of our lives. We don't change foreign policy; we merely regulate the innocent American people by abandoning the Fourth Amendment protection of their privacy. Those who wanted bigger government anyway conveniently used the problems—such as the 9/11 terrorist attacks—to build fear in the people so they practically beg the government to protect them from harm.
It's quite similar in economic affairs. Excessive spending and the Federal Reserve money machine bring on all kinds of economic problems in the corrective phase of the business cycle they create. The cry once again is for government, the perpetrators of the crisis, to come to the rescue with even more government, which requires more sacrifice of liberty.
The cycle is continuous. At first personal liberty is nibbled away at, but the appearance of prosperity continues. Later on, the worse the crisis, the greater is the threat of tyrannical government entirely taking over our lives and the economy.
This attitude can best be understood by what President Bush said on CNN on December 16, 2008, when he proudly announced: "I have abandoned free-market principles to save the free-market system." Astounding and preposterous!
Unfortunately, most Americans agree with him. They agreed after 9/11 that abandoning privacy protection by the Constitution was required to keep us safe and alive. "How else," they asked, "can you enjoy your freedom?" How could they not see the contradiction in that? The President's statement is quite similar to the excuse for burning a village and killing civilians while being unconcerned, during the Vietnam War, about collateral damage. "Destroying the village," they claimed, "was required to save it." (194-5)

When a society is relatively free, such as ours, it is through the use of deficits, taxes, fear, and fiat money that power is solidified. The authoritarians need the central bank for this takeover.
Those who have, on principle, correctly argued against the tax-collecting tactics of our government and the unconstitutionality of our monetary system find that their punishments can be even harsher than that of rapists and murderers. As the iron fist grows in size and the invisible hand influence on the market is diminished, we will see a transformation of America that spells the end of a grand experiment in human liberty. (195-6)

If we're not careful, a lot of anger will result from the collapse of this house of cards that the bank of paper built. (197)

When we unplug the Fed, the dollar will stop its long depreciating trend, international currency values will stop fluctuating wildly, banking will no longer be a dice game, and financial power will cease to gravitate toward a small circle of government-connected insiders. The entire banking industry would undoubtedly go through an upheaval of sorts as sound banks thrive and unsound banks go the way of the investment banking industry of last year: out of business as they should be. Those who are dependent on Fed welfare would have to clean up their act or shut down. Depositors would become intensely aware of which banks are sound and which are not. (202-3)

We should work for reform and sound economics with a strict adherence to the Constitution, but, absent such change, we should be prepared for hyperinflation and a great deal of poverty with a depression and possibly street violence as well. The worse the problem, the greater the chance a war will erupt, especially as protectionist sentiments around the world grow. These are the wages of central banking. (207-8)

Among all the arguments that can be used to reject the Federal Reserve, the moral argument alone should suffice. It's cheating. It's a tax. It's counterfeiting. It benefits the few at the expense of the many. It breaks the rule of contracts. It causes suffering and punishes the innocent. It enables world wars and vast payoffs to the powerful. That should be enough for all Americans to call for an end to this ninety-five-year-old failed scheme. (209-10)

If the freedom movement continues to grow as it has these past two years, I would say there's plenty of room for optimism. Freedom and central banking are incompatible. It is freedom we seek, and when that precious goal is achieved, the chant "End the Fed!" will become a reality. (210)

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