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Fed injected into the presidential campaign

Albeit in a small way, probably for the first time since the creation of the Federal Reserve System, it has been injected into a presidential campaign.

In the first Republican presidential candidates’ debate, Ron Paul, a Republican member of the House from Texas, spoke out in favor of the gold standard. Although Ron Paul’s formal education is in medicine, he is qualified to discuss money and economics as he has long studied the works of the great free market economist Ludwig von Mises. Mises is famous for his writings on money and for having exposed the fallacy of a central authority controlling the money supply.

In 1982 Ron Paul served on the U.S. Gold Commission to evaluate the role of gold in our monetary system. The Commission was Paul’s idea, and forming the Commission fulfilled a promise made in the 1980 Republican platform. Although the Commission was Paul’s idea, he could not select the Commission members, and from day one he fought an uphill battle.

After serving on the Gold Commission, Ron Paul coauthored The Case for Gold with Lewis Lehrman, who also served on the Commission. Lehrman became a National Humanities Medal recipient in 2005.

However, discussing the case for gold in a monetary system cannot be done without at least some understanding of the concept of central banking and the Federal Reserve System, which is our central bank, a fact not generally known by most Americans.

When the Fed came into existence, Americans were told that it would put an end to “economic panics,” the scare term of late 19th century and early 20th century. In the 1930s, however, the Fed-caused Great Depression made “economic panics” look like rainy days, and today the great scare term is “depression.” (The best book on the Great Depression and how the Fed caused it is America’s Great Depression, by the late Murray Rothbard.)

A depression is, of course, an extended and deep recession. According to Establishment lore, the Fed has prevented numerous depressions since the 1930s, giving us only recessions.

In calling for a return to the gold standard to end business cycles, which give us either credit-induced false booms (the last 15 years) or recessions, Ron Paul has been called “anti-government.” One Ron Paul critic said the neocons were much better than Paul, since at least they wouldn’t try to scale back government.

(The neocons are the architects of the Middle Eastern foreign policy that led to the US invasion of Iraq. Neocons further promote, despite the high costs in lives and money, a continued US military presence in the Middle East. Such policies could not be sustained were it not for our huge government and a massive military, both of which are financed by our fiat monetary system.)

Although the promise of scaling back government has long been a popular campaign cry, primarily of Republicans but sometimes Democrats, it always has been a false promise. Government continues to grow, even when Republicans such as Ronald Reagan gain office. More recently, George W. Bush railed against big government when campaigning and look what we have now.

The Federal Reserve System and its ability to create money out of thin air facilitate big government. If the Fed did not exist, the government would have to raise funds either by increasing taxes (a politically unpopular thing to do) or by borrowing in the marketplace, competing with businesses and individuals also wanting to borrow. Additional borrowing by the government, of course, increases interest rates and is detrimental to the economy.

So, to finance our welfare state, our wars, and a few good things such as highways, the federal government hands the Fed little pieces of paper called treasury bills and treasury bonds. The Fed, in turn, credits the federal government’s checking account in amounts equal to the face value of the bonds, and new money is created out of thin air.

Actually, the process is a little more cumbersome than described, as the federal government cannot, by law, borrow directly from the Fed, which means that when the federal government does borrow it has to go through Wall Street, which allows the major bond houses and banks to earn billions of dollars by acting as middle men.

The present borrowing scheme is a gift to bankers, for there is no reason for the federal government not to be able to borrow directly from the Fed. Taking it a step further, there is no reason for the Fed when it comes to the federal government borrowing money.

Instead of the Fed creating the new dollars (and collecting interest on money that did not exist before the federal government needed to borrow), the US Treasury could create the dollars, saving billions in interest. (Not recommended, but at least it would cut Wall Street out of the process.)

If the gold standard becomes a major issue in this presidential campaign, the American people can only benefit. Americans have little grasp of the concept of money and the deleterious effects of central banks. Americans would need to be much more knowledgeable about the Fed before it could be eliminated.

Presently, most Americans put the Fed on a pedestal. An understanding of how the Fed really works would cut the legs from under that pedestal. Murray Rothbard’s The Case Against the Fed is an excellent, short book about the Fed.

Meanwhile, Americans wanting honest money need to become more knowledgeable about money and the Fed, and they need to encourage a debate in this presidential campaign about returning to the gold standard. An excellent book on the gold standard is Murray Rothbard’s The Case for a 100% Gold Dollar.

Meanwhile, with every Republican presidential candidates’ debate, Congressman Ron Paul gets the opportunity to wake up a few more Americans to the dangers of fiat money and the Federal Reserve System. If the Democrats had a candidate knowledgeable about money and economics, then we could have a great increase in awareness of the unsound financial structure that underlies our economy.