On the Fed's purported role in smoothing out the business cycle and eliminating inflation, PH wrote:
Obviously, the ability to control it implies the ability to raise it as well as lower it. Inflation is not a random or naturally occurring event in the business cycle. It is a choice by policy makers. The Fed is specifically empowered to control the rate of inflation through monetary control so as to support the goals of the government.At first blush, there is nothing wrong with what PH says. In fact, what he writes actually supports Paul's contention that the Fed acts contrary to the purposes for which it was sold to the American people. Inflation does not occur randomly, it is a conscious choice by some actor in the financial system. But the part that I'd like to focus on is where PH says "policymakers". Usually in our government, this word is used in reference to elected officials or other agents of government. In other words, guys that work for We the People. In this case, however, the decision to inflate or not inflate is made by those appointed to a supposedly quasi-governmental body that oversees a banking cartel, whose end purpose is to enrich themselves at the public's expense. That their policies supports the goals of the government--i.e., easy money to support state-enlarging and empire-maintaining spending is secondary to assuring their own profits.
Referencing the Fed's leading role in the debauching of the currency:
This is stupid and misleading. You cannot buy a 1913 product with a 2010 dollar. Nor can you buy a 2010 loaf of bread with a 1913 dollar. Dollars, just like all other commodities have no fixed price or value. Ideally dollars are abstract and undergo changes in value over time.Here PH has it wrong. If I were to transport myself back in time to buy a 1913 car, it would take a heckuva lot more 2010 dollars to do so than 1913 dollars. My preference for four-wheeled transport hasn't changed, but the value of the money in my pocket certainly has. Which is Paul's argument, and is where PH's red-herring focus on an "ideal" money whose value shifts over time serves only to excuse a skyrocketing increase in the quantity of money required to barter for a certain product. If my preferences haven't changed, but it takes so much more money for me to trade for the things I want, where did the value represented in the difference in quantity of money go?
On inflation and interest:
The big losers in inflation are in fact those people who lend money out and expect to be paid back. It is the banks themselves that lose the biggest value when they are repaid with inflated dollars. So long as the interest rate is above the inflation rate, savers and banks win. As long as they have a known inflation rate, they can make long term loans at a set interest and be assured to gaining value.The trouble I have with this characterization is that the very agents of inflation...the banking cartel...appear to be sowing the seeds of their own destruction by debauching the currency. Why would they do this? Where is the profit, the incentive, if they are simply consigning themselves to failure? Thus I find difficult to accept the assertion that inflation, stoked each time a fractional reserve banker makes a loan, hurts bankers and savers alike. The interest rate would have to continually increase each time a loan was made in order for this concept to hold true. Yet we know this does not happen, otherwise they would not, and could not, remain in business.
Inflation is caused by government spending in excess of income. Either by borrowing or by printing.Bzzzt! Inflation is the insertion of more money into the money supply, simply by decreeing it so. Each monetary unit introduced into circulation makes each existing one worth that much less. Of course, modern economists and their Keynesian/monetarist focus obscure this issue by pointing to the rise in prices and calling that inflation. But that is like pointing at a stuffy nose and fever and calling that the flu, when it is a virus that causes the symptoms. Inflation is the same way.
Either way, eliminating the FED does nothing to eliminate government excess.Wrong again. While eliminating the Fed will not eliminate government excess, I'll admit as much, one cannot say that it will have no effect. Reckless spending by government is naturally limited when can only tax the people for it. Even if the government has to borrow for their spending, it is limited. Not so with a central bank, for such an animal gives a central government the ability to monetize its debt and stealth-tax its spending, which hides the cost of its growth.
...while the British government was heavily in debt during our revolution, the British nation was wealthy beyond belief.As has been our country in the past two decades, but I suspect the piper will need to be paid soon. Paul contends, and I agree with him, that such wealth is an illusion, a consequence of a government spending bubble financed by easy money. Our society is prosperous and shiny on the outside, but rotten to the core on the inside.
Also, if my understanding of history is correct, a portion of the wealth of the British empire came from its overseas possessions, the wealth of which flowed toward the center of the empire .
The degree of militarism that a nation can afford is a function of its wealth and national government fundraising ability. A country the size of the USA can easily afford to occupy 15-20 foreign countries with substantial military force and stay within the normal budget (as evidenced by the fact that we have for the past 50 years).Perhaps PH misses the fact that we've run up monstrous budget deficits...i.e., not "within the normal budget"...and a $13T national debt, partially in an effort to maintain a huge blue-water navy and to keep our huge military busy meeting strange new people and killing them in far-flung places overseas. Our latest adventure--installing democracy at the point of a gun--is but one incarnation of such a policy. Paul's point is that the Fed enables this behavior far beyond what would normally be possible via taxation and simple borrowing.
PH appears to be missing Paul's main point that central banking encourages the growth and metastasization of aggressive government policies. Yes, PH is right in that aggression is the function of trigger-happy pols. But he neglects to account for the additive effect of central banking that permits governments to go far beyond what they would ordinarily be able to do.
Wrt the Constitution and paper money:
This is a limitation on the powers of the states, not on the federal government. Paper money had been widely used in all of the colonies and by the Continental Congress. In this article, the constitutional framers were giving exclusive power to create money to the national government. This says nothing to keep a national government from issuing paper or any other kind of currency.PH is correct here insofar as I erred in my review by not citing both applicable Sections of the Constitution that apply to money. Here is the text of Article 1, Section 10:
No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts...And Article 1, Section 8:
...To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures...PH is also correct in noting that paper money was used by all the states during the Revolutionary war. What he neglects to mention is how the phrase "not worth a Continental" came about, and the well-documented antipathy the Framers felt for paper money.
This debate about paper money and coin money has been raging for over 200 years, neither PH nor I will settle this debate today. Paul's assertion is that the Constitution forbids paper money given Article 1, Sec 8's instruction to "coin" money, not print it, and in Article 1, Sec's 10's prohibition on the states to make nothing but gold and silver legal tender. I agree with Paul, in that when one combines the written words of the Constitution, to include the Tenth Amendment's "reserved powers" clause, with the intent of the Framers for "no paper/fiat money", that the Constitution forbids paper money and certainly does not give Congress the authority to outsource management of the currency to a quasi governmental banking cartel. But even if the Constitution said explicitly "no central bank", we'd still have one anyway. On this PH and I agree...IMHO, there is too much money to be made and too much power to be had to permit the people a sound, honest money.
Then PH engages in a bit of "American exceptionalism" hubris about the dollar as the world's reserve currency:
The US dollar, unbacked by anything, has been the world preferred reserve currency because everyone universally trusts it. Attempts by other nations to replace it have been self-serving attempts to put their own currency (and the wealth that would generate) in the place of primacy. Their attempts have failed because the world money market is already open and free and other nations are already free to hold reserve currencies of any other nation. The US dollar is still king because other nations make it so. As soon as a different currency proves itself to be stronger, it will be the king.It is the preferred reserve currency not because it is so great intrinsically, but because of our size and dominance on the political landscape for the last 70 years. PH is correct in noting that the dollar will no longer be king when American hegemony ends. That day is rapidly approaching--both the end of American hegemony and the use of the dollar as the world's reserve currency--and the debauching of our currency and the money bubbles blown by the Fed and members of the Fed cartel will go a long way toward ensuring both events happen. For certain, it couldn't last forever, not when we tax via inflation everyone and every nation that has loaned the US government money.
In sum, I respect PH like a brother, but I think he's dead wrong about the impact of the Fed on our national economy and in his blithe acceptance of immoral, unconstitutional, and hazardous "free money" run by a cartel of banksters unaccountable to the people.
* an easy mistake to make, given how I largely agree with what Paul has to say