11A136 The Fed's End by Jim Davies, 11/2/2011    

Probably nobody outside the Federal Reserve Bank understands it better than Ron Paul; and in the middle of his campaign site list of "Issues" comes the forthright call to "end the Fed." His explanation there of what it does and why it needs to be ended is succinct and sufficient.

The Fed, he explains, was established by Congress in 1913 and given power to expand and contract the supply of money in circulation, by a rather complex process. It has used the former so liberally as to destroy 98% of the value of a 1913 dollar, and used the latter only once, in the early 1930s, with the effect of increasing distress in the Great Depression. Money - what it is and how much of it is needed - perhaps above all should be left to the choices of the free market, but in that year it was monopolized by government. Paul writes that Congress did it sneakily "on Christmas Eve in 1913" but since then it's had 99 years to change its mind and hasn't, so we may take it to be a deliberate act.

Government does very well from this ability to have money printed on demand (it can wage war at a moment's notice, for example, without waiting for new taxes to pay for it to be approved) and so do the member banks, which are allowed under Fed rules to lend out at interest nine times more than they take in as deposits. While both of those parties win nicely, everyone else is stuck with the bill - in the form of ever rising prices and distorted investment decisions.

Dr Paul is therefore 100% right: the Fed needs to be ended.

Unfortunately, as President he has no direct power to do that, for what Congress set up, only Congress can take down. So his campaign plank speaks of "auditing" the Bank effectively, and "ultimately" bringing it to an end - but even then, he doesn't say how. The nearest to that comes in a phrase he uses more than once on his web site: "he will also fight to legalize sound money so Americans will have alternatives to the Fed’s inflated paper money." What exactly does he mean by "legalize sound money?"

Sound money would be silver and gold coin, or trustworthy warehouse receipt certificates for them; but how as President can he "legalize" them as money? He doesn't say. I have a couple of suggestions.

In order for the Fed to create new "money" out of thin air, it has to purchase a Treasury Bill, with money it drawn on an account that is empty until the Bill is deposited; the whole process begins with that act of "kiting." And it has two parties - the Fed as buyer (whom the President cannot control) and the Treasury as seller (whom the President does control.) The Treasury is part of his staff, of the Executive Branch. When elected, he will have the power to fire any Treasury Secretary who sells any T-Bill to the Fed. Therefore, he can stop any or all such sales, and thus prevent the creation of fiat "money" regardless of the wishes of Congress. I wonder why he didn't think of that.

However, it's not a full fix. The Fed could respond by changing the fractional reserve rules for its member banks, so that they could (eg) lend out not nine times what they receive as deposits, but nineteen or for that matter ninety nine; and that second stage is actually the primary engine of money creation. So President Paul would need to use his "bully pulpit" to educate voters about what is being done to their pocketbooks, and on the assumption that he is elected President that may not be as fruitless as at first it may seem. It's tough, though; for as long as a creditor is compelled to accept worthless paper in place of real money, that's what will circulate; under that compulsion, Gresham's Law applies and bad money will drive out good. Why spend silver coin, when scraps of paper will do the job? The key fix is therefore to repeal that legal-tender law, removing that compulsion - and only Congress can do that. But Congresscritters do respond to well-educated voters; they really love to be re-elected. If the bully pulpit is used well enough, it might just work. I wish him well.

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