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A Curious Critique

By Daniel McCarthy

Justin Fox, Time‘s “Curious Capitalist” blogger, recently read End the Fed and professes to be disappointed. He says Ron Paul, “succumbs to the temptation of promising an easy way out. Guess he’s more of a typical politician than I’d been led to think.”

Yet in his nine-point analysis of the book, Fox winds up agreeing with Dr. Paul just about every step of the way. Would abolishing the Fed end dollar depreciation? “You betcha.”  Would doing away with the central bank make it harder for the government to fund its warfare and welfare projects? “Paul is right” about the warfare state and “as for his welfare state argument, there’s surely something to it.” Would ending the Fed tame the business cycle? Fox says that it might not end the business cycle outright, but he concedes that there’s  “an argument to be made … that central banks exacerbate the business cycle.” And a gold standard would put a stop to inflation, wouldn’t it? “Correct,” Fox says.

And so on down the list. Fox agrees with practically everything that Ron Paul says, but he complains about what Dr. Paul doesn’t say. In particular, he thinks End the Fed should have included discussion of the harm that deflation can do to an economy and how fractional-reserve banking makes the financial system inherently unstable whether there’s a central bank or not.

Fox is missing the point — End the Fed is not supposed to be Man, Economy, and State, a comprehensive theory of economics, or an updated supplement to Ludwig von Mises’s The Theory of Money and Credit. It’s a short book laying out the basic case against the Fed. Dr. Paul includes a list of supplementary readings, including the books I’ve just mentioned, precisely so that anyone who wants to do so can read up on the theory behind the general argument he presents.

That fractional-reserve banking is inherently unstable is not at all news to Ron Paul or the Austrian economists he cites; in fact, those economists have produced a vast body of literature on the subject. As for deflation, wouldn’t a bit of deflation be a natural and salutary response to the massive inflation caused by central banking?  Deflation can be problematic, but there are no deflationary nightmares to compare with the inflationary catastrophes that befell the Weimar Republic or various Latin American states in the 20th century.

Fox believes that without a central bank, private banks would fail more often and some people would lose their savings. But that outcome has to be compared to the situation that prevails under central banking, where everybody loses their savings to inflation. Consider the story Theodore Dalrymple relates of what happened to his father:

He sold his business in the sixties, at the end of the period of price stability that had reigned throughout his life, for what then seemed a large amount of money. He was a man who, for both temperamental and ideological reasons, held a deep contempt for financial speculation and wheeling and dealing, with the result that he did nothing as inflation inexorably eroded his savings. He grew poorer and poorer through the remaining 30 years of his life, and might have sunk into poverty had he not moved into a house that I owned. And this after reaching a level of wealth that, relatively speaking, was greater than I shall probably ever know.

Ending the Fed is not a panacea, but it’s a necessary first step toward stabilizing the money supply, which will alleviate the busisiness cycle and put an end to the inflation tax. Fox concedes all of this. So why does he cavil? For a full, theoretical account of central banking and its alternatives, he should consult Mises, Rothbard, and the other sources cited in Dr. Paul’s book.

View the original article at Campaign for Liberty

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