Ron Paul vs. the Federal Reserve: Does he really want to End the Fed?

Commentary about business and finance.
Feb. 9 2011 6:45 PM

End the Fed? Actually, Maybe Not.

Now that Ron Paul actually has some power over the Fed, what is he going to do with it?

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But Paul is not always happy to entertain such counterfactuals or criticisms. For instance, I asked him who he considers his most trenchant critic. He paused before responding, "I did like talking to Paul Volcker." I also asked whether there were any economists or economic theories that had changed his views since the 1970s, when he first became a devotee of the Austrian school. "I mostly go back to the Austrian economists," he said, matter-of-factly.

In testimony, Paul's dogmatism also shines through. Bernanke—whom Paul described today as "arrogant"  and "cocky"—has, for instance, tried to convince him that the dollar is in no danger of crisis in numerous testimonies. Paul has swatted the notion away.

When I asked Paul about this, he maintained the Fed has set us up for a currency crisis down the road. "It won't be as bad as Zimbabwe," he says. "But perhaps something like 1979 or 1980." He noted that geopolitical events often kick off economic ones. "The revolutions in the Middle East, that could end up being the precipitating event," he said. "Tunisia, Egypt—they may well tumble."

Paul might be steadfast in his beliefs, but he has few plans to impose them on an unsuspecting America. He is, in fact, honest about what would happen if his fondest wishes came true. "If tomorrow we closed the Fed and started using a gold standard, it would be so chaotic nobody would know what to do," he says. "There are interim positions, such as allowing competition in currencies." But, he admits, "People aren't ready for that. It's complicated—it is very complicated."

Rather than returning America to the banking system of the 1890s, then, Paul has adopted a somewhat more modest mission: Keeping alive the current conversation about the Fed. It's a conversation that some economists and think tank scholars say can't hurt. "We have not seen a lot of hearings on monetary policy from the monetary policy subcommittee," notes Mark Calabria, the director of financial regulation studies at the Cato Institute. "To a certain extent, a lot of members of Congress don't want to bother with the topic. The way I see it, Paul will attempt a public-information campaign. It is not going to be the end of the world for the Fed."

On Wednesday, that first hearing came to pass. Paul's subcommittee invited three economists to debate the question that was also the hearing's title: "Can Monetary Policy Really Create Jobs?" The economists were Thomas DiLorenzo of Loyola University Maryland, Richard Vedder of Ohio University, and Josh Bivens of the Economic Policy Institute. The answers were no, no, and yes.

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Committee hearings are rarely enlightening, as members of Congress and testifying witnesses compete to get their sound bites into the record. But this hearing proved particularly shambolic. The conversation lurched from the Fed's dual mandate to quantitative easing to the Dodd-Frank bill to China to price stability to the money supply to money volatility to universal default laws—resting only briefly on the subject of monetary policy and unemployment. The economists were so ideologically at odds—DiLorenzo and Vedder both from the tiny, heterodox Austrian school and Bivens representing nonpartisan but progressive EPI—that they agreed on virtually nothing except for the faults of the North American Free Trade Agreement.

Then, the ranking committee member, Democrat Rep. Lacy Clay, really set off fireworks. He began by criticizing the Austrian school, saying it was marked by its "lack of scientific rigor and rejection of empirical data." (Paul sat next to him poker-faced.) Then he attacked DiLorenzo, noting he is perhaps best known for a "revisionist" history of Abraham Lincoln—and, more to the point, holds an affiliation with the League of the South, a "neo-Confederate" "hate group" that seeks to build a society dominated by those of European backgrounds. "After reviewing your work and the so-called message you employ, I still do not understand you being invited to testify today on the unemployment situation," Clay said. "But I do know that I have no questions for you."

But Paul seemed upbeat at the hearing's end: The subcommittee accomplished his stated goal of bringing outside perspectives into Congress and letting criticism of the Fed fly. "Everybody knows that I believe in free markets and sound money and I'm a critic of Federal Reserve policy," he said. "That was the point I wanted to get across." In this Congress, he will have ample opportunity to do so.

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Annie Lowrey is a contributing editor for New York magazine. She can be reached at annie.lowrey@gmail.com.

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