Aaron Russo and Ron Paul on the Federal Reserve

July 12th, 2007 by Mark

21 Responses to “Aaron Russo and Ron Paul on the Federal Reserve”

1. 1 University Update - Ron Paul - Aaron Russo and Ron Paul on the Federal Reserve Says:
   July 13th, 2007 at 12:55 am

   [...] Clark Link to Article ron paul Aaron Russo and Ron Paul on the Federal Reserve » Posted at Doubting [...]

2. 2 v Says:
   July 13th, 2007 at 4:14 am

   from another ron paul video you posted earlier, dr. paul said he didn’t accept medicare or medicaid from patients. did he then refuse to treat them? give them a discount? treat them for free? how would he fix the health care system?

3. 3 trevelyan Says:
   July 13th, 2007 at 4:45 am

   This is hilarious. He tried to lecture Ben Bernanke on the merits of the gold standard? What a nutbag.

   http://www.lewrockwell.com/paul/paul53.html

   I take it all back Mark. I hope this guy gets the Republican nomination. The delta quadrant deserves to be heard.

4. 4 Mark Says:
   July 13th, 2007 at 5:45 am

   V,

   Ron Paul largely blames the rise of HMOs for the decline in US health care over the past few decades. Lew Rockwell has reproduced some of his writings on the topic:

   Lowering the Cost of Health Care
   Diagnosing Our Health Care Woes

5. 5 Mark Says:
   July 13th, 2007 at 5:50 am

   David, if you enjoyed that post, then I highly recommend that you follow the link at the top, and check out Russo’s movie. The “delta quadrant” is a big place.

6. 6 v Says:
   July 13th, 2007 at 9:55 am

   i checked out ron paul on wikipedia. in answer to my own question, when he didn’t accept medicaid or medicare, he either didn’t charge or else he put the patient on a payment plan- both noble alternatives. what didn’t sit well with me was that he believes life begins at conception, so he is pro-life. but he would leave the question of abortion up to the states. so all the men and women who don’t want to conceive children when they have sex (no contraception is 100%) can move to states that allow abortion. then when they get sterilized, they can have their pick of all 50

7. 7 trevelyan Says:
   July 13th, 2007 at 2:09 pm

   I watched both videos Mark. When I was a graduate student, I used to get this sort of pamphleteering crammed into my inbox on a weekly basis. There is a brief explanation of why it’s garbage here:

   http://econ161.berkeley.edu/Politics/whynotthegoldstandard.html

   The short version is that any government that commits to a currency peg (to gold, copper, wheat, apples, whatever….) needs to be able to credibly defend that peg against both external speculators, and the international transactions its own citizens make. But any government that can credibly defend such a peg can also credibly control its own money supply.

   If you want a more academic (substantively researched, statistically defended) repudiation, see if you can find the book “Golden Fetters” by Barry Eichengreen. One of its key points is that adherance to the Gold Standard echoed and amplified deflationary pressure during the Great Depression. Elites stuck to the gold standard out of a belief that recessions were “purgative” events that realigned national economies with “natural” economic phenomena like… the amount of copper in the world. The forceful abandonment of this sort of biblical analyis is one reason Keynes’ general theory was a breakthrough.

   Eichengreen has a wonderful chart about halfway through the book where he presents statistical evidence of economic recovery country-by-country, and fairly compellingly demonstrates the turnaround for most countries being about six months after they abandoned the gold standard and took control over their own money supply.

8. 8 Prince Roy Says:
   July 14th, 2007 at 3:46 pm

   In one of your video clips, Ron Paul suggests that the Constitution does not permit the existence of the Federal Reserve. I think most constitutional scholars would find that a barmy idea. Article One, Section 8 states that Congress has the power to: “To coin money, regulate the value thereof…”

   Congress has delegated this power to the Federal Reserve, by way of the final paragraph of Section 8: “To make all laws which shall be necessary and proper for carrying into execution the foregoing powers, and all other powers vested by this Constitution in the government of the United States, or in any department or officer thereof.”

   The Supreme Court has ruled on numerous occasions that the US Constitution permits Congress and other branches to delegate certain functions, as long they retain oversight.

   One could possibly argue that Congress does not oversee the Fed closely enough, but that is vastly different than positing the Fed is unconstitutional.

   Frankly, from what I’ve seen of Ron Paul, I haven’t been very impressed with his grasp of legal (constitutional) issues. I think law school may have served him in better stead than medical school.

9. 9 Mark Says:
   July 14th, 2007 at 5:45 pm

   Travelyan,

   Harvard-educated economist Martin Mayer doesn’t subscribe to your point of view. See The Fed’s Faded Glory (2001). The guy that you and Wayne quoted, Eichengreen, worked for the IMF, which hasn’t exactly had a successful track record.

   Alan Greenspan’s is also for the gold standard. He actually blames the depression on the fiat monetary system. This is an excerpt from his essay, Gold and Economic Freedom.

   When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. More disastrous, however, was the Federal Reserve’s attempt to assist Great Britain who had been losing gold to us because the Bank of England refused to allow interest rates to rise when market forces dictated (it was politically unpalatable). The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain’s gold loss and avoid the political embarrassment of having to raise interest rates.

   The “Fed” succeeded; it stopped the gold loss, but it nearly destroyed the economies of the world in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market — triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed. Great Britain fared even worse, and rather than absorb the full consequences of her previous folly, she abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a world-wide series of bank failures. The world economies plunged into the Great Depression of the 1930’s.

   Greenspan is still pro-gold today, and I don’t think anyone would argue that his position kept ever him from doing his job as chairman of the Federal Reserve very, very well. Personally, I’d like to see the Fed operated transparently (not abolished), but I certainly wouldn’t count out Paul on the basis of this issue. The big issues for me are the war, the war on drugs, the high prison rate, and personal liberties.

10. 10 trevelyan Says:
    July 14th, 2007 at 9:47 pm

    Mark,

    Your quote is a pretty damning inditment of the Gold Standard, not defense of it. Assuming its facts are accurate, your quote is either suggesting that (1) it was proper for the US to promote “speculative imbalances” in its domestic economy in order to support the British peg to gold, or (2) the UK should have abandoned the gold standard.

    I’m not fond of Greenspan’s class warfare and find Ayn Rand acolytes creepy. He did a good job as Chairman of the Fed, although much of the credit for the good times in the 1990s goes to the Clinton Treasury, whose efforts to push the budget into surplus (at political cost on the left) created a very pro-business environment of naturally low interest rates.

    This has been squandered by Bush’s “trifecta” and tax cuts, and the US budget is now completely in the tank. Greenspan’s interference promoting Bush’s tax cuts in Congress and his lowering of interest rates prior to the 2004 election is pretty damning. I won’t get into the Harvard thing except to note that Mankiw has pretty much trashed his reputation carrying water for the current administration. Lesson: don’t put your reputation on the line when you’ll need to defend supply-siders.

11. 11 Mark Says:
    July 16th, 2007 at 1:49 am

    Franc, in the video, Ron Paul said that the issue of the constitutionality of a fiat monetary system was argued out at the beginning. From what I’ve read, the consensus was that it was not constitutional. Madison was against it, and Jefferson was particularly against it.

    “History records that the money changers have used every form of abuse, intrigue, deceit, and violent means possible to maintain their control over governments by controlling the money and its issuance.”

    - James Madison

    “If the American people ever allow private banks to control the issue of their money, first by inflation and then by deflation, the banks and corporations that will grow up around them (around the banks), will deprive the people of their property until their children will wake up homeless on the continent their fathers conquered.”

    - Thomas Jefferson

    Paul then went on to say that the issue was “settled” in 1913, which I took to mean that he accepts that his opinion is the minority one, but one that kept with the original intent of the constitution- a reasonable position considering that Madison wrote most of it and that Jefferson’s ideas were instrumental in the process.

12. 12 trevelyan Says:
    July 16th, 2007 at 2:24 am

    I don’t believe either Jefferson or Madison had a clue about the trade-offs between pegged and floating exchange rates, but its worth mentioning nonetheless that they are both making statist arguments that governments should control their own currencies, rather than leaving them under the control of private parties.

13. 13 Mark Says:
    July 16th, 2007 at 3:31 am

    Exactly. The constitution clearly spells out that their statist position towards currency, in contrast to a privately owned Federal Reserve. More concerning is its opacity. Considering how much influence the Fed wields, it’s there are quite a few reasons to be concerned by the fact that the self interest of the banks is not necessarily the same as that of the people.

14. 14 trevelyan Says:
    July 16th, 2007 at 3:56 am

    The Federal Reserve is not privately owned, Mark. It’s a public institution established by an act of Congress and it exists at the whim of Congress.

    http://www.federalreserve.gov/generalinfo/faq/faqfrs.htm

    You’re joking about the lack of transparency? The exact timing of interest rate changes is determined by the board, but everyone knows which way the wind is blowing. The institution is about as transparent as they come.

15. 15 Mark Says:
    July 16th, 2007 at 5:55 am

    Check out the wikipedia link above. Many have complained about a lack of transparency, even members of congress. In the past the Federal Reserve has outright refused request for information from Congress, and even illegally ignored requests made under the Freedom of Information Act. More recently, the fed has stopped sharing M3 statistics with Congress. As for ownership, the same article will verify that while the fed was created by congress, it is not a purely public entity.

16. 16 Prince Roy Says:
    July 16th, 2007 at 9:27 pm

    Mark,

    if push came to shove, the Fed wold have to bow before Congress, it’s that simple. Like I wrote before, one can argue that Congress doesn’t oversee the Fed closely enough, but that is a far cry from saying the Fed is unconstitutional.

    Ron Paul shows a lack of understanding if he describes the Fed as a ‘fiat’ privatized monetary system. As Trevelyan has pointed out, it is a creature of Congress and exists solely at the pleasure of Congress. It is constitutional, full stop. Jefferson and Madison were arguing about something different entirely.

    Paul’s argument is as nutty as those who say the income tax is unconstitutional.

17. 17 Prince Roy Says:
    July 16th, 2007 at 9:41 pm

    Also, the Senate must confirm all members of the Federal Reserve Board of Governors. Congress could legislate the Fed out of existence if it wanted to.

18. 18 Mark Says:
    July 16th, 2007 at 9:47 pm

    Here’s the exact text from Wiki for those who haven’t read it:

    The Federal Reserve Banks are owned by private member banks (see below). Each member bank owns nonnegotiable shares of stock in its regional Federal Reserve Bank; see below). In Lewis v. United States,[18] the United States Court of Appeals for the Ninth Circuit stated that “the Reserve Banks are not federal instrumentalities for purposes of the FTCA [the Federal Tort Claims Act], but are independent, privately owned and locally controlled corporations.” The opinion also stated that “the Reserve Banks have properly been held to be federal instrumentalities for some purposes.”[19] Another decision is Scott v. Federal Reserve Bank of Kansas City[20] in which the distinction between the Federal Reserve Banks and the Board of Governors is made.

    The member banks are privately owned corporations. The stocks of many of the member banks are publicly traded.

    The goal of any company corporation is to maximize profits. To assume that their goals align with the greater good of the people is a bit unrealistic. To assume they set aside their own goals for the good of the people is naive. In most markets, this isn’t a large problem, since there is competition. Putting our monetary policy under the control of a few privileged private entities, on the other hand, is disturbing, as is the fed’s opacity.

    Yes, Congress could force the information out of them or eliminate them, if push came to shove, but that would take a pretty big shove. Thus far, they haven’t even been capable of getting information out of a hugely unpopular vice president, or stopping the war they were voted in to end. Taken to its logical conclusion, Congress could legislate away pretty anything they wanted to. I don’t see it happening anytime soon, but we can hope.

19. 19 Prince Roy Says:
    July 16th, 2007 at 10:05 pm

    And those who read the entire entry will understand that the Federal Reserve System is not a privatized monetary system, but one that is created by an act of Congress, its officers subject to confirmation by Congress, required to report to Congress.

    In other words, Congress has duly delegated to the Federal Reserve System the authority to regulate the value of money as stipulated in Article One, Section 8, and the Congress retains authority over the Federal Reserve System.

20. 20 Mark Says:
    July 16th, 2007 at 10:20 pm

    Congress can make any rules they want to, as long as they are united in that desire. They could even repeal the bill of rights if they wanted to. I’m not sure what your point is.

    My point, is that there are many, many respected economists, including Nobel prize winning giants such as Milton Friedman who have blamed the Federal Reserve for the Great Depression, and support abolishing it. Another important point, which Friedman himself pointed out, is that a large fraction of all of the economists who work full time on monetary research are employed by the Federal Reserve.

    I also sincerely doubt the framers of the constitution supported anything remotely like the Federal Reserve. I’m interested in getting my hands on as much reading material about the topic as I can, though.

21. 21 Prince Roy Says:
    July 16th, 2007 at 11:55 pm

    actually no, Congress could not by itself repeal the Bill of Rights. Two-thirds of each house would have to vote for its repeal, and then legislatures of 3/4 of the states would have to approve.

    your point that some people disapprove of the Fed says nothing as to whether it is constitutional, which is the point I was raising. Ron Paul believes it is unconstitutional–he is wrong.

    It doesn’t matter if the Founding Fathers would have supported the Fed–I can imagine we have many current laws they would not support. The point is that the Fed was created by Congress in a constitutionally prescribed manner: Congress passed the Federal Reserve Act in 1913 and President Woodrow Wilson signed it into law.

    Incidentally, Andrew Jackson (a favorite of yours) vetoed the first central banking system out of existence in 1832. If Ron Paul becomes president that is pretty much his only option.

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